In early 2020, even as the COVID-19 virus spread beyond China and took root on the North American continent, industry analysts confidently predicted that U.S. property insurers would largely escape the pernicious effects of this pandemic in light of their policies’ "direct physical loss" requirements as well as virus exclusions that were adopted in the aftermath of the 2003 SARS pandemic. Unfortunately, these predictions failed to take into account the political dynamic that often intrudes into insurance coverage disputes involving mass catastrophic losses, whether they result from the terrorist attacks of 9/11, catastrophic storms such as Katrina, Maria and Sandy or this novel coronavirus.
Beginning with New Jersey on March 16, proposals to compel insurers to pay COVID-19 business interruption claims have now been filed in Louisiana, Massachusetts, New York, Ohio, Pennsylvania, South Carolina and, most recently, the U.S. House of Representatives. The common theme of these legislative proposals is a retroactive directive compelling pandemic coverage for policies insuring business interruption and that were in effect when state Governors declared a state of emergency. They differ in subtle ways, however, notably with respect to whether these insurers will be reimbursed by state governments through surcharges on other property and casualty insurers.
Even President Trump has weighed in declaring at an April 14 press conference that “You have people that have never asked for business-interruption insurance and they have been paying a lot of money for a lot of years for the privilege of having it and then when they finally need it, the insurance company says ‘We’re not going to give it. We can’t let that happen.” The President continued:
I’m very good at reading language. I did very well in these subjects, OK? I don’t see pandemic mentioned. Now, in some cases it is; it’s an exclusion. But in a lot of cases I don’t see it. I don’t see reference that they don’t want to pay up.
I would like to see the insurance companies pay if they need to pay, if it’s fair. And they know what’s fair. And I know what’s fair. I can tell you really quickly.
Legislative intrusion into the common law of insurance is certainly not a novel thing. Over the years, dozens of state statutes have been passed in response to State Supreme Court decisions that legislatures have found to unfairly disadvantage policy holders and bad faith claimants. Similarly, legislators in Colorado and South Carolina mandated coverage for construction defect claims in the wake of court rulings that faulty workmanship is not an “occurrence.” Most recently, politicians and insurance regulators in Connecticut unsuccessfully attempted to mandate "collapse" coverage for hundreds of first-party losses resulting from crumbling home foundations.
What is troubling about these legislative initiatives is not that they would re-write the law to impose coverage but that they would re-write the policies themselves to do so with retroactive effect. As a result, these proposals, if enacted, will be subject to constitutional challenges as infringing Article One’s guarantee that “no State shall…pass any…Law impairing the Obligation of Contracts.”
State Legislatures Propose to Mandate Coverage
Since mid-March, proposals have been filed in seven state legislatures that would mandate coverage for business interruptions losses resulting from the COVID-19 pandemic. This is in addition to the actions of state legislatures that have adopted related measures, such as declaring that the presence of a virus is a “physical loss” or that virus-related illnesses are compensable under worker’s compensation policies.
On March 16, 2020, eleven members of the New Jersey legislature introduced Bill No. 3844 which declares:
Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in the State on the effective date of this Act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as described in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the corona disease 2019 pandemic.
After being reported out of committee the same day that it was introduced, action on A.B. 3844 was suspended briefly while efforts were undertaken while insurers negotiated with State regulators and legislators in an effort to reach some resolution. It appears that these efforts of compromise foundered given the fact that the legislation is now on the verge of final approval.
On March 24, two Ohio legislators filed H.B. 589. This proposal is essentially a carbon copy of A. 3844 and would require insurers offering business interruption coverage to insure losses attributable to “global virus transmission or pandemic.”
The following day, the chair of the Massachusetts Senate Judiciary Committees filed S.D. 2888 with seven co-sponsors. As with the New Jersey and Ohio bills, S.D. 2888 mandates property insurance for business interruption and provides for reimbursement to affected insurers through general assessments on admitted carriers:
SECTION 1. (a) Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, notwithstanding the terms of such policy (including any endorsement thereto or exclusions to coverage included therewith) which includes, as of the effective date of this act, the loss of use and occupancy and business interruption in force in the commonwealth, shall be construed to include among the covered perils under such policy coverage for business interruption directly or indirectly resulting from the global pandemic known as COVID-19, including all mutated forms of the COVID-19 virus. Moreover, no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.
Unlike the New Jersey and Ohio bills, S.D. 2888 includes not only “direct physical loss” but also virus exclusions. There is also a gratuitous but menacing declaration at the conclusion of S.D. 2888 that these provisions are subject to the Massachusetts Unfair Claims Settlement Practices Act (M.G.L. c. 176D).
