More Pain Ahead For Cincinnati Financial

Cincinnati Financial (CINF) has a problem. As businesses across the country comb through their Business Income / Interruption (BI) policies in the weeks ahead, the majority of CINF customers are going to arrive at a welcome realization: CINF does not, for the vast majority of BI policies, have a specific virus exclusion. We believe that the absence of virus exclusions is going to put CINF at a disadvantage to other insurers as litigation commences in the months ahead. CINF may well find themselves in the unenviable position of having to pay up - or having to pay more to defend themselves from lawsuits - while other insurers, like Travelers (NYSE: TRV), hide under the umbrella of a virus exclusion. We believe that this creates a unique opportunity for risk-tolerant investors to establish and benefit from a medium-term short position in CINF.

The Landscape

There has been a lot of debate in the insurance industry in recent weeks surrounding the tremendous influx of BI claims being filed across the country by businesses large and small impacted by the coronavirus. Shut down for weeks, these businesses are desperately hoping to get some relief from the insurance companies they have been paying premiums to for years.

For claimants, there are two major stumbling blocks. First, in order to trigger BI coverage, the claimant must prove that there has been physical damage to the building. This is a complicated question that involves what your definition of physical damage is. Lawyers are already making the case that contamination of the premises by the virus certainly meets the definition of physical damage.

In one of the first lawsuits filed concerning this issue, Cajun Conti LLC, Cajun Cuisine 1 LLC and Cajun Cuisine LLC d/b/a Oceana Grill v. Certain Underwriters at Lloyd's of London and Governor John B. Edwards, the attorney for Oceana Grill restaurant in New Orleans argues that "It is clear that contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment."

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Disclosure:  I am/we are short CINF.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship ...

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Susan Miller 9 months ago Member's comment

Hope we see more by you Don, it's been a while!