No Need to Social Distance from Traditional Policy Exclusions & Policy Interpretation Case Law When Assessing Coverage for Coronavirus Related Claims
April 1, 2020
New York Executive Order 202.10 and the Gross Negligence Standard in New York, New Jersey and Pennsylvania
April 8, 2020

COVID-19 Business Interruption Insurance Coverage Bills and New Regulatory Communications

In response to the staggering losses being suffered by businesses across the country due to their partial or total closures caused by the COVID-19 pandemic, some states have been looking at ways for small businesses to be able to recoup these losses, thereby enabling them to remain in operation. The States of New Jersey, Ohio, New York and California and the Commonwealth of Massachusetts have recently proposed bills seeking to retroactively create insurance coverage for these COVID-19 business interruption losses under insurance policies even when these policies specifically preclude such coverage. These states will likely not be the last states to propose such legislation.

In effect, these states are considering forcing insurance companies, rather than the states themselves or the federal government, to keep these businesses from closing even if they purchased insurance policies where such virus-related losses are excluded or limited and/or where the losses do not constitute “direct physical loss or damage” to covered property. Accordingly, if these bills are signed into law, they will require insurance companies to cover losses that they never agreed to cover and that they never collected premiums for.
In fact, the States of New York and California have issued communications seeking information from insurance companies. Ostensibly, they intend to utilize this information to introduce additional bills and/or amendments to current bills to require insurance companies to cover these losses. 

A.New Jersey Assembly Bill 3844On March 16, 2020, New Jersey state Assemblymen Roy Freiman, Louis D. Greenwald and Annette Chaparro introduced Assembly Bill 3844 (“A.B. 3844”) that provides a mechanism by which eligible small businesses can recoup these COVID-19 losses from their insurance companies if they had a policy of business interruption insurance in effect on March 9, 2020, the date that New Jersey Governor Phil Murphy issued Executive Order 103 in which he declared a Public Health Emergency and a State of Emergency. 

A.B. 3844 would retroactively (from March 9, 2020) apply to such insurance policies in force on the effective date of the act with less than 100 “eligible employees” in the State of New Jersey, who are defined as full-time employees who work a normal work week of 25 or more hours, for the duration of the State of Emergency.

Of importance, A.B. 3844 provides as follows:
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 and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic. (emphasis added)

A.B. 3844 also provides that the insurance coverage provided shall indemnify the businesses, but subject to the limits under the policies, for any loss of business or business interruption for the duration of the State of Emergency.

Furthermore, A.B. 3844 permits insurers to apply to the New Jersey Commissioner of Banking and Insurance for relief and reimbursement from funds collected through a “special purpose apportionment” that would be collected from all insurers insuring risks in New Jersey. This provision essentially means that all New Jersey insurance companies would be covering these losses, even if they do not even write business interruption insurance in New Jersey.

As written, A.B. 3844 appears to implicitly prevent insurance companies from relying on insurance policy provisions, such as those that provide that these types of losses do not constitute “direct physical loss or damage” to covered property as well as exclusions that preclude coverage for business interruption losses resulting from viruses, including the commonly used ISO CP 01 40 07 06 Virus or Bacteria Exclusion, to argue that there is no coverage for COVID-19 business interruption losses.

On March 16, 2020, A.B. 3844 was passed by the New Jersey Assembly. Before the bill reached the New Jersey state Senate, the bill was pulled from consideration. As of the date of this article, no further action has been taken on A.B. 3844.

A.Ohio House Bill 589
Following in New Jersey’s footsteps, on March 24, 2020, Ohio state Representatives Jeffrey Crossman and John M. Rodgers introduced a similar bill, House Bill 589 (“H.B. 589”), “[t]o require insurers offering business interruption insurance to cover losses attributable to viruses and pandemics and to declare an emergency.”

H.B. 589 would retroactively (from March 9, 2020) apply to such insurance policies that were in force on the effective date of the act and that were issued to businesses, which are located in Ohio and have 100 or fewer “eligible employees”, who are defined as full-time employees who work a normal work week of 25 or more hours, for the duration of the state of emergency. 

Of importance, H.B. 589 provides (like A.B. 3844) as follows:
Notwithstanding any other law or rule 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 section, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency [declared under Executive Order 2020-01D, issued on March 9, 2020, to protect the well-being of Ohio citizens from the dangerous effects of COVID-19]. (emphasis added)

H.B. 589 also provides that the insurance coverage provided shall indemnify the businesses, but subject to the limits under the policies, for any loss of business or business interruption for the duration of the state of emergency.

