COVID-19 and Insurance Premiums

The COVID-19 pandemic has brought about myriad issues including whether there is insurance coverage for losses allegedly caused by the virus and its collateral effects. In the United States, insurance companies have been largely successful in avoiding coverage in the majority of disputes over whether commercial property policies provide coverage under business income and extra expense provisions for COVID-19 losses. That is because most commercial property policies require direct physical loss or damage to property for coverage to apply.

To avoid the issue of alleging and proving direct physical loss, one insured took a different tactic. It argued that it was being overcharged its insurance premium because its exposure to loss was much lower due to COVID-19. An interesting and novel approach.

In Alissa’s Flowers, Inc. v. State Farm Fire & Casualty Co., No. 20-3340 (8th Cir. Feb. 3, 2022), a flower shop suffered a significant loss in revenue because of COVID-19 restrictions. It sued its property insurer in a putative class action claiming that it overpaid its insurance premiums when its exposure to risk decreased because of COVID-19. Essentially, it claimed that the insurer used the wrong exposure rates in calculating the insured’s premium for the period of time when its business suffered because of the pandemic.

The insurer moved to dismiss the complaint and the district court granted the motion based on the insured’s failure to exhaust its administrative remedies by challenging the rate before the Missouri Department of Insurance. On appeal, the Eighth Circuit affirmed.

In affirming, the circuit court rejected the insured’s attempts to distinguish rates from premiums and the authority of the regulator to review rates as opposed to an insurer’s rating plan. The court concluded that the administrative review process set forth in the relevant statute applied in the commercial insurance context and to the insured’s claims. The Eighth Circuit agreed that the district court properly determined that the insured was required to exhaust administrative remedies because the “claims, in essence, constitute a challenge to [the insurer’s] rates, rating plan, rating system and underwriting rules.” (citation omitted).

Most policyholders are unfamiliar with the regulatory framework that governs insurance premiums, rates, rating plans, policy forms and the like. Because insurance is a highly regulated industry, when a policyholder has issues with its insurance policy–other than a coverage dispute–the first port of call is raising the issue with the company under the policy provisions, if any, and next with the relevant state insurance regulator under the procedures set out in the relevant statutes or regulations. Failure to exhaust administrative remedies, a jurisdictional doctrine in administrative law, will often preclude any court proceeding, which the policyholder in this case found out.