COVID: Legislative Responses and Legal Challenges to Viral Exclusions for Business Interruption Loss Coverages

Part I: Legislative Responses and Legal Challenges to Viral Exclusions for Business Interruption Loss Coverages

Written by Luke Schmitt, Flaherty Sensabaugh Bonasso PLLC (Part I)
Written by Erica Baumgras, Flaherty Sensabaugh Bonasso PLLC (Part II)

All eyes are on New Jersey Legislature, which is currently discussing and reviewing a bill that could force coverage under business interruption insurance for coronavirus related losses even in the presence of a “virus” related exclusion.

After the SARS outbreak in 2003, which saw devastating effects, insurance companies made serious changes to their insurance policies relating to coverage for interruptions stemming from the disease. Specifically, many businesses who purchased business interruption coverage had “virus and bacteria” exclusions added to their policies.

Business interruption policies generally cover direct property damage, which leads to periods of in-operation of the company. Arguably, pandemics, like COVID-19, could lead to property damage if there is contamination of the property or HVAC system, which caused property damage, but such claims may be difficult to demonstrate.

Many insurers have added “Exclusion for Loss Due to Virus or Bacteria” provisions or similarly named exclusion provisions. As seen in reports out of New Jersey, these exclusions may bar first-party recovery for companies who suffer “loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease.” Many business interruption policies contain slightly different language; however, the effect is still the same: no coverage for viral related damage during pandemics.

Fast forward to 2019, when the world sees its second coronavirus related pandemic in the 21st Century, COVID-19 (a virus in the coronavirus family similar to that of SARS).

To battle business losses stemming from the required social-distancing and other related damage, the New Jersey legislature appears to be the first to attempt to negate or void these existing insurance exclusion provisions. On March 16, 2020, New Jersey’s legislature proposed the following:

“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 . . . concerning the coronavirus disease 2019 pandemic.”

The purpose behind this proposed legislation is to ease the burden on local, state, and federal governments, which would most likely need to provide nationwide bailouts, and of course, to aid the businesses who paid premiums for business interruption loss coverage. The New Jersey proposed legislation only intends to provide two changes: 1) to eliminate the virus exclusion, and 2) to eliminate the need to prove direct physical property damage under the business interruption policy. Aside from the myriad financial effects that this bill will have on the public and the insurance industry, this type of prospective legislation raises constitutional issues and will likely be reviewed by the courts in New Jersey and anywhere else similar legislation is adopted.

This is not the first time that a legislature has retroactively acted to influence liability determinations. Following the Minnesota I-35W Bridge Collapse in 2007, which resulted in thirteen deaths and many injuries, the Minnesota legislature voluntarily established a $37 million fund for the compensation of affected families. To offset these payments, the state sought recovery from the engineering companies that had designed the bridge between 1962 and 1965. Typically, such a claim would be barred by the applicable statute of repose due to the passage of significant time since construction. Since the design professionals’ liability had been extinguished by way of that statute of repose, the Minnesota legislature revised its statutes to permit claims for indemnity and reimbursement against the designers. Specifically, the laws were amended to retroactively revive these time-barred claims arising out of one specific incident. The design professionals argued that the legislature’s action was unconstitutional; however, the Minnesota Supreme Court disagreed and allowed the state’s claims for indemnity against the engineer to stand.

Not wishing to wait for their respective legislatures to act, some businesses are resorting to the courts to seek relief from these types of coverage exclusions. March 16, 2020, marked the date for the first of many anticipated declaratory actions brought in light of COVID-19 related business losses. Oceana Grill, a restaurant in New Orleans, filed suit seeking a declaration of coverage under their “all risks” property policy, which provided an extension of coverage for business closure by order of Civil Authority. The business is seeking a declaration that “the policy provides coverage to plaintiffs for future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises.” In advancing these arguments, businesses are relying upon the nature of the virus, specifically its propensity to stay on surfaces or materials, “fomites” for up to 28 days, and its ability to infect individuals physically. The outcome of these declaratory actions will likely not be seen for months, or even years.

Moreover, legislatures that pursue similar measures to the one advanced in New Jersey will likely see their actions challenged on constitutional and other grounds. Which path West Virginia will follow will be determined in the coming weeks, months, and even years.

Until then, Flaherty is here for your needs, whether they are part of your routine business or new in the face of unprecedented actions taken to combat COVID-19. In these fluid times, you can count on us to have current information that will help your business take advantage of opportunities as they become available. Please reach out if you have any questions or concerns about how these new requirements may impact your business or employees.

Part II: Insurance Law Update on COVID-19: Part II

Flaherty will continue to follow developments at both the national and state level, whether in the legislative, administrative, or judicial arena.  Please reach out to Erica Baumgras or Luke Schmitt if you have any questions about how these developments may impact you, your business, or your employees.

