Several state legislatures have tacitly acknowledged that the typical insurance policy does not cover business interruption losses resulting from viruses and microorganisms. Such recognition has caused state lawmakers to propose legislation that would retroactively modify property and casualty insurance policies to include COVID-19 as a covered cause of loss. Such legislation has been proposed in Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and South Carolina.
The proposed legislation has sparked fierce backlash from insurance industry associations, with several pieces of legislation already having been pulled from legislative consideration or extensively modified. While other states may similarly remove the proposed legislation from consideration, several federal constitutional challenges may be raised if those states continue to press forward. Unsurprisingly, at the forefront of constitutional challenges is the Contracts Clause, which prohibits states from making laws that “impair the Obligation[s] of Contracts.” Secondly, the proposed legislation arguably violates the Takings Clause. Lastly, the proposed legislation also arguably violates the Due Process Clause.
After discussing the general nature of the proposed legislation, this article explores constitutional challenges to state legislative efforts to retroactively modify business interruption coverage in the wake of COVID-19-related shutdowns.
Characteristics of the Proposed Legislation
Generally speaking, the proposed legislation has three key components. First, the proposed legislation requires insurers to construe COVID-19 as a covered cause of loss in the property and casualty business interruption context. Second, the proposed legislation is specifically directed toward the benefit of small businesses. Third, the proposed legislation often includes a reimbursement mechanism for insurers forced to pay COVID-19-related claims, although the reimbursement would ultimately come from assessments imposed on the insurance industry.
Representative language of the proposed legislation. Ohio’s proposed legislation offers a representative example of language requiring insurers to include COVID-19 as a covered cause of loss. Ohio’s proposed legislation provides:
Notwithstanding any other law or rule 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 section, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.
There are a few takeaways from this broad mandate. Namely, the legislation is directed to insurance policies that provide coverage for “loss of use and occupancy and business interruption” and are in force on the effective date of the legislation. Most significantly, the legislation commands that “covered perils” shall be interpreted to include “global virus transmission or pandemic” for business interruption purposes. The import of this dictate cannot be overstated. By this decree, the state of Ohio proposes to inject itself into previously negotiated private contracts to rewrite the fundamental terms of that contract. Also not to be overlooked is the phrase “during the state of emergency.” The inclusion of this limiting language raises questions about the time period during which the proposed legislation is effective and whether it is only effective during the “state of emergency.”
Naturally, there are variances and differences among the different states’ proposed legislation. For instance, some proposed legislation specifically provides that COVID-19 will be considered a covered cause of loss regardless of any endorsement or exclusion. The proposed legislation in Massachusetts and South Carolina goes further, explicitly prohibiting insurers from declining coverage for business interruption claims on the basis that COVID-19 is a virus. New York’s proposed legislation extends beyond standard business interruption coverage to include contingent business interruption coverage as well.
Small business limitations. The proposed legislation generally applies only to small businesses. Typically, the number of employees determines whether a business is deemed “small.” In Massachusetts and South Carolina, the proposed legislation would apply only to businesses that have 150 or fewer employees. In Ohio and Michigan, the proposed legislation is limited to businesses that have 100 or fewer “eligible employees.”
Conversely, one of several pieces of legislation proposed in Pennsylvania explicitly provides that small businesses “shall receive 100%” of available limits for eligible claims while other insured-businesses not classified as small businesses “shall receive 75%” of available limits for eligible claims. There, “small business” refers to any business that qualifies as such under the U.S. Small Business Administration’s guidelines or that has received, “or will receive,” funding through a program administered by the U.S. Small Business Administration.
Reimbursement of insurers. Another notable characteristic of the proposed legislation is that it frequently includes a mechanism for insurers to be reimbursed for COVID-19-related claims that they were forced to pay. Under the typical reimbursement scheme, the proposed legislation directs the governmental entity that regulates insurance in that state to establish a means for insurers to apply for reimbursement of paid claims. The reimbursement mechanism may be funded by an assessment imposed on insurers licensed in that state. In most states, the assessment is calculated based on the net premium underwritten by the insurer.
