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.
Efforts to compel insurance coverage for COVID-19 business interruption losses began in mid-March and have since proceeded on parallel tracks in courthouse and statehouses. This article will attempt to trace the progress of these efforts at this early stage of the coverage debate and analyze the issues and challenges presented by these claims.
COVID-19 BUSINESS INTERRUPTION COVERAGE LITIGATION
Two months after the first coverage suit was filed in New Orleans on March 15 by the Oceana Grille, nearly two hundred separate actions are pending across the country. Although suits are pending in twenty-five states, the heaviest concentrations of litigation are in Pennsylvania, California, Illinois, Washington, Ohio and Indiana.
All but one of these suits have been brought by policyholders and all involve commercial property insurance. About two-thirds are pending in federal district courts, although that percentage will likely grow as recently-filed state actions are removed to federal court. More than half of these filings, particularly among more recent suits, are putative class actions against individual insurers. At least three quarters of these businesses are in the hospitality business, whether as restaurants, nightclubs or hotels.
As the number of cases has grown, so too have efforts to consolidate them. In Pennsylvania, lawyers representing the Joseph Tambellini Restaurant in Pittsburgh filed a praecipe petition with the Pennsylvania Supreme Court in late April, asking the court to invoke its “King’s Bench Power” to exercise original jurisdiction over all pending state court pandemic coverage cases. The motion was denied on May 14 after vehement amicus opposition by AIG and a consortium of trade industry groups led by the American Property and Casualty Insurance Association (APCIA).
Around the same time, three separate petitions were filed with the Joint Panel on Multi-District Litigation, variously arguing that MDL consolidation was appropriate and that all federal cases should be assigned to either the Eastern District of Pennsylvania (Philadelphia), the Northern District of Illinois (Chicago) or the Southern District of Florida (Miami). The JPMDL has yet to take action on any of these petitions.
Multi-district litigation is typically granted in cases where the various federal district courts would be severely burdened by administrative issues, and discovery matters presented by mass litigation involving defective products (e.g. pelvic mesh) or natural disasters (e.g. Katrina Canal Breaches. Although insurance issues are often involved in these disputes, there has never been an MDL that was solely devoted to insurance coverage claims. Not only has the JPMDL historically been loath to grant MDL status for contract disputes, it is unclear whether these disputes will present significant administrative or evidentiary issues, since insurers will likely seek summary dismissal of these claims as not involving a "direct physical loss" or being subject to virus exclusions in the policies.
While federal MDL consolidation seems unlikely, it is possible that similar efforts may fare better under state MDL procedures that exist in half of the United States.
Notably, the law firms bringing these suits are not the usual suspects. Most of these suits, particularly the class action cases, are being brought by law firms that have specialized for years in consumer class actions against financial institutions for improper fees and the like.
As yet, all of this litigation concerns the availability of business interruption coverage under commercial property policies. It seems likely, as the scope of COVID-19 related litigation continues to spread, that the claims already being made against hotels, employers, cruise ship lines, and other insurance may result in liability insurance disputes. Additionally, claims will likely arise under employer's employment practices liability insurance by workers who are forced to work in unsafe conditions, or who are prevented from working, due to their age or physical infirmities. Finally, several recent suits in California have named insurance brokers as co-defendants, arguing that they were negligent in failing to procure insurance policies that would have covered pandemic losses.
LEGISLATIVE EFFORTS TO RETROACTIVELY COMPEL PANDEMIC COVERAGE
The day after the first pandemic coverage suit was filed in New Orleans, a proposal was submitted in the New Jersey legislature on March 16 to require property insurers to cover BI losses under existing policies. In the following weeks, similar proposals were filed by legislators in Louisiana, Massachusetts, Michigan, 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 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 LEGISLATIVE PROPOSALS TO MANDATE PANDEMIC COVERAGE
Since mid-March 7, 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.
In Louisiana, Senate Bill No. 477 would amend existing statutes to mandate that all policies in effect on March 11, 2020, shall insure against loss or damage to property, shall insure against coverage for business interruption due to the COVID-19 pandemic insofar as these policies insure against loss or damage to property including the loss of use, loss of occupancy or business interruption. 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 to this new Section 1272, 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.
Louisiana’s Insurance Commissioner Jim Donelon opposed SB 477, calling it “dangerous” and warning that it might bankrupt the insurance industry. In the face of this opposition, the bill’s sponsor, Senate Rick Ward agreed in late May to eliminate the retroactive coverage mandate from its proposal. As revised, SB 477 would only require insurers to add a form to their policies explaining what sorts of incidents are not covered for business interruption losses.
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.
As with these other proposals, H.R. 5379 that was introduced in the Michigan House of Representatives on April 24, 2020 mandates business interruption coverage for all insureds with fewer than 100 employees for the duration of the pending emergency declared by Governor Whitmer.
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."
Prognosis for Future Action?
After an initial surge of legislative activity, these proposals appear to be stalled in committee. Nor have other states joined this effort in the past several weeks, although the Rhode Island legislature is rumored to be considering a similar proposal when it comes back into session.
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 employee. 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 premiums 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.