Like A.B. 3844, H.B. 589 as written also appears to implicitly prevent insurance companies from relying on insurance policy provisions, such as those that provide that these types of losses do not constitute “direct physical loss or damage” to covered property as well as virus-related exclusions, to argue that there is no coverage for COVID-19 business interruption losses.

Additionally, H.B. 589 allows any insurer that pays for such COVID-19-related losses to request from the Ohio Superintendent of Insurance for relief and reimbursement from funds collected and made available for this purpose.

Ohio would then pay the insurance companies’ claims for reimbursement either by utilizing “available” funds or by charging an assessment to insurers engaged in the business of insurance in Ohio to create a “Business Interruption Insurance Fund” for this purpose. Similar to A.B. 3844, this provision essentially means that all Ohio insurance companies would be covering these losses, even if they do not even write business interruption insurance in Ohio.

As of the date of this article, no further action has been taken on H.B. 589.

A.Massachusetts SD. Bill 2888
On the heels of the A.B. 3844 and H.B. 589, on March 24, 2020, Massachusetts state Senator James B. Eldridge introduced SD. Bill 2888 (“SD. 2888”) that goes further than these bills because it explicitly mandates coverage even in the face of unambiguous policy language. SD. 2888 is meant “to require certain insurance companies in the commonwealth to provide business interruption insurance coverage to their insured in connection with the COVID-19 pandemic.”

SD. 2888 would retroactively (from March 10, 2020) apply to such insurance policies that were in force on the effective date of the act or that became effective prior to the date on which Executive Order 591 is rescinded by the Governor and that were issued to businesses with 150 or full-time equivalent employees in Massachusetts, for the duration of the emergency declaration. 

SD. 2888 provides as follows:
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. (emphasis added)

SD. 2888 also provides that the coverage required by this section is subject to any monetary limits and maximum length of time set forth in the policy for such business interruption coverage and covers the business for any loss of business or business interruption until such time as the emergency declaration issued by Massachusetts Governor Charlie Baker dated March 10, 2020, and designated as Executive Order number 591, is rescinded by the Governor. Thus, the insurance coverage provided by SD. 2888 is still subject to the limits of liability as is the case in A.B. 3844 and H.B. 589.

However, unlike A.B. 3844 and H.B. 589, SD. 2888 as written appears to explicitly prevent insurance companies from relying on insurance policy provisions, such as those that provide that these types of losses do not constitute “direct physical loss or damage” to covered property as well as virus-related exclusions, to argue that there is no coverage for COVID-19 business interruption losses.

Moreover, SD. 2888 provides that insurance companies who pay COVID-19-related losses “may apply to the commissioner of insurance for relief and reimbursement from funds collected and made available for such purpose as provided” therein. SD. 2888 would require the commissioner to reimburse those claims with funds collected from “assessments” imposed “against licensed insurers in [Massachusetts] that sell business interruption insurance as may be necessary to recover the amounts paid, or estimated to be paid, to insurers” seeking reimbursement. This provision means that only Massachusetts insurance companies that sell business interruption insurance, and not all insurance companies like in A.B. 344 and H.B. 589, would be covering these losses.

As of the date of this article, no action has been taken on SD. 2888.
A.New York Assembly Bill 10226 and New Regulatory Communications
Finally, on March 27, 2020, New York state Assemblyman Robert Carroll introduced a bill more similar to those in New Jersey and Ohio than in Massachusetts, Assembly Bill 10226 (“A10226”), that is intended to require “certain perils be covered under business interruption insurance during the coronavirus disease 2019 (COVID-19) pandemic.”

A10226 would retroactively (from March 7, 2020) apply to such insurance policies that were in force on the effective date of the act and that were issued to businesses, which have less than 100 “eligible employees”, who are defined as full-time employees who work a normal work week of 25 or more hours, for the duration of the state of emergency. 

Of importance, A10226 provides (like H.B. 589 and A.B. 3844) as follows:
Notwithstanding any provisions of 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, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic. (emphasis added)

A10226 also provides that the insurance coverage provided shall indemnify the businesses, but subject to the limits under the policies, for any loss of business or business interruption for the duration of the state of emergency due to the COVID-19 pandemic.

Like A.B. 3844 and H.B. 589 (but unlike SD. 2888), A10226 as written also appears to implicitly prevent insurance companies from relying on insurance policy provisions, such as those that provide that these types of losses do not constitute “direct physical loss or damage” to covered property as well as virus-related exclusions, to argue that there is no coverage for COVID-19 business interruption losses.