Significantly, the assessments are not limited to insurers that have been forced to pay COVID-19 claims under the proposed legislation. Indeed, in some states, the assessment may be mandated on “all licensed domestic companies and foreign companies” that sell business interruption insurance. Therefore, under the mechanisms prescribed by the proposed legislation, insurers are essentially reimbursing themselves without any contribution from the government or the general public.
The Contracts Clause Is a Leading Contender to Curb Legislative Overreach
The Contracts Clause of the Constitution is phrased in absolute terms, providing: “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” Early Supreme Court decisions interpreted the Contracts Clause in line with its absolute prohibition. More recently, however, the Court has sought to balance the Contracts Clause with a state’s inherent police powers, i.e., the ability to regulate the health, morals, comfort, and general welfare of the public. In doing so, the Court has established a two-step analysis to determine when legislation violates the Contracts Clause.
The first step of the analysis requires a determination as to whether the disputed legislation “has operated as a substantial impairment of a contractual relationship.” At this step, courts must consider the extent to which the law “undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights.” Additionally, during this step, courts must consider whether the industry being regulated has been subject to prior regulation.
If the law substantially impairs a contractual relationship, the second step analyzes the “means and ends” of the law, with a particular focus on “whether the state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.” Requiring that the law serve a legitimate public purpose ensures that the law is an exercise of the state’s police power instead of “providing a benefit to special interests.” Further, when the state is not a party to the disputed contract, courts generally defer to legislative judgment concerning the necessity and reasonableness of the legislation.
Substantial impairment analysis. The complete rewriting of an insurance policy’s terms to include COVID-19 as a covered cause of loss surely constitutes a “substantial impairment” to the contractual relationship. Such action undermines the basic “contractual bargain” of the parties by altering covered losses to include a type of virus—an occurrence that, in some policies, has been explicitly excluded. This rewriting also directly interferes with the “reasonable expectations” of the parties. Similar to the statute deemed unconstitutional by the Court in Allied Structural Steel Co. v. Spannaus, here the proposed legislation “nullifies express terms of [insurers’] contractual obligations and imposes a completely unexpected liability in potentially disabling amounts.”
While the insurance industry is extensively regulated, legislation that retroactively rewrites the basic terms of an insurance policy to favor the interests of one party over another is not the type of regulation one could reasonably anticipate. Particularly troubling is the fact that the proposed legislation attempts to render a covered cause of loss an occurrence that has already happened. This drastic action wholly upends the basic principles of insurance to cover unknown, fortuitous losses and would prove catastrophic for the industry as a whole.
“Means versus ends” analysis. The proposed legislation fares no better under the “means and ends” analytical prong. Providing economic relief to individuals and businesses suffering from the COVID-19 pandemic is arguably a legitimate public purpose within the state’s police power. Nevertheless, that power must be tempered against the Contracts Clause. And, the proposed legislation is not drawn in an appropriate and reasonable way to advance that legitimate purpose. The proposed legislation surpasses any legitimate purpose by focusing solely on small businesses that previously purchased business interruption coverage. Put simply, the proposed legislation is not drafted in a manner that provides broad economic relief to the general public. Rather, the proposed legislation retroactively modifies only certain types of insurance policies that were issued to certain types of policyholders.
Although courts defer to legislative determinations of appropriateness and necessity, the courts’ deference is not unfettered. As the Supreme Court has stated, “[i]f the Contract Clause is to retain any meaning at all . . . it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.” Here, the Contracts Clause must impose its limitation on the proposed legislation.
The Takings Clause May Also Challenge the Proposed Legislation
Not only does the proposed legislation run afoul of the Contracts Clause, but there is also a compelling argument that the proposed legislation would be an unconstitutional taking. The Takings Clause of the Fifth Amendment provides that private property shall not “be taken for public use, without just compensation.” The purpose of the clause is to prevent the government “from forcing some people alone to bear public burdens, which in all fairness and justice, should be borne by the public as a whole.” A regulation may constitute an unconstitutional taking of a property right, and a contract may constitute a property right.