On March 27, 2020, Assembly Bill 10226 was introduced by a New York legislator, Robert Carroll. The legislation declares that the COVID-19 pandemic is a “covered peril” under commercial property policies in effect as of March 7, 2020 and otherwise generally mirrors the provisions of the proposed New Jersey legislation.
AB 10226 has since been amended to make clear that it was intended to render "null and void" any solution "based on a virus, bacterium, or other microorganism that causes disease, illness or physical distress or that is capable of causing disease, illness or physical distress." The threshold for eligibility also was increased from 100 to less than 250 full time employees. Finally, it states that any policy that expires during the current state of emergency will be automatically renewed at current premiums.
Pandemic bills are pending in both chambers of the Louisiana legislature.
On March 30, 2020, Representative Royce Duplessis introduced House Bill No. 858. This legislation would add Section 1897 to the Louisiana Code requiring that all policies insuring against loss or damage to property, including the loss of use and occupancy and business interruption that were enforced as of March 11, 2020, when a state of emergency was declared in Louisiana, must be construed to include coverage for business interruption due to a global virus transmission or pandemic. This statute only applies to insurance with fewer than 100 full-time employees. It does not make provision for any reimbursement from state funds or insurer assessments.
On the same date, Senator Rick Ward introduced Senate Bill No. 477. His proposal would create a new Section 1272, mandating that all policies in effect as of March 11, 2020 that insure against loss or damage to property including the loss of use, loss of occupancy or business interruption must cover business interruption losses from COVID-19 pandemic. This new Section 1272 does not provide for reimbursement of any payments that insurers are thereby required to make, nor does it provide for the creation of a fund through surcharges effected on admitted carriers in Louisiana.
In addition, Section 1273 would mandate that all insurers writing coverage for business interruption in Louisiana or after August 1, 2020, shall include a notice of all exclusions on a form prescribed by the commissioner of insurance. The form shall be provided by the insurer and signed by the named insured or his legal representatives. This form will create a rebuttable presumption that the insured knowingly contracted for coverage with the stated exclusions. Once an additional form is submitted and signed, further forms it will remain valid for the life of the policy and new forms are not required as of the date of renewal, reinstatement, substitution or amendment of said policies.
Finally, Senate Bill No. 495 proposed by Senator Carter, proposes to create a Business Compensation Fund. Instead of requiring insurers to provide coverage for pandemic business interruption claims under current policies, SB 495 would create a fund pursuant to R.S. 22:1272 that any insurer writing commercial insurance in Louisiana could opt into. The price for doing so would be the greater of $50 million or 80 percent of the aggregate policy limits for all commercial insurance policies that the insurer presently had in effect in Louisiana. Any insurer that does so, is deemed to be immune from claims of bad faith brought by any person seeking payment for claims under a policy written in Louisiana for losses associated with the COVID-19 pandemic. In consideration of doing so, however, participating insurers would be insulated from bad faith claims by their insurers and policyholder recoveries would be restricted to 80% of the value of the claims.
Both chambers of the Pennsylvania legislature are considering pandemic BI proposals:
House Bill No. 2372 was introduced in the Pennsylvania General Assembly on April 3, 2020. It requires coverage for pandemic claims under all policies in effect as of March 6, 2020, the date that a proclamation of disaster emergency was declared in Pennsylvania. The bill applies to all businesses in Pennsylvania with fewer than 100 eligible employees. It further provides that any insurer obliged to make payment for such claims shall be entitled to reimbursement from the Commonwealth through funds collected from insurers engaged in providing property and casualty insurance in Pennsylvania whether or not their policies provide for business interruption coverage. As with other states, this surcharge shall be in proportion to the net premium written in the Commonwealth of Pennsylvania.
A competing proposal was filed by eighteen state senators on April 15, 2020. SB 1114 is considerably more detailed than its antecedents including a reference to an ISO endorsement that would permit insureds to purchase coverage for claims of this sort notwithstanding virus exclusions which, to date, has not been put into effect. SB 1114 supplies a specific definition of "direct physical loss", declaring that coverage will arise in cases where an individual infected with COVID-19 has been on the property or "the presence of at least one person positively identified as having been infected with COVID-19 in the same municipality of this Commonwealth where the property is located."
