BELMONT — As many people stayed home and ventured out less for several weeks during the closures related to the COVID-19 pandemic, auto insurers responded.
Since people were driving less and claims declined accordingly, auto insurance carriers started to provide credits or adjustments for premiums, moves that were eventually required by state regulators and spelled out in an executive order signed by Gov. Gretchen Whitmer.
Those adjustments and credits totaled $96.7 million, according to the Michigan Department of Insurance and Financial Services.
A federal lawsuit filed in Grand Rapids now raises the question: What about similar rate adjustments or credits for businesses on their liability insurance coverage?
After all, argues the lawsuit filed on behalf of 1259 Post LLC, which does business as Flo’s Pizzeria & Sports Bar on Post Drive in Belmont, many businesses — particularly bars and restaurants — were shut down for weeks under the governor’s executive order. That resulted in a “dramatic departure” in the restaurant’s liability exposure from when the policy was purchased and “materially changed” applicable underwriting guidelines, an attorney for Flo’s Pizzeria claims in a court filing.
Michigan Liquor Control Commission records indicate the sports bar is owned by Davide Uccello and Daniele Uccello.
The lawsuit against Des Moines, Iowa-based EMC Insurance Group Inc., which has an office in Lansing, contends that because the sports bar had a “significantly lower” exposure to liability claims while it was closed, it overpaid premiums for the period and should receive an adjustment or credit accordingly.
‘Reduction in exposure’
Filed last month in U.S. District Court for the Western District of Michigan, the case seeks class-action status and “to remedy that disparity … on behalf of businesses who were overcharged premiums during the COVID-19 pandemic.”
“Despite a comparable drop in insurable conduct, insurers have not offered any sort of premium relief to businesses, even though they also have experienced a substantial reduction in business and exposure due to COVID-19,” according to a court filing. “Thus, while insurers offer billions of dollars in insurance premium relief to automotive policyholders, they are offering no premium relief to businesses that are experiencing a similar reduction in exposure.”
The lawsuit was filed by M. Blake Heath, a trial attorney in Kansas City, Mo. He did not respond to requests for comment from MiBiz.
A spokesperson for EMC Insurance Group declined to comment, saying the company does not discuss pending litigation. As of late last week, the company had yet to file a response to the lawsuit.
MiBiz also reached out to a few West Michigan law firms for a perspective on the case. In each instance, they also declined to comment.
Brian Calley, the president of the Small Business Association of Michigan, offered the perspective that liability coverage for businesses has several components. Some types of coverage may have higher risk in the pandemic, such as worker’s compensation if a company remained open, while instances in which a business closed clearly generated less risk, Calley wrote in an email to MiBiz.
“Whereas with auto policies, the dramatic decline in the movement of people was nearly universal,” he wrote. “Seems like it’s definitely worth a conversation/negotiation with the underwriter if you had to close. But I think an across the board policy adjustment for all policyholders would be less clear than on auto policies.”
The federal lawsuit indicates that Flo’s Pizzeria & Sports Bar, which was closed from March 6 to June 8, paid $4,317 for 12 months of liability coverage, an amount EMC calculated using the company’s “gross sales, sale of alcohol, and percentage of sales related to alcohol versus total sales.”
Under the policy, EMC would conduct an audit and compute an earned premium for the period. If the sum paid for the prior period exceeded the earned premium, EMC would return the excess.
“This provision is an admission by EMC that the premium is an estimate, that it is possible to overpay, and that Defendant EMC is required to return overpayments by the class,” the sports bar claims in the lawsuit. “However, EMC systematically ignores its obligations to return excessive premium payments made by the class. Instead, EMC uses audits to increase the amounts of premiums.”
Court papers indicate that EMC “evaluated the exposure” of Flo’s Pizzeria but the review “did not consider the shutdown due to COVID-19.”
The case argues that the sports bar’s “current exposure is a dramatic departure” from when the company bought the coverage from EMC, and that “materially changed the underwriting guidelines applicable” to the coverage.
“In this respect, (Flo’s) premium rates are excessive and unlawful because they are unreasonably high for the insurance coverage provided. Like automobile policyholders, (Flo’s) … overpaid their commercial insurance premiums in an amount to be determined,” the company claims in court documents.
Flo’s also paid EMC $10,040 for liability, personal injury protection, property protection, and uninsured and underinsured motorist coverage on its commercial vehicles that had “a substantial decrease in use due to COVID-19.” As well, the business paid $1,266 for a commercial umbrella policy, according to the court filings.
The case seeks restitution, damages and “other equitable relief as the Court deems proper.”
The lawsuit comes after the surplus for property and casualty insurers declined $79.5 billion in the first quarter to $771.9 billion as of March 31, the largest-ever quarterly decline in the industry’s surplus, according to a report last week from the American Property Casualty Insurance Association (APCIA) and Verisk Analytics Inc., a New Jersey-based data analytics company. The decline, which followed a $35.6 billion surplus increase for the industry in the fourth quarter of 2019, came mostly from investment losses in the first quarter.
APCIA reports that property and casualty carriers recorded collective net income of $17.9 billion in the first quarter, about the same as the first three months of 2019. Carriers had a net underwriting gain of $6.3 billion, an increase of nearly 20 percent from a year earlier.
In the first quarter, property and casualty carriers had net premium revenue of $164.4 billion, a 6.2-percent increase from 2019.
The association’s report noted that Verisk estimates auto carriers offered more than $13 billion in rebates and credits in the first half of the year. An arm of Verisk, MarketStance, also estimates that at least 1 million insured businesses in the U.S. will fail in 2020, resulting in a direct decline of 2.8 percent in commercial insurance premiums.
News coverage in the small business section of MiBiz is made possible by advertising support from the Small Business Association of Michigan. SBAM is the statewide and state-based association that focuses solely on serving the needs of Michigan’s small business community. This advertisement has no effect on editorial consideration in MiBiz.