While the Court has not adopted a “set formula” for determining when a taking has occurred, the Court has set forth three analytical factors of “particular significance” for consideration in the individualized factual inquiry. These factors are “(1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action.” Considering each of these factors in order, the economic impact of the proposed legislation on any insurer forced to pay COVID-19-related claims would be devastating.
Economic Impact. The American Property Casualty Insurance Association has estimated that business interruption losses for small businesses with 100 or fewer employees are between $255 billion to $431 billion per month. S&P Global Ratings has warned that forcing insurers to provide business interruption coverage for COVID-19-related claims could significantly influence the creditworthiness of property and casualty insurers. In basic terms, the staggering nature of potential COVID-19 claims under the proposed legislation could cause a solvency crisis among insurers.
The inclusion of a mechanism to reimburse insurers in the proposed legislation does not ameliorate its significant detrimental economic impact nor provide “just compensation.” As stated above, the exemplar proposed reimbursement mechanism is not funded by the general public or government but, rather, by insurers. Consequently, the economic impact would be borne most significantly, if not entirely, by insurers.
Investment-backed expectations. The proposed regulation also directly and extensively interferes with the investment-backed expectations of insurers. Forcing insurers to pay claims for which they did not collect premium, set reserves, or anticipate paying necessarily contravenes their expectations. While the insurance industry is comprehensively regulated, the proposed legislation is much more than the usual prospective regulation.
Character of governmental action. The third factor—the nature of the governmental action—is slightly more complicated. Takings are more readily found when the governmental action constitutes a “physical invasion” of property than when the taking is from a program “adjusting the benefits and burdens of economic life to promote the common good.” Nonetheless, economic regulations may constitute a taking. Considering the sweeping reach of the proposed legislation and the fact that the purpose of the Takings Clause is to prevent “forcing some people alone to bear public burdens,” there is an argument that the governmental action constitutes a taking, especially considering that a pandemic may be the archetype of a “burden” that “in all fairness and justice, should be borne by the public as a whole.”
A Due Process Challenge to the Proposed Legislation Should Not be Underestimated
Although subject to a high standard, in certain circumstances the Due Process Clause may invalidate economic legislation. A Due Process challenge may be effective given the retroactive nature of the proposed legislation. For centuries, retroactive legislation has been disfavored because it runs the risk of favoring one group over another. Justice Story succinctly highlighted the ills of retroactive legislation, stating “[r]etrospective laws are, indeed, generally unjust; and, as has been forcibly said, neither accord with sound legislation nor with the fundamental principles of the social compact.” More recently, Justice Kennedy expounded that “due process protection for property must be understood to incorporate our settled tradition against retroactive laws of great severity.” And the Court’s precedent provides that a retroactive law may be stricken down on Due Process grounds if it is “arbitrary and irrational.”
A comparison of the proposed legislation with other recent legislation addressing COVID-19 demonstrates the arbitrariness and irrationality of the proposed legislation. The stated purpose of the proposed legislation is to provide economic support to small businesses. The Paycheck Protection Program (PPP) of the CARES Act has a similar goal. In advancing that shared goal, however, the PPP—unlike the proposed legislation—does not seek to retroactively rewrite the core terms of existing contracts. Rather, the PPP strives to make capital available to qualifying businesses for certain purposes through a program underwritten by the public. Thus, part of the irrationality of the proposed legislation is that it takes a retroactive approach to a current and ongoing problem all while interfering with preexisting contractual rights at the expense of certain insurers. Meaningful solutions to the COVID-19 pandemic should be unifying and forward-facing as opposed to divisive and retrospective.