Additionally, A10226 provides that insurance companies who pay COVID-19-related losses “may apply to the superintendent of financial services for relief and reimbursement by the department from funds collected and made available for this purpose as provided” therein. A10226 would require the superintendent to reimburse those claims from funds that will be financed by a “special purpose apportionment” collected from “the companies engaged in business pursuant to the insurance law” in “such additional amounts as may be necessary to recover the amounts paid to insurers” seeking reimbursement. This provision essentially means that all New York insurance companies would be covering these losses, like in A.B. 3844 and H.B. 589, even if they do not even write business interruption insurance in Ohio, as opposed to SD. 2888 where only Massachusetts insurance companies that sell business interruption insurance would be covering these losses.

As of the date of this article, A10226 has been referred to the Assembly Insurance Committee but without any further action taken.

Not only has the New York Assembly introduced A10226, but on March 10, 2020, the New York Department of Financial Services (“DFS”) issued two broad communications to the insurance industry.

First, in a letter entitled “Call for Special Report Pursuant to Section 308, New York Insurance Law: Business Interruption and Related Coverage Written in New York,” the Department of Financial Services (“DFS”) instructed each authorized property/casualty insurer (“Insurer”) to provide certain information regarding the commercial property insurance it has written in New York and details on the business interruption coverage provided in its policies. For the purpose of this letter, DFS considered commercial property insurance to include the following: business owner policies, commercial multiple peril policies, and specialized multiple peril policies.Insurers are required to explain to their insureds the benefits under their polices and the protections provided in connection with COVID-19. If an Insurer that does not write any of the business covered in the Letter, then the Insurer is required to notify DFS in a statement signed by an officer or other authorized representative of the Insurer.Each Insurer is required to provide to DFS the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage that it wrote that has not lapsed as of the date of the letter, expressed in amounts of direct premium, policy types and numbers of policies written of each type.Next, each Insurer is required to examine the policies that it has issued and explain the coverage each policy offers in regard to COVID-19, both presently and as the situation could develop to change the insured’s status (i.e., is there any potential for coverage as a result of COVID-19). For each policy type, each Insurer is required to prepare such information in a clear and concise explanation of benefits that is suitable for policyholder review. Each Insurer is then required to send such explanation to each of their insureds and to send copies of all explanations to DFS, along with a representation that the explanations have been provided to each Insurer’s insured. The explanation to insureds should include all relevant information, including:

What type of commercial property insurance or otherwise related insurance policy does the insured hold?

Does the insured’s policy provide “business interruption” coverage? If so, provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.” Please describe what type of damage or loss is sufficient for coverage under the policy.

Does the insured’s policy provide “civil authority” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please also describe any relevant limitations under the policy. Please explain whether a civil authority prohibiting or impairing the insured’s access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.

Does the insured’s policy provide “contingent business interruption” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”

Does the insured’s policy provide “supply chain” coverage? If so, is such coverage limited to named products or services from a named supplier or company? Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”

For each instance of coverage described above, please provide the applicable waiting period under the insured’s policy. Please also indicate whether the amount of time coverage remains in effect once becomes active for a given incident.

Second, DFS issued Circular Letter No. 5 regarding “Guidance to Department of Financial Services (“DFS”) Regulated Insurance Entities and Request for Assurance Relating to Operational and Financial Risk Arising from the Outbreak of the Novel Coronavirus (COVID-19). ” This Letter requires that each regulated entity must submit by April 9, 2020 a response describing its plans of preparedness to manage the risk of disruption to its operations and the financial risk arising from COVID-19. The plan should be sufficiently flexible to effectively address a range of possible effects that could result from COVID-19 and, at a minimum, should include:

  1. Preventative measures tailored to the entity’s specific profile and operations to mitigate the risk of operational disruption, which should include identifying the impact on consumers and vendors;
  2. A documented strategy addressing the impact of the outbreak in stages, so that the entity’s efforts can be appropriately scaled, consistent with the effects of a particular stage of the outbreak;
  3. Assessment of all facilities, systems, policies and procedures necessary to continue critical operations and services if members of the staff are unavailable for longer periods or are working off-site, including the effectiveness and security of remote access;
  4. Employee protection strategies, critical to sustaining an adequate workforce during the outbreak, including employee awareness and steps that employees can take to reduce the likelihood of contracting COVID-19;
  5. Assessment of the preparedness of critical third-party service providers and suppliers;
  6. Development of a communication plan to effectively communicate with consumers and vendors, and to deliver important news and instructions to employees, along with establishing forums for questions to be asked and addressed;
  7. Testing of the plan to ensure that the policies, processes, and procedures are effective; and
  8. Governance and oversight of the plan, including identifying the critical members of a response team, to ensure ongoing review and updates to the plan, including the tracking of relevant information from government sources and the entity’s own monitoring program.

