As the economic fallout of the global COVID-19 pandemic increases by the day, state legislatures and regulators are coming under increasing pressure to shift the resulting economic losses onto the insurance industry. One of the major issues that legislatures and regulators are focusing on in this respect is whether business losses related to the virus might implicate the “business interruption” coverage found in many commercial property policies.
Business interruption coverage generally applies to direct interruptions to a company’s operations caused by property damage, such as a fire or similar event. As the New York State Department of Financial Services – New York’s insurance regulator – noted in an FAQ document entitled The Novel Coronavirus and Business Interruption Insurance: “Business interruption coverage typically can only be triggered if you have property loss that leads to the business interruption.”
Additionally, many insurance policies contain express exclusions for virus- or pandemic-related losses. Perhaps recognizing that business interruption coverage for losses related to COVID-19 is generally unavailable, whether because of the terms of coverage or virus-related exclusions, state governments have begun to take extraordinary steps to potentially force the issue.
On the legislative front, a bill introduced in New Jersey earlier this week appears aimed at overriding the plain language of insurance policies that cover business interruption loss in the state as well as any applicable exclusions. On March 16, 2020, New Jersey Bill A-3844 was introduced with the goal of alleviating the economic toll on certain insureds arising from the global COVID-19 pandemic and with the extraordinary aim of potentially forcing private insurers to cover business interruption losses not covered by the plain language of their polices and/or that were expressly excluded from the policies. The principal provision of draft bill A-3844 states:
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 this 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 provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
This language appears aimed at directly overriding the plain language of typical business interruption coverage as well as express exclusions to business interruption caused by viruses or pandemics. The draft bill is limited to insureds in New Jersey with fewer than 100 full-time employees (those who work 25 hours or more per week), and the forced coverage would still be subject to policy limits otherwise in place for business interruption. The draft bill also includes a provision that would allow liable insurers to petition the Commissioner of Banking and Insurance for partial reimbursement collected from other insurers in the state that do not provide any business interruption loss coverage. In short, the bill aims to shift at least a portion of business losses attributable to COVID-19-related closures to all insurers in the state, even those that do not offer business interruption coverage.
A-3844 was passed out of committee on March 16, but was pulled from consideration before being presented to the full assembly. Nevertheless, its passage is still very much a possibility in New Jersey, and its appearance evidences what other states might undertake as they grapple with the economic fallout of the COVID-19 pandemic.
Legislation in the wake of large-scale crises that mandates coverage for particular losses is not entirely unprecedented. For example, after the September 11 terrorist attacks, the insurance industry bore massive losses due to the attacks and subsequently stopped or limited its offerings of insurance coverage for terrorism. In light of this cessation, the Terrorism Risk Insurance Act of 2002 was passed, which mandated that insurers provide terrorism coverage and provided a federal backstop to insurers for particularly large attacks. New Jersey’s bill is different, however, because unlike the Terrorism Risk Insurance Act, it doesn’t require insurers to provide coverage going forward; it unilaterally alters the terms of existing contracts.
Laws like that proposed by New Jersey would thus face stiff legal challenges for that reason, and because they would ultimately shift business interruption losses onto other policyholders through inflated premiums.
In addition to state legislatures, regulatory bodies may take action related to business interruption coverage. For instance, on March 10, 2020, the New York Department of Financial Services mandated that property/casualty insurers provide to the Department “certain information regarding the commercial property insurance it has written in New York and details on the business interruption coverage provided in the types of policies for which it has ongoing exposure” and to then provide this same information to its policyholders. While insurers that do not provide commercial property insurance in New York need not provide this information, they must provide a certification to the Department, "in a statement signed by an officer or other authorized representative of the Insurer," that they do not provide such insurance. Additionally, several members of the U.S. House of Representatives have signed a letter asking insurer trade groups to recognize COVID-19 losses as included under policies’ business interruption coverage.