The proposed legislation is also arbitrary because it fails to take a measured approach as to who qualifies and, equally important, who does not qualify for economic relief consistent with its purported goal. Indeed, the proposed legislation advances the interests of certain economic stakeholders, i.e., small businesses, over others without providing a basis for that distinction.
In short, the purpose of the proposed legislation—helping small businesses that have been adversely affected by COVID-19—is admirable, but the manner in which the proposed legislation seeks to achieve that goal runs afoul of the Constitution and practical considerations, particularly in light of other legislation that seeks to achieve similar goals through different and less radical means. COVID-19 has presented unrivaled challenges; nevertheless, in times of crisis, constitutional values and norms should be embraced, not compromised.
Charles F. Modzelewski is an associate with the law firm of Robinson & Cole, LLP, in Hartford, Connecticut. His practice focuses on property insurance coverage litigation.
 Proclamation No. 9994, 85 Fed. Reg. 15,336 (Mar. 13, 2020).
 See Proclamation No. 9994, 85 Fed. Reg. 15,336, supra note 1.
 Shan Li & Jennifer Calfas, “U.S. Coronavirus Cases Surpass Five Million,” Wall St. J., Aug. 9, 2020.
 Proclamation No. 9994, 85 Fed. Reg. 15,336, supra note 1.
 E.g., Mass. Exec. Order No. 591 (Mar. 10, 2020); Ohio Exec. Order No. 2020-01D (Mar. 9, 2020); Press Release, County of Los Angeles Public Health, County of Los Angeles Declares Local Health Emergency in Response to New Novel Coronavirus Activity (Mar. 4, 2020).
 See Sarah Mervosh et al., “See Which States and Cities Have Told Residents to Stay at Home,” N.Y. Times, Apr. 20, 2020.
 See Mervosh et al., “See Which States and Cities Have Told Residents to Stay at Home,” supra note 6 (listing states with orders requiring nonessential businesses to shut down); Press Release No. 20/98, International Monetary Fund, The Great Lockdown: Worst Economic Downturn Since the Great Depression (Mar. 23, 2020).
 H.B. 858, 2020 Reg. Sess. (La. 2020); S.B. 477, 2020 Reg. Sess. (La. 2020); S.B. 2655, 191st Gen. Ct. of the Cmmw. of Mass. (Mass. 2020); H.B. 5739, 100th Leg., Reg. Sess. (Mich. 2020); A.B. 3844, 219th Leg., 1st Ann. Sess. (N.J. 2020); A.B. 10226, 243d Leg. Sess. (N.Y. 2020); S.B. 8211, 243d Leg. Sess. (N.Y. 2020); H.B. 589, 133d Gen. Assemb., 2019–2020 Sess. (Ohio 2020); S.B. 1114, 204th Gen. Assemb., 2019–2020 Sess. (Pa. 2020); S.B. 1127, 204th Gen. Assemb., 2019–2020 Sess. (Pa. 2020); S.B. 1188, 123d Sess. Gen. Assemb., 2d Reg. Sess. (S.C. 2020).
 E.g., H.B. 858, 2020 Reg. Sess. (La. 2020); S.B. 477, 2020 Reg. Sess. (La. 2020); A.B. 3844, 219th Leg., 1st Ann. Sess. (N.J. 2020).
 U.S. Const. art. I, § 10, cl. 1.
 U.S. Const. amend. V.
 U.S. Const. amend. V.
 H.B. 589, 133d Gen. Assemb., 2019–2020 Sess., § 1(B) (Ohio 2020).
 H.B. 589, 133d Gen. Assemb., 2019–2020 Sess. (Ohio 2020).
 H.B. 589, 133d Gen. Assemb., 2019–2020 Sess. (Ohio 2020).
 E.g., S.B. 2888, 191st Gen. Ct. of the Cmmw. of Mass., § 1(a) (Mass. 2020).
 S.B. 2655, 191st Gen. Ct. of the Cmmw. of Mass., § 1(a) (Mass. 2020); S.B. 1188, 123d Sess. Gen. Assemb., 2d Reg. Sess., § 1(A) (S.C. 2020).
