Civil Authority Coverage and the PPP

Photo by Cloris Ying on Unsplash

First published on April 7, 2020

The legislatures of Louisiana, Massachusetts, New York, New Jersey and Ohio have before them bills purporting to rewrite small business insurance policies to cover business income loss resulting from COVID-19 lockdown orders.

Even beyond a starling assault on the rule of law, if enacted these proposals would undermine the protections and safeguards of the new federal Payroll Protection Program (PPP) by allowing a qualifying business to shift onto its insurance company:

  • The cost of executive salaries exceeding $100,000 per year;
  • Any shortfall in profits that otherwise would have benefitted its shareholders; and
  • Repayment of the used-up portion of the PPP loan should management decide to lay off staff within the first eight weeks rather than keep them on in order to qualify for loan forgiveness.

Congress intentionally designed PPP to continue full compensation to average wage-earners while sustaining their employers until this crisis subsides. Wrapped in a Hugo Chavez meets Gordon Gekko scale contradiction, these recent state legislative proposals would appropriate private assets to top-off corner-office income and clear the way for premature layoffs. Surely, that cannot be the proponents’ intentions.

While there is most certainly a role for the insurance industry to help small businesses weather the COVID-19 lockdown, this is not it.

The attached analysis untangles the criteria for triggering Civil Authority Coverage and compares them to COVID-19 orders directed at non-essential businesses. It then measures business income and extra expense coverage against the terms of the new Payroll Protection Program.

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