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States may shift Covid-19 Business Interruption Losses to Insurers

(April 13, 2020) Several states may shift Covid-19 business losses to insurers. At least seven states have introduced legislation to make insurance companies retroactively compensate businesses for losses suffered due to Covid 19 closures. The bills all center on “business interruption” coverage, which typically applies only to losses resulting from physical damage to property, such as damage caused by fires, earthquakes, or other natural disasters. Some policies may now exclude losses triggered by viral or bacterial pandemics.

If passed, these bills would force many commercial property insurers to provide retroactive coverage to their insureds for losses caused by the Covid-19 plandemic. The bills would make insurance companies compensate business for losses, regardless of the policies’ exclusions and the existence of physical damage to the insured’s property. The bills would also require insurance companies to pay for a business’ losses regardless of the premiums charged and the underwriting considerations made by the insurance companies when they issued the policies.

Proposed Bills would Require Retroactive Coverage of BI Losses

Seven states thus far have proposed bills that would require commercial property insurers to retroactively cover business interruption losses that insured businesses statewide have suffered from the Covid-19 pandemic.

Related: Business Interruption Claims Attorney

National Law Review reports that all of the draft bills would require private insurers to cover business interruption losses not covered by the plain language of their policies. All of the draft bills would take effect immediately upon approval.

Coverage required is limited to policy limits and most of the draft bills are limited to insureds with a certain number of employees.

The application date of coverage varies. For example, while most of the draft bills would apply to policies in effect at the time the bill becomes law, the Ohio, Massachusetts, New York, Pennsylvania, and South Carolina draft bills include provisions for partial reimbursement from state funds collected from other insurers in the state. Insurers forced to indemnify policyholders under these bills must apply to their state’s regulatory authority in order to obtain partial relief or reimbursement. The new draft bills would effectively shift a portion of the business losses resulting from the Covid-19 plandemic to insurers within the state, even if those insurers do not write business interruption coverage.

The Massachusetts, South Carolina, and newly amended New York draft bills are the only ones to expressly address viral exclusions and/or the physical damage requirement.

The National Law Review reports seven states have proposed similar Covid insurance legislation:

  • New Jersey: The state legislature introduced the first such bill – NJ Bill A-3844 – on March 16, 2020. The bill’s sponsors pulled it before it reached the general assembly, giving insurers and lawmakers a chance to discuss a solution. The bill has not been scheduled for a general assembly vote.
  • Ohio: March 24 – Introduced House Bill 589, which applies to insureds employing 100 or fewer full-time employees. Ohio also declared its bill to be an emergency measure, allowing the bill to expedite through the legislature.
  • Massachusetts: March 24 – Introduced Bill SD.2888.  On April 6, the bill was referred to the Joint Committee on Rules. The draft covers insureds employing 150 or fewer full-time employees. The Mass. bill would also apply to policies that become effective prior to the date the emergency declaration executive order related to COVID-19 is rescinded by the governor. Mass. closed the traditional 90-day gap between the bill’s approval date and effective date by declaring the bill to be an emergency law.
  • New York: March 27 – Introduced Assembly Bill A10226, amended it April 8, and again referred to the Insurance Committee. Coverage is limited to insureds with fewer than 250 full-time employees. The New York bill has also declared viral exclusions in business interruption coverage to be null and void, stating: “Any clause or provision of a policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, which allows the insurer to deny coverage 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 shall be null and void[.]”
  • Louisiana: March 31 – Introduced House Bill 858 and Senate Bill 477. The Louisiana Senate bill does not limit coverage to small businesses with a certain number of employees. The senate bill includes a requirement for notice of exclusions. Every insurance policy including business interruption coverage issued on or after August 1, 2020, must include a notice of all exclusions on a certain form provided by the commissioner of insurance. Once properly signed, the form creates a rebuttable presumption that the insured knowingly contracted for coverage with the stated exclusions. The Louisiana House draft bill applies to insureds with fewer than 100 full-time employees (working at least 25 hours on a normal week). The Louisiana bills stipulate that if the bill is vetoed by the governor and subsequently approved by the legislature, the law would take effect the day following such approval.
  • Pennsylvania: April 3 – Introduced House Bill No. 2372, which was referred to the Committee on Insurance. The Penn. House draft bill applies to insureds with fewer than 100 full-time employees (working at least 25 hours on a normal week). The Penn. bill would only apply to policies already in force on March 6, 2020, the date of the state’s Proclamation of Disaster Emergency.
  • South Carolina: April 8 – Introduced Bill S.1188, which was referred to the Committee of Banking and Insurance. The draft covers insureds employing 150 or fewer full-time employees. The South Carolina bill would also apply to policies that become effective prior to the date the emergency declaration executive order related to Covid-19 is rescinded by the governor.

Legal Challenges Likely

None of these bills has become law. While the legislation remains pending, insurance companies nationwide have the chance to voice the many legal challenges this legislation will likely face. National Law Review notes the bills as written would unilaterally alter the terms of existing contracts, potentially posing violations of the Contracts Clause and other provisions of the U.S. Constitution. Other problems these these bills face include the enormous shift of the economic burden of Covid-19 related losses to insurers who didn’t agree to cover such losses. The insurance industry will likely argue that the bills would place them at risk and shift the economic load to other policyholders through higher premiums.

More states nationwide may soon undertake similar legislative measures. Rep. Schiff’s Coronavirus Task Force continues to address the significant business, legal, and economic challenges that stem from the Covid-19 plandemic.

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