On Tuesday, May 5, 2020, the D.C. Council declined to vote on a portion of the Coronavirus Omnibus Emergency Amendment Act of 2020, called the Business Interruption Insurance Amendment Emergency Act, which would have required every business interruption and loss of use or occupancy insurance policy currently in force in the District of Columbia be read to cover business interruptions directly or indirectly resulting from a public health emergency declared under the District of Columbia Public Emergency Act of 1980, D.C. Law 14-194, D.C. Official Code § 7-2304.01 (“Public Emergency Act”). The proposed bill would have been the first in the nation to require insurers to retroactively cover, regardless of policy language, the current losses that businesses are facing as a result of closures mandated by COVID-19.
Jackson & Campbell, P.C. attorneys are providing this client alert to address the proposed legislation and the potential implications of this type of legislation on the insurance industry.
Business Interruption Insurance
Business interruption insurance typically covers financial losses, such as lost income or operating expenses, incurred by a business when it is unable to operate as a result of disaster, resulting in direct physical loss, physical damage, or destruction of property, typically from fire, flood, water wind or some other similar occurrence. This coverage generally does not include instances where the covered property has not sustained any actual, demonstrable damage.
The majority of business interruption coverage excludes damage incurred as a result of viruses and bacteria or other such infectious diseases, like COVID-19. Certain policies may even explicitly exclude pandemics. Additional coverage for pandemic losses is sold in the marketplace but is very rarely purchased.
On March 24, the District of Columbia’s Department of Insurance, Securities and Banking (the “Department of Insurance”) issued responses to Frequently Asked Questions, which included a response to whether business interruption insurance will likely provide coverage for businesses that had to close because of COVID-19. The Department of Insurance indicated that it is not likely that business interruption insurance will provide coverage for COVID-19 because communicable diseases are usually excluded. In addition, the Department of Insurance indicated that “for a business interruption policy to respond, the following conditions will need to be met: 1. Actual loss of business income; 2. Suspension of business operation; 3. Direct physical loss or damage at the described premises that is from a covered cause. Business interruption insurance does not provide coverage for a slowdown or reduction in operations.”
According to the Insurance Services Office (“ISO”), only about 30% of small businesses purchase business interruption insurance. But as a result of the COVID-19 pandemic, numerous lawsuits have been filed by small businesses, such as restaurants, seeking business interruption coverage following government-mandated closures. These policyholders typically allege that the business has sustained a substantial loss in income and direct physical losses and that the loss is covered because their properties have been physically damaged by being contaminated by COVID-19. The policyholders may also contend that government-ordered closures constitute physical damage to the properties. Finally, the policyholder may also include allegations against brokers and wholesalers alleging they breached their duties to the policyholder by communicating inaccurate information as to what the policy covers, or by not procuring a policy that fully covers a business’s losses.
The recent lawsuits demonstrate that insurers must actively investigate and respond to business interruption claims. In California, for instance, numerous complaints from policyholders submitting business interruption claims caused the California Insurance Commissioner to issue a notice that requires insurers to “acknowledge and fairly investigate all business interruption insurance claims cause by the COVID-19 pandemic.” As evidenced by the notice, business interruption coverage claims will likely only increase in the coming months.
The District of Columbia’s Proposed Business Interruption Insurance Amendment Emergency Act
If passed, the Business Interruption Insurance Amendment Emergency Act (“Act”) would have been the first in the nation to require insurers to retroactively cover, regardless of policy language, the current losses that businesses are facing as a result of closures mandated by COVID-19.
The Act would have provided broad language for coverage, requiring coverage for losses: (1) directly or indirectly resulting from the public health emergency; (2) arising from actions a policyholder takes in response to the Mayor’s orders, regardless of any virus exclusions in the policy; and (3) regardless of whether there is physical damage to the policyholder’s property or any other relevant property.
The Act also would have limited coverage for losses: (1) to business interruption and loss of use or occupancy policies in force as of the effective date of the Act; (2) for the duration of the public health emergency; (3) up to the policy’s limits of liability; and (4) for only those policyholders with fewer than 100 full-time employees, each of whom works 25 or more hours per week as of March 1, 2020.
The Act further would have provided reimbursement to insurers for such incurred losses, which they would submit to the Commissioner of the District of Columbia Department of Insurance, Securities, and Banking (“Commissioner”) subject to Commissioner-established procedures. The procedures were required to include standards necessary to protect against the submission of fraudulent claims by policyholders and appropriate safeguards for carriers to employ in the review and payment of such claims. But any reimbursement borne by the District of Columbia would have been temporary, as the Act would ultimately put liability back on all business interruption insurers doing business in the District of Columbia through one or more assessments, which the Commissioner would be given the authority to make in each fiscal year. The assessed amounts would be in proportion to the insurers’ net premiums written and annuity considerations, as shown in their annual reports. Business interruption insurers would have been required to claim such assessments as normal operating costs of the company.
