One response to the lack of coverage for COVID-19 business interruption insurance claims is to try to legislate it.
The push to have business interruption insurance coverage respond to the business interruption losses caused by the COVID-19 pandemic is intensifying on several fronts. For insurers, insurance agencies, and their producers, the lack of coverage for virus pandemics may seem apparent. For those who would like a primer on this issue please see Agency Checklists’ article of March 17, 2010, “Business Interruption Coverage and The Coronavirus Pandemic.”
Massachusetts and five other states have bills pending to mandate COVID-19 coverage
The idea of mandating insurance coverage, the contract be damned, has garnered some attention and support. Six states, Louisiana, New Jersey, New York, Ohio, Pennsylvania, and Massachusetts, already have legislation pending to mandate coverage for COVID-19 business interruption insurance claims.
Thirty-nine legislators have co-sponsored the Massachusetts COVID-19 bill
In Massachusetts, the proposed bill is SD.2888, entitled “An Act Concerning Business Interruption Insurance,” with approximately thirty-nine legislators as co-sponsors. On April 6th, the Senate referred the bill to the Joint House-Senate Committee on Rules.
According to the proposed legislation, it will apply to existing policies issued to:
- Insureds with 150 or fewer full-time-equivalent employees in Massachusetts.
- That have policies in force on the effective date of the act, or
- Policies that become effective before the date that the governor rescinds his executive order ordering the closure of businesses.
The legislation then provides that every property policy that has in-force coverage for the loss of use and occupancy and business interruption as of the effective date of the law:
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.
The proposed rewriting of the policies does have some limitations. The bill ties the mandated business interruption coverage for COVID-19 to the Governor’s executive order by providing:
“the coverage required by this section shall cover the insured for any loss of business or business interruption until such time as the emergency declaration issued by the governor, dated March 10, 2020, and designated as executive order number 591, is rescinded by the governor.
The coverage is also subject to “(i) any monetary limits of the policy and (ii) any maximum length of time set forth in the policy for such business interruption coverage.”
The proposed bill prohibits the denial of a COVID-19 business interruption claim
After the passage of the proposed bill, no insurer in the Commonwealth will be able to deny a claim by insureds under the Act for the loss of use and occupancy and business interruption on account of:
- COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses), or
- there being no physical damage to the property of the insured or any other relevant property.
The proposed Bill also provides in its final section: “For the avoidance of doubt, this act is subject to Chapter 176D of the General Laws.” This statute gives the Commissioner of Insurance the power to enter cease and desist orders, as well as the ability to fine insurers for unfair and deceptive business practices, including unfair claim practices.
Insurers paying COVID-19 claims can apply for reimbursement to the Commissioner of Insurance
Another provision included in the Act worth noting is that insurers that become obligated to pay Massachusetts businesses with 150 or fewer employees for COVID-19 business interruption insurance claims can apply to the Commissioner of Insurance for reimbursement from a fund established under the Act.
The proposed law states the funds to reimburse the insurers paying these COVID-19 business interruptions claims will come from “one or more assessments in each fiscal year against licensed insurers in the Commonwealth that sell business interruption insurance as may be necessary to recover the amounts paid, or estimated to be paid, to insurers pursuant to … this act.”
The Bill, however, also states two sentences later that “The amount to be so assessed shall be made against all licensed domestic companies and foreign companies in proportion to their net premiums written and annuity considerations in the Commonwealth…” As such, the reconciliation of the assessments from insurers writing business interruption coverage in the first instance, and all domestic and foreign companies in the second instance, is not clear from the bill as it is currently written.
If the bill becomes law, constitutional challenges are certain
The COVID-19 pandemic is a frightening event that is causing tremendous economic damage to small businesses in Massachusetts. This proposed Bill is a response from legislators to the destruction of small businesses in their districts, and as a result of the mandated shutdowns ordered by the Governor. While it is unlikely this bill and similar bills in other states will become law, there is a finite chance that one or more may become law.
In that scenario, constitutional challenges in the courts by the affected insurers will inevitably follow. The two major constitutional provisions that could void this type of law are the “contract clause” and the “taking clause” of the US Constitution.
The rewriting of existing insurance contracts, as proposed by this legislation, would raise constitutional questions under the United States Constitution’s Contract Clause. This clause states that “no state shall …pass any…law impairing the Obligations of Contract.”
As members of a regulated industry, insurance companies have not fared well in contesting state legislative or regulatory action claiming a constitutional violation of the Contracts Clause. The United States Supreme Court has upheld laws impairing contracts based on a state promoting public welfare. However, this legislation may be one of the very few laws that fails that minimal test based on its blatant revision of existing insurance contracts for a limited class of insureds.
The second constitutional challenge arises under the “Takings Clause” of the US Constitution. This clause states that “private property [cannot] be taken for public use, without just compensation.” for a law. Insurers have had some success contesting laws where a state’s regulatory mandates go too far and amount to a confiscation of property.
In this case, the proposed law creates new obligations that take money from insurance companies and transfers it to small businesses that have suffered economic loss because of state action. It is difficult to see how these insurers would not have had their property taken for a public purpose in violation of the Constitution.
Owen Gallagher
Co-Founder & Publisher Agency Checklists
About Owen Gallagher
Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. His interest and affinity for insurance began at a young age working the counter at his father’s assigned risk agency in Roxbury.
Over the course of his career, Owen has argued a number of cases in the Massachusetts Supreme Judicial Court and has helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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