Proposed COVID-19-Related Business Interruption and Property Loss Insurance Legislation

Recent claims by private businesses seeking to recover coronavirus-related (COVID-19) losses under their business interruption and property insurance policies have typically been denied by their insurers based on the rationale that such losses are either not included in the policies' general coverage language, are omitted from coverage by the specific exclusions in the policies, or both. Whether those denials will be upheld remains an open question, and a large number of lawsuits on the issue are already pending, but for small businesses all over the country that do not have the time or the resources to challenge these denials in court before their money runs out, the immediate consequences have been so severe that their continued existence is threatened, prompting them to urgently request relief from their elected representatives.

Proposed State Legislation

In an effort to address those requests, state legislators in Louisiana,¹ Massachusetts,² New York,³ New Jersey,⁴ Ohio,⁵ Pennsylvania⁶ and South Carolina⁷ have each introduced and are considering proposed legislation that would require insurance companies operating in their states, either temporarily or permanently, to pay out on coronavirus-related loss claims brought by their small business insureds (generally those with less than 100-150 employees) since the beginning of the crisis, without regard to whether the relevant business interruption and property policies actually cover such claims – subject only to the procedural requirements, monetary caps and time limits of those policies. Many of these proposed statutes also permit the insurers to subsequently seek reimbursement from their states for such payouts, subject to the states being able to impose a surcharge back on all insurers selling such policies in their jurisdictions to recoup those reimbursement payments (which the insurers in turn could pass on to their customers later), though it is not clear whether the reimbursements would be total or partial. 

There are constitutional limitations, however, on the ability of states to impose this kind of retroactive "across the board" interpretation of contractual provisions on a select group of private parties, particularly where those same contractual provisions in insurance policies issued to larger insureds could wind up being construed differently, either by the parties or in subsequent litigation over the issue. The U.S. Supreme Court, for example, has interpreted the "Contracts Clause" of the U.S. Constitution⁸ as prohibiting "substantial" retroactive interference with private contract rights, such as those established by insurance policies, unless 1) the state has a significant and legitimate public purpose for the law; and 2) the impairment is reasonable and appropriate in light of that public purpose.⁹ The Supreme Court has also held that the Due Process Clause of the Constitution prohibits the states from retroactively interfering with vested contractual rights without due process, effectively requiring that any such interference be "rationally related" to a "legitimate state interest."¹⁰ 

These constitutional requirements are sufficiently complex and debatable that any state statutes seeking to retroactively impose a "forced" interpretation of insurance policies in this manner will almost certainly be challenged in court immediately upon enactment. With this in mind, state legislatures have been taking extra time to review and revise the new proposed laws so as to maximize the chances of their surviving constitutional challenges, including by inserting "legislative intent" language describing the "legitimate" state interests that they are intended to protect, and the "reasonableness" of the impairment of insurance contracts that will result. This review and revision process, along with contentious political debate over the fundamental wisdom of such measures, has for the moment caused delay in the enactment of these statutes, none of which has yet been actually adopted or gone into effect.

Proposed Federal Legislation

In the meantime, several members of the U.S. House of Representatives have introduced proposed federal legislation on this issue¹¹ that would similarly void any provisions in business interruption or property insurance policies purporting to exclude coverage for COVID-19-related losses and losses resulting from certain other "major events" such as mandatory evacuations, public safety power shut-offs, etc., and require the issuers of such policies to cover such losses. This federal override, however, would apply to all property and casualty insurance policies "provided or made available for losses resulting from periods of suspended business operations," not just policies issued to small businesses, and it would preempt any conflicting state laws permitting insurers to exclude such coverage.

Specifically, in its present form, the proposed federal legislation, as set forth in the April 14, 2020, draft of H.R. 6494, is as follows, with key provisions underlined:

SECTION 1. SHORT TITLE.

This Act may be cited as the ''Business Interruption Insurance Coverage Act of 2020''.

SEC. 2. BUSINESS INTERRUPTION COVERAGE REQUIREMENTS

Effective upon the date of the enactment of this Act, each insurer that offers or makes available business interruption insurance coverage—

(1) shall make available, in all of its policies providing business interruption insurance, coverage for losses resulting from—

(A) any viral pandemic;

(B) any forced closure of businesses, or mandatory evacuation, by law or order of any government or governmental officer or agency, including the Federal Government and State and local governments; or

(C) any power shut-off conducted for public safety purposes; and

(2) shall make available business interruption insurance coverage for losses specified in paragraph (1) that does not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than those specified in paragraph (1).

SEC. 3. PREEMPTION AND NULLIFICATION OF PRE-EXISTING EXCLUSIONS.

(a)  GENERAL NULLIFICATION.— Any exclusion in a contract for business interruption insurance that is in force on the date of the enactment of this Act shall be void to the extent that it excludes losses specified in section 2(1).

(b)  GENERAL PREEMPTION.—Any State approval of any exclusion of losses from a contract for business interruption insurance that is in force on the date of the enactment of this Act shall be void to the extent that it excludes losses specified in section 2(1).