SB 1114 also differs from other state’s proposals in that it provides 100 percent coverage for small businesses but also extends coverage to larger businesses in the amount of 75 percent of the otherwise applicable policy limits. Unlike other states, however, SB 1114 makes no provision for reimbursement to commercial property insurers through surcharges to other admitted carriers.
On April 8, 2020, several South Carolina Senators submitted S. 1188, which would invalidate any defense to coverage for COVID-19 claims on the basis virus exclusions, “civil authority” or the lack of “direct physical loss.” As with other state proposals, this new proposed § 38-75-70 permits insurers who are thereby required to pay out pandemic losses to obtain recovery from the funds to be established by the South Carolina Insurance Department to be paid for by assessments against licensed insurers in the state "as may be necessary to recover the amounts paid or estimated to be paid pursuant to the section."
Three proposals are now under consideration in the U.S. House of Representatives.
Pandemic Risk Insurance Act
On March 18, 2020, the chair of the House Financial Services Committee, Maxine Waters, called for the passage of a Pandemic Risk Insurance Act (PRIA) modeled on the Terrorism Risk Insurance Act (TRIA) that was enacted in the aftermath of the 911 terrorist attacks. Although this legislation has not yet been formally filed, a discussion draft has been circulating on Capitol Hill.
The April 3 Discussion Draft would create a program where commercial property insurers may voluntarily agree to provide business-interruption losses from “infectious disease or pandemic for which an emergency is declared under the Public Health Service Act." Participating insurers will be responsible for the first $250 million in business interruption losses paid for any certified public health emergency. Thereafter, they will be reimbursed for 95 percent of further payments by the federal government pursuant to a reinsurance backstop that will cap out at $500 billion. This Discussion Draft contemplates that insurers will be permitted to charge additional premium reflecting the potential risks that they will be taking on for pandemics. Furthermore, it provides that the insurers are allowed to reinstate virus exclusions and other limitations to coverage in the event that the insured declines to pay the additional premium allocable to pandemic coverage. Each participating insurer shall be obligated to pay commercial premiums for this reinsurance coverage. The draft exempts various lines of insurance including auto coverage and professional liability policies.
This legislation would require insurance to make full disclosure to policyholders concerning the amount of premium allocable to pandemic coverage.
Even as discussions concerning a possible Pandemic Risk Insurance Act continued, Congressman Michael Thompson of California filed the Business Interruption Insurance Coverage Act of 2020 (H.R. 6494) on April 14, 2020. H.R. 6494 differs from state proposals in several respects. To begin with, it is not restricted to the COVID-19 pandemic. Section 2 of the bill would mandate business interruption coverage for viral pandemics as well as “any forced closure of businesses, or mandatory evacuation” as well as “any power shut-off conducted for public safety purposes,” presumably in reference to the rolling black outs that utilities conducted in California in 2019. Section 3 of the bill also purports to nullify any state approval of policy wordings.
Finally, the bill contains a curious section that appears to have been copied from the Discussion Draft of the draft Pandemic Risk Insurance Act but which makes no sense at all in the context of legislation that would mandate retrospective coverage. Section 3(c) provides that insurers may only reinstate virus exclusions in the event that
- the insured fails to pay any increased premium charged by the insurer for providing such business interruption coverage; and
- the insurer provided notice, at least 30 days before any such reinstatement, of
- the increased premium for such business interruption coverage; and
- the rights of the insured with respect to such coverage, including any date upon which the exclusion would be reinstated if no payment is received.
On April 14, Congressman Brian Fitzpatrick, a Pennsylvania Republican, introduced the "Never Again Small Business Protection Act of 2020" (H.R.6497) with four bipartisan co-sponsors. Section 2 of the Bill would require insurers that presently offer business interruption insurance to "make available" coverage that applies to business interruption "due to any order, by any officer or agency of the Federal Government or of any State or local government", requiring cessation of operations during a national emergency, and would cover such losses for a continuous period that begins upon the declaration of the national emergency and is not shorter than 30 days.
Section 4 further provides that insurers may add exclusions for business interruption losses due to national emergencies only if (1) the insurer has received a written statement from the insured affirmatively authorizing such exclusion or the insured fails to pay the premium charged by the insurer for providing such coverage.
Section 5 calls on the U.S. Secretary of the Treasury to form a federal advisory committee on insurance "to conduct a study regarding the effectiveness and efficiency of using a Federal backstop mechanism, private equity pools, risk assessments, and market pricing to reinsure insurers for excessive losses under coverage made available pursuant to Section 2 of this Act." The report shall be submitted to Congress within 180 days of the enactment of this legislation.