At the virtual meeting on May 5, District of Columbia councilmembers expressed concerns over protracted litigation with the insurance industry if the Act were passed, potential constitutional implications, and that it would be the first in the nation to pass such legislation.
Other States Seek to Retroactively Apply Coverage to COVID-19 Claims
Other states, such as Louisiana (S.B. 477), Massachusetts (S.D. 2888), New Jersey (A.B. 3844), New York (A.B. 10226), Ohio (H.B. 589), Pennsylvania (H.B. 2372), and South Carolina (S.B. 1188), are considering similar legislation. Rhode Island has yet to introduce a bill, but a proposed draft circulated to media outlets is set to be introduced during the next legislative session. Like the District of Columbia, the benefits of these states’ proposed legislation appear to be conferred on “small businesses,” limiting coverage to those with 100 or fewer employees in New Jersey, Ohio, Pennsylvania, and Rhode Island, those with 150 or fewer employees in Massachusetts and South Carolina, and 250 or fewer employees in New York.
States have also proposed a mechanism for reimbursement of the losses incurred by business interruption insurers, with at least Massachusetts, New York, New Jersey, Ohio, Pennsylvania, Rhode Island, and South Carolina permitting the state’s insurance commissioner to impose an assessment on insurers to recoup the reimbursed amounts. Of those, New Jersey, New York, Ohio, Pennsylvania, and South Carolina’s bills allow the insurance commissioner to collect amounts from certain categories of insurers even if they do not offer business interruption coverage.
Louisiana’s proposed legislation currently places no limit on the policyholder’s number of employees and offers no mechanism for reimbursement.
Insurance industry associations have condemned such proposed legislation, indicating that these acts could potentially destabilize and possibly bankrupt the insurance industry, which in turn could negatively impact policyholders and entire coverage lines. The associations assert the global closure losses are so significant that the cost of retroactively changing insurance policies cannot be estimated. A former CNA Financial Corp Chief Executive has indicated that losses could exceed $500 billion if state lawmakers require insurers to cover business-interruption claims for pandemic losses.
On March 25, the National Association of Insurance Commissioners (NAIC) issued a statement that it would oppose any proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover. NAIC indicated that coverage for such claims would “create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.”
On May 1, the American Property Casualty Insurance Association (APCIA) specifically addressed the D.C. Council’s proposed legislation, indicating that that closure losses targeted by the legislation could range from $300 million to $1.1 million per month, which would “dwarf the premiums for all relevant commercial property risks in the key insurance lines for D.C., which are estimated at $16 million a month.”
Some insurers have voluntarily begun providing relief to small businesses by suspending premium billing and recalculating premiums on renewals as a result of the significantly decreased economic activity caused by COVID-19.
An additional issue for policyholders is that, in the absence of a federally-backed program to protect insurance companies, insurers are likely to decline to continue issuing business interruption coverage or shift towards decreasing policyholders’ limits and increasing their premiums.
Should legislation be passed, insurers are likely to contest the legality of these laws in court raising a variety of constitutional challenges. These legal challenges would likely take years to resolve, during which time business interruption claims would be left unpaid. This outcome defeats the essential purpose of the legislation in providing timely relief to small businesses during this pandemic.
As mentioned above, if the District of Columbia and other states were to enact this type of legislation, they would be likely face challenges on constitutional grounds. The Contracts Clause of the U.S. Constitution prohibits states from passing any law that impairs the obligations of contracts. U.S. Const. art. I, § 10, cl. 1. Applying a three-part test, insurers would need to argue that the retroactive nature of the proposed legislation is a substantial impairment of an existing contractual relationship because it requires insurers to indemnify policyholders for losses that were never bargained for, and that while the laws may have a significant and legitimate purpose, it is unreasonable for those costs to be imposed only on insurers.
The Fifth Amendment’s Taking Clause provides that private property shall not be taken “for public use, without just compensation.” U.S. Const., Amend. V. The Supreme Court has long-recognized that contractual rights, such as the existing contracts of insurance providing business-interruption and loss-of-use coverage at issue here, are considered property for purposes of the Takings Clause. An insurer’s challenge to the legislative enactments of the states and the District of Columbia could be brought under the theory of a regulatory taking, which would require a showing of an economic impact to the insurer, interference with the insurer’s investment-backed expectation, and that the government action did act with a significant public purpose. Although the third prong may be difficult to overcome, in the past courts have not given governments carte blanche to place the burden of a significant public purpose on particular groups, finding instead that the cost should be borne by the public as a whole.
Given the expansive rights that could be granted to policyholders under the proposed legislation, and because of the overwhelming burden insurers are facing under these proposed bills, these are issues that insurance companies will need to follow closely. Jackson & Campbell, P.C. will continue to monitor this business interruption legislation and provide insight and guidance as it evolves.
This summary is not intended to contain legal advice or to be an exhaustive review. If you have any questions regarding this article, please contact Annette Rolain, Christopher Quinlan or another member of Jackson & Campbell’s Insurance Coverage Practice Group.