There are any number of problems with these legislative proposals that may be due to the fact that these bills were drafted in haste with limited or no consultation with state regulators. To state only one example, how will state insurance regulators respond to requests for reimbursement from property insurers whose policies lack virus exclusions in jurisdictions whose courts have taken a broad view of what constitutes a “direct physical loss” such that they might have been obliged to provide coverage for these claims even absent these legislative mandates?
Additionally, whereas insurers that are required to issue payments under their policies may be able to obtain reimbursement from their reinsurers pursuant to “follow the payments” or “follow the fortunes” clauses, will the same be true of property and casualty insurers that were not in privity with any of the businesses suffered COVID-19 business interruption losses but are compelled to fund these payments through state-mandated assessments?
Federal Proposals to Create Pandemic Coverage
Apart from these state proposals, several measures are under consideration in the U.S. House of Representatives.
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 free 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.
Meanwhile, Congressman Michael Thompson of California filed the Business Interruption Insurance Coverage Act of 2020 (HR 6494) on April 14, 2020. HR 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 vial 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, 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:
(A) the insured fails to pay any increased premium charged by the insurer for providing such business interruption coverage; and
(B) the insurer provided notice, at least 30 days before any such reinstatement, of
(i) the increased premium for such business interruption coverage; and
(ii) 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.
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.
Despite its seemingly inviolate wording, the contracts clause in Article One, Section 10 has not always proved to be an effective defense to state invasion of contractual rights. Early on, the clause was given absolute effect. See Dartmouth College v. Woodward, 17 U.S. 481 (1819). Over time, however, the Supreme Court acknowledged exceptions to this prohibition, especially in times of national crisis. See Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934)(upholding Depression era law that allowed homeowners additional time to prevent their homes from entering foreclosure) and State of Louisiana v. All Property & Casualty Insurers Doing Business in Louisiana, 817 So.2d 313 (2006)(sustaining extension of time for insurers to bring property insurance claims arising out of Hurricane Katrina).
As most recently analyzed in Sveen v. Melin, 138 S. Ct. 1815, 1822 (U.S. 2018), the U.S. Supreme Court set forth a two part analysis: (1) “whether the state law has operated as a substantial impairment of a contractual relationship” and (2) “whether the state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.”
There seems little doubt that courts will find that these legislative proposals substantially impair the terms of these insurance agreements. The more complex issue is whether they are nonetheless justifiable as being a reasonable effort to accomplish a legitimate public purpose.
In two significant cases, courts have rejected efforts to retroactively mandate coverage:
In Hand v. Philadelphia Insurance Company, 973 A.2d 973 (N.J. Super. 2009), a dispute arose concerning the applicability of a recently-enacted statute to the limits that a commercial auto insurer was required to pay for an underinsured motorist claim. The Appellate Division concluded that the statute unconstitutionally infringed Philadelphia Indemnity's contractual rights. While conceding that the legislation served a rational public purpose and did so in a specific and targeted manner, the Appellate Division concluded that retroactive application would work a "manifest injustice" to Philadelphia Indemnity. The court declared that "a manifest injustice is found where the affected party relied to his or her prejudice, on the law that is now to be changed as a result of the retroactive application of the statute and where the consequences of this reliance are so deleterious and irrevocable that it would be unfair to apply the statute retroactively." Id
Efforts to retroactively create CGL coverage for a construction defect claims were also deemed unconstitutional by the South Carolina Supreme Court in Harleysville Mutual Insurance Company v. State of South Carolina, 736 S.E.2d 651 (S.C. 2012) in a case wherein the state legislature countermanded a Supreme Court ruling barring CGL coverage for faulty workmanship even while a motion for reconsideration of that ruling (which ultimately proved successful) was still pending. In overturning this legislative mandate, a divided Supreme Court found that there were no exigent circumstances that warranted this intrusion on the insurer’s right and that the retroactive application of the Act was therefore not "reasonable and necessary."
In addition to challenges based on the contracts clause in Article One, insurers will argue that these proposals are an unconstitutional taking in violation of the Fifth Amendment’s prohibition of taking private property without just compensation. Plainly, insurance policies are a form of contract within the ambit of the takings clause See, e.g., United States Trust Co. v. New Jersey, 431 U.S. 1, 19 n.16 (1977) (“Contract rights are a form of property and as such may be taken . . . provided that just compensation is paid).”
Finally, insurers may assert due process arguments under the Fourteenth Amendment. See General Motors Corp. v. Romein, 503 U.S. 181 (1992)(legislation changing contractual obligations must serve “legitimate legislative purpose furthered by rational means” because it “can deprive citizens of legitimate expectations and upset settled transactions.”)
Much remains to be determined about this dispute. Will state legislatures ultimately adopt these proposals and with what limitations? Will state insurance regulators develop procedures that fairly reimburse affected insurers for ex gratia payments? And how will reinsurers respond to claims that may be tendered by cedents?
In a perfect world, some grand bargain might be negotiated among policyholders, legislators and insurers that would create some means of compensation and avoid years of litigation. But in a perfect world, there would not be pandemics. And, unfortunately, the history in decades past of failed “grand bargain” negotiations to comprehensively resolve asbestos liability or Superfund claims does not provide much ground for optimism.