In addition, each Insurer’s risk management program should include a plan to assess and monitor the financial risk that may arise from COVID-19 and should include the following minimum assessments:

  1. Assessment of the overall impact of COVID-19 on reserve requirements, consumers’ ability to make timely premium payments, and resources required to timely process claims;
  2. Assessment of the credit risk of counterparties and business sectors impacted by COVID-19;
  3. Assessment of the credit exposure to counterparties and business sectors impacted by COVID-19 arising from investing and other financial transactions;
  4. Assessment of the scope and the size of admitted assets or other investments adversely impacted by COVID-19 that currently are in, or potentially may move to, non-performing/delinquent status, including consideration of stress testing and/or sensitivity analysis of such assets or investments;
  5. Assessment of the valuation of assets and investments that may be, or have been, impacted by COVID-19; and
  6. Assessment of the overall impact of COVID-19 on earnings, profits, capital, and liquidity.

The board of directors or the equivalent of each Insurer is responsible for ensuring that appropriate plans are in place and that sufficient resources are allocated to implement such plans. Additionally, the senior management is responsible for ensuring that effective policies, processes, and procedures are in place to execute the plan and for communicating the plan throughout the entity.

A.California’s New Regulatory Notice
On the heels of New York’s communications, on March 26, 2020, the California Department of Insurance (“CDI”) issued a Notice to all admitted and non-admitted insurance companies entitled “Request for Information: Business Interruption and Related Coverage in California”. In the Notice, the CDI requests that each insurance company receiving the Notice (“Insurer”), to the extent it is available, provide the following data regarding business interruption related insurance matters to CDI by April 9, 2020.

Particularly, each Insurer should provide to CDI the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage, and supply chain coverage the Insurer wrote that has not lapsed as of the date of the letter. For these coverages, each Insurer should provide information on the following questions:

  1. How many policies are covered under each coverage identified?
  2. Out of these policies, how many policies fall under businesses with more than 500 employees, or alternatively, meet your definition of large business?
  3. Out of these policies, how many policies fall under businesses with less than 500 employees, or alternatively, meet your definition of medium size business?
  4. Out of those with less than 500 employees, how many policies fall under businesses with less than 100 employees, or alternatively, meet your definition of small business? B.Possible Federal Bill ProposalsOn March 18, 2020, U.S. Congresswoman Maxine Waters called for a Pandemic Risk Insurance Act that would “create a reinsurance program like the Terrorism Risk Insurance Act for pandemics by capping the total insurance losses that insurance companies would face.” 

Just one day later, on March 19, 2020, a bipartisan group of U.S. House members known as the Problem Solvers Caucus (comprised of an equal number of Republicans and Democrats) released a policy recommendation to “[l]egislatively declare the coronavirus a public health crisis, and, as such, a qualifying event for all existing force majeure contract provisions and business interruption insurance policies.”

Whether the U.S. Congress will pass a bill similar to those mentioned infra remains to be seen.

C.Conclusion
If any of these bills are passed, they would potentially eliminate the ability of insurance companies to deny coverage for COVID-19 business interruption claims based on the absence of physical loss or damage to covered property and/or virus-related exclusions.

While A.B. 3844, H.B. 589 and A10226 implicitly override the language in business interruption policies, SD. 2888 goes even further by explicitly providing that insurance companies cannot deny business interruption claims based on these policy provisions.

There can be no doubt that these bills (or substantially similar ones) if they are signed into law would impair the contract rights of the insurance companies. As such, these potential laws would likely be the subject of lawsuits challenging their constitutionality under the Contract Clause in Article 1 of the U.S. Constitution and corresponding clauses in state constitutions.

Nevertheless, the States of New York and California are seeking information from insurance companies that they likely intend to utilize to introduce additional bills and/or amendments to current bills to require insurance companies to cover these losses. Insurance companies in New York and California should provide the information requested while insurers in other states should be preparing to provide similar information in their respective states.

Please visit our website at www.rebarkelly.com to learn more about the legal services we can provide. If you have any questions or would like more information on the issues discussed in this article, please contact Cathleen Kelly Rebar or Andrew Shaw.

Dated: April 2, 2020