 S.B. 8211, 243d Leg. Sess. (N.Y. 2020).
 S.B. 2655, 191st Gen. Ct. of the Cmmw. of Mass., § 1(c) (Mass. 2020); S.B. 1188, 123d Sess. Gen. Assemb., 2d Reg. Sess., § 2 (S.C. 2020).
 H.B. 5739, 100th Leg., Reg. Sess., § 2245(2) (Mich. 2020); H.B. 589, 133d Gen. Assemb., 2019–2020 Sess., § 1(D)(2) (Ohio 2020).
 S.B. 1114, 204th Gen. Assemb., 2019–2020 Sess., § 4(b) (Pa. 2020).
 S.B. 1114, 204th Gen. Assemb., 2019–2020 Sess., § 3 (Pa. 2020).
 E.g., H.B. 589, 133d Gen. Assemb., 2019–2020 Sess., § 1(F) (Ohio 2020); S.B. 2655, 191st Gen. Ct. of the Cmmw. of Mass., § 3 (Mass. 2020); S.B. 1188, 123d Sess. Gen. Assemb., 2d Reg. Sess., § 1(E) (S.C. 2020).
 S.B. 2655, 191st Gen. Ct. of the Cmmw. of Mass., § 3 (Mass. 2020).
 U.S. Const. art. I, § 10, cl. 1.
 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241 (1978); Sveen v. Melin, 138 S. Ct. 1815, 1827 (2018) (Gorsuch, J., dissenting).
 Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410 (1983).
 Sveen v. Melin, 138 S. Ct. 1815, 1821 (2018).
 Sveen, 138 S. Ct. at 1821–22.
 Sveen, 138 S. Ct. at 1822.
 Energy Reserves Group, 459 U.S. at 411.
 Sveen, 138 S. Ct. at 1822 (citation and quotation marks omitted).
 Energy Reserves Group, 459 U.S. at 412.
 Energy Reserves Group, 459 U.S. at 412–13.
 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 247 (1978).
 Allied Structural Steel, 438 U.S. at 242 (emphasis omitted).
 U.S. Const. amend. V.
 E. Enters. v. Apfel, 524 U.S. 498, 522 (1998) (plurality opinion) (quoting Armstrong v. United States, 364 U.S. 40, 49 (1960)).
 Connolly v. Pension Benefits Guar. Corp., 475 U.S. 211, 224 (1986).
 Connolly, 475 U.S. at 224–25.
 Connolly, 475 U.S. at 224–25 (internal quotation marks and citations omitted); see also Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978) (prescribing factors for consideration in the context of a regulatory taking).
 Lawrence A. Wilkinson et al., “Credit FAQ: How COVID-19 Risks Factor into U.S. Property/Casualty Ratings,” S&P Glob. Ratings, Apr. 27, 2020.
 Wilkinson et al., “Credit FAQ: How COVID-19 Risks Factor into U.S. Property/Casualty Ratings,” supra note 42.
 Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978).
 E. Enters. v. Apfel, 524 U.S. 498, 523 (1998) (plurality opinion).
 Eastern Enterprises, 524 U.S. at 522.
 U.S. Const. amend. V.
 Eastern Enterprises, 524 U.S. at 548 (Kennedy, J., concurring in judgment, dissenting in part).
 Eastern Enterprises, 524 U.S. at 533 (plurality opinion) (quoting 2 J. Story, Commentaries on the Constitution § 1398 (5th ed. 1891)).
 Eastern Enterprises, 524 U.S. at 549 (Kennedy, J., concurring in judgment, dissenting in part).
 Eastern Enterprises, 524 U.S. at 547 (Kennedy, J., concurring in judgment, dissenting in part).
 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,812 (Apr. 15, 2020) (to be codified at 13 C.F.R. pt. 120).
 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, supra note 52.
 Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. supra note 52, at 20,812.