Can the Government Rewrite My Policy? Legislative Attempts to Expand Business Interruption Insurance in Response to the COVID-19 Pandemic
As businesses are forced to close their doors, lay off staff, and make other difficult decisions, Congress and legislatures around the United States are seeking to come up with solutions. The latest trend? Pushing insurers to provide business interruption coverage, regardless of whether there is physical damage to trigger coverage.
On March 18, 2020, a group of 18 members of Congress, representing ten different states, wrote a letter to insurance industry leaders asking that they “work with…member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.” In essence, the letter asks that insurers ignore – or at least liberally construe – the requirement found in many commercial property policies, that there must be physical damage to property before business interruption coverage is triggered. Typically, business interruption insurance is not a standalone product, and there must be a covered risk in order for business interruption insurance to apply.
The Congressional letter comes on the heels of New Jersey Bill A-3844, an act that was proposed by the New Jersey General Assembly. Bill A-3844 would extend coverage “for business interruption due to global virus transmission or pandemic,” regardless of whether there was attendant property damage, and would create a pool of funds to reimburse insurers, collected from assessments on insurers themselves. As of the date of this alert, the New Jersey Senate has not passed Bill A-3844.
Can a government intervene like this to rewrite coverage? We would anticipate significant constitutional challenges. Such intervention would fundamentally rewrite the parties’ policies, imposing additional obligations on the insurer, which were not considered in underwriting or reflected in the premiums paid. Indeed, some insurers may have specifically opted to include the ISO Exclusion for Loss Due To Virus Or Bacteria, developed in result to the SARS outbreak in the early 2000s. Legislation like Bill A-3844 would seemingly require insurers to provide coverage for risks that were specifically excluded.
This type of legislative advocacy may also embolden policyholders. For example, in Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., filed in the Civil District Court for the Parish of Orleans, Louisiana, the insured has taken the position that the “contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment,” similar to “the intrusion of lead or gaseous fumes.” The complaint, which seeks a declaratory judgment that the insured is entitled to “business income coverage in the event that the coronavirus has contaminated the insured premises,” goes on to posit that “[a]ny effort by [the insurer] to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders and the public.” It is likely that policyholders may seek to recast economic losses as property damage, particularly as governments advocate for more expansive coverage. Bill A-3844 and the Congressional letter may prove a trend, and we encourage our clients and other carriers and brokers to stay abreast on these and other legislative attempts to expand business interruption insurance coverage.