(c) REINSTATEMENT OF EXCLUSIONS.—Notwithstanding subsections (a) and (b) or any provision of State law, an insurer may reinstate a preexisting provision in a contract for business interruption insurance that is in force on the date of the enactment of this Act and that excludes coverage for losses specified in section 2(1) only—

(1) if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement; or

(2) if—

(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.

SEC. 4. DEFINITIONS.

For purposes of this Act, the following definitions shall apply:

(1) BUSINESS INTERRUPTION INSURANCE COVERAGE .—The term ''business interruption insurance coverage'' means property and casualty insurance coverage provided or made available for losses resulting from periods of suspended business operations, whether provided under broader coverage or separately.

(2) INSURER.—The term ''insurer'' has the meaning given such term in section 102 of the Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note).

H.R. 6494, dated April 14, 2020
(Emphasis added)

Significantly, there is no provision in H.R. 6494 for the federal government to reimburse the insurers for the cost of paying COVID-19-related loss claims – only a somewhat ambiguous provision giving them the right to "reinstate" exclusions of coverage for such claims in policies in effect on the date of enactment of the statute, after giving 30-days' notice of the premium increase needed to prevent such reinstatement, and receiving no payment of the increase from the insured by the date specified in the notice. Other insurance-related federal statutes under consideration to deal with the COVID-19 epidemic, such as the Pandemic Risk Insurance Act, may fill some of this gap, but given the magnitude of the expected loss claims, it remains a significant omission at this point. 

Congressional consideration of this bill is still in its early stages, however, and its federal preemption provisions – which would invalidate any contrary provisions in the pending state statutes discussed above – suggest that other provisions, or other complementary federal laws, may be planned to help insurers pay out on the new claims. Whether they are or not, though, this kind of retroactive federal intervention, if it occurs, is likely to significantly alter the shape of the casualty insurance and reinsurance markets for years to come, and become yet another legacy of the COVID-19 pandemic. It may also result in major litigation over the constitutionality of the new federal statutes, and the extent of their preemptive effects on existing state insurance law. 

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Notes

¹ Louisiana – H.B. 858, 3-31-30, "Provides relative to business interruption claims due to the coronavirus disease 2019 pandemic Mandatory Coverage for COVID-19 Business Losses." A second proposed bill, S.B. 477, "Provides relative to business interruption insurance," is not limited to small businesses.

² Massachusetts – S.D. 2888, 4-6-20, "An Act Concerning Business Interruption Insurance."

³ New York Assembly A10226, 3-27-20, "An Act in relation to requiring certain perils be covered under business interruption insurance during the coronavirus disease 2019 (COVID-19) pandemic."

⁴ New Jersey Assembly A.3844, 3-16-20, "An Act concerning certain covered perils under business interruption insurance and supplementing Title 17 of the Revised Statutes."

⁵ Ohio General Assembly H.B. 589, 3-24-20, "Require certain insurance cover pandemic losses."

⁶ Pennsylvania Senate S.B. 1114, 4-15-20, "An Act providing for coverage under business interruption insurance during the COVID-19 disaster emergency."

⁷ South Carolina – S.B. 1188, 4-8-20, requiring insurers providing coverage for loss of use and or business interruption to cover claims directly or indirectly resulting from the COVID 19 pandemic.

⁸ U.S. CONST. Art. I, Sec. 10, Cl. 1 ("No State…pass any…Law impairing the Obligation of Contracts")

⁹ Energy Reserves Group v. Kansas Power & Light Co., 459 U.S. 400, 410-13 (1983) ("Although the language of the Contract Clause is facially absolute, its prohibition must be accommodated to the inherent police power of the State 'to safeguard the vital interests of its people.' "); General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992) ("Generally, we first ask whether the change in state law has 'operated as a substantial impairment of a contractual relationship.' … This inquiry has three components: whether there is a contractual relationship; whether a change in law impairs that contractual relationship, and whether the impairment is substantial.")

¹⁰General Motors Corp. v. Romein, 503 U.S. 181, 191 (1992) ("Retroactive legislation presents problems of unfairness that are more serious than those posed by prospective legislation, because it can deprive citizens of legitimate expectations and upset settled transactions. For this reason, 'the  retroactive aspects of (economic) legislation, as well as the prospective aspects, must meet the test of due process': a legitimate legislative purpose furthered by rational means"), citing Pension Benefit Guaranty Corporation v. R. A. Gray & Co., 467 U.S. 717, 730 (1984). E. Enters. v. Apfel, 524 U.S. 498, 503 (1998) ("Retroactive legislation is generally disfavored. It presents problems of unfairness because it can deprive citizens of legitimate expectations and upset settled transactions.").

3082, 6 Fla. L. Weekly Fed. S 68.

¹¹ The proposed legislation that was introduced by Rep. Mike Thompson (D-Calif.) is entitled H.R. 6494, the "Business Interruption Insurance Coverage Act of 2020," (BIICA), and states that it is intended "To make available insurance coverage for business interruption losses due to viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs, and for other purposes."