H.R. 6497 has some unique features, including the provision in Section 3 that employers who fire workers or terminate their healthcare insurance are not eligible for this coverage. The effective date of the legislation is also unusual. Unlike other legislative proposals that have keyed the effective date of their provisions to a state Governor's declaration of emergency, H.R. 6497 states that the legislation will not become effective until "a determination that there is in effect a Federal backstop mechanism to reinsure insurers for excessive losses under coverage made available pursuant to Section 2 of this Act."
H.R. 6497 appears to anticipate the creation of a PRIA-style reinsurance backstop but differs from the pending Discussion Draft in one important respect. This is not a voluntary program. It states that all insurers shall make such coverage available. On the other hand, as with PRIA, it does not apply to policies that are already in effect and contemplates that insurers would be permitted to charge a premium for this new coverage, so long as there is a reinsurance backstop in effect.
Although these bills are similar in their main provisions, there are some subtle but significant differences.
Which Insureds Qualify?
The statutes differ with respect to whether they encompass out of state policies that insure in-state facilities. The Massachusetts bill is vague in this regard, merely referring to policies “in force in the Commonwealth.” The New York bill says nothing. H.B. 589 only requires that the “business” be located Ohio. Only A.B 3844 clearly applies to both New Jersey insureds and out of state policyholders that have New Jersey facilities.
There is also some divergence with respect to how small the business has to be to qualify for this relief. Most of the bills (New Jersey, New York and Ohio) set the ceiling at 100 employees. Massachusetts allows recovery up to 150 in-state employees.
Each of these bills provides that state insurance regulators should implement procedures to reimburse affected property insurers for some unspecified amount of losses paid pursuant to these statutes. In turn, these reimbursements will be funded through assessments to admitted insurers in each state.
Some of the statutes are clearer than others with respect to which insurers will be assessed. Massachusetts Senate Bill 2888 stipulates that only insurers that write business interruption insurance will be assessed but doesn’t state whether the assessment will reflect those companies’ total premium or just the amount charged for commercial property insurance. The explanatory Statement accompanying A. 3844 authorizes assessments to all insurers in New Jersey other than life and health insurers.
Additionally, Senate Bill 2888 states that “licensed insurers in the Commonwealth” of Massachusetts shall be assessed. New York Assembly Bill 10226 is vague in this respect, only referring to “the companies engaged in business pursuant to the insurance law” in the state. Ohio Bill 589 states that the insurance commissioner shall “charge an assessment to insurers engaged in the business of insurance under Chapter 3937 of the Revised Code.” However, Chapter 3937 is entitled “Casualty Insurance.”
It is also unclear how much these reimbursements will offset or mitigate the ex gratia losses that property insurers might otherwise suffer. Ohio Bill No. 589 is encouraging in this regard, stating “the Superintendent shall charge an assessment to insurers engaged in the business of insurance under Chapter 3937 of the Revised Code in an amount as necessary to recover the amounts paid to insurers pursuant to this section.” The New Jersey and Massachusetts bills only state that these assessments shall be sufficient to cover the amount that the states pay to reimburse property insurers but leave open the question of how much of their own losses property insurers can expect to be reimbursed for. New York Assembly Bill 10226 is completely silent in this regard.
The bills also differ with respect to the linkage between the receipt of assessed funds and the right of property insurers to be reassessed. Senate Bill 2888 implies that the Commonwealth will make payment to the insurers and will then itself be reimbursed through assessment to licensed insurers. The New Jersey, New York and Ohio bills all provide that reimbursement will come from the funds that each state receives by way of assessment, leaving open the question of what would happen if those other insurers challenge the validity of these assessments or the constitutionality of these statutes or attendant regulations.
Nor is it clear whether state regulators will dispute some applications on the basis that the insured’s premises were contaminated by the COVID-19 virus and therefore had suffered a covered “direct physical loss” irrespective of the statute’s impact.
What is apparent, of course, is that these assessments will fall largely on the shoulders of the larger property and casualty insurers in these states since the assessments are weighted in proportion to the overall amount of premium charged in each state. This formula is very much to the disadvantage of large companies that write relatively small amounts of commercial property insurance.
Finally, the retroactive application of these bills will likely be challenged as violating the U.S. Constitution’s guarantee that “no State shall…pass any…Law impairing the Obligation of Contracts.” This protection is not as iron-clad as it may seem, however, and the outcome of the present debate is no more certain than the pandemic that has engendered it.