On March 22, 2020, a bipartisan group from the United States House of Representatives sent a letter to four (4) insurance industry trade organizations, asking insurers to provide business interruption coverage under existing commercial property policies for losses due to closures tied to COVID-19. The lawmakers asserted that the coronavirus pandemic fulfills the policies’ requirement that an interruption in business be attributable to a “direct physical loss” or damage to a property. They also asserted that state and local “shelter-in-place” and curfew orders should trigger coverage for losses under the “civil authority” prong that is often found in commercial property policies.

In response, executives of the four groups, the American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, Independent Insurance Agents, and Brokers of America, and Council of Insurance Agents and Brokers, sent a joint letter to Rep. Nydia Velazquez, D-N.Y., saying that business interruption policies “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” The groups said that the “U.S. insurance industry remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.” The trade groups added that their member companies have assisted in local charitable relief efforts and have begun to work with customers “on issues such as flexibility in premium payments.” The groups also said the “U.S. is in the midst of a national crisis that will require federal assistance that provides funding directly to those American individuals and businesses most in need,” and that their “organizations stand ready to work with Congress on solutions that provide the necessary relief as soon as possible.”

Also, at the national level, a subcommittee of the House Committee on Oversight and Reform on Wednesday asked three (3) travel insurance carriers to produce documents and participate in interviews to address the scope of coverage provided by their policies for trip cancellations related to the coronavirus. The chairman of the Economic and Consumer Policy subcommittee sent letters to Allianz Global Assistance USA, Generali Global Assistance Inc., and Travel Guard Group Inc., asking them to provide certain information by March 25. Among other things, the subcommittee is seeking data on the number of claims the carriers have received from policyholders for reimbursement of trip cancellations or medical expenses, as well how many of those claims have been paid or denied. Rep. Raja Krishnamoorthi, D-Ill., also asked executives of the three insurers to schedule interviews, noting that the subcommittee “can make arrangements for a remote interview.” The executives previously declined invitations to testify at a subcommittee hearing on travel insurance issues scheduled for March 11. The inquiries are part of an ongoing investigation into consumer complaints that their travel insurance claims have been improperly denied.

The three insurers have all issued public statements indicating they now consider the coronavirus outbreak to be a “foreseeable event” and that cancellations for fear of travel generally will not be covered under most of their policies. The carriers have said their “cancel for any reason” policies might provide partial or full coverage for cancellations on these grounds, depending on the policies’ terms. In addition, the insurers have all indicated that some of their policies might cover claims for trip cancellation or interruption if a policyholder’s plans are disrupted by a confirmed diagnosis of COVID-19.

At the state level, in the New Jersey General Assembly, lawmakers are in discussions with insurance carriers regarding potential changes to a bill, A3844, that would retroactively expand business interruption insurance to include losses attributed to the coronavirus pandemic. The bill was reported out of the General Assembly’s Homeland Security and State Preparedness Committee last Monday. It was set for a vote by the full chamber the same day before the sponsors pulled it at the last second. Assemblyman Freiman’s chief of staff reported that the bill was pulled so lawmakers could engage in further discussions with insurers. After several conversations with various insurance companies, they concluded that they are going to allow companies to come forward with their plans to address the issue proactively, and they want to give them a few days to do so. As of March 20, talks were still ongoing.

As currently written, A3844 would apply to business interruption policies held by New Jersey businesses with fewer than 100 full-time employees, provided that the policies were issued by March 9, when Gov. Phil Murphy declared a state of emergency. The bill would effectively rewrite such policies to explicitly include coverage for “business interruption due to global virus transmission or pandemic.” Insurers that pay out business interruption claims under these policies would potentially be eligible for reimbursement from the New Jersey Department of Banking and Insurance, according to as-yet-undetermined standards that would have to be established by the department.

A3844 was met with swift criticism by a host of both New Jersey and national insurance industry trade groups, which cautioned against legislation that would retroactively create coverage for otherwise uncovered losses. Those concerns were echoed by attorneys who represent insurers, who pointed out that many policies with business interruption coverage contain a “virus” exclusion that was developed by the Insurance Services Office and approved by state regulators years ago. If passed in its current form, the bill could be met with numerous constitutional challenges by insurers.

Citing the coronavirus outbreak, the California Insurance Commissioner issued a notice March 19 requesting that all insurance carriers doing business in the state grant their policyholders a “grace period” of at least 60 days before canceling their policies due to a failure to pay premiums. During that period, policyholders would be able to catch up on payments. Commissioner Lara said he issued the notice, which applies to insurers offering life, health, auto, property, casualty, and other types of coverage, to ensure policies are not canceled for nonpayment of premium due to the novel coronavirus (COVID-19) public health emergency. Lara further requested that all insurance agents, brokers and others who accept premium payments on behalf of insurers take steps to ensure that customers have the means to make payments if and where possible, including alternate methods of payment, such as online payments, to eliminate the need for in-person payment methods in order to protect the health and safety of both workers and customers.