May 06, 2020 Article

States Working to Protect Small Businesses Through Insurance

Summary of legislative efforts to compel insurers to pay COVID-19 related business interruption losses.

By Sathima Jones

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Small businesses across the country debilitated by the COVID-19 crisis are searching for solutions to shrinking revenue due to nationwide stay-at-home orders. Many businesses believe their insurance should cover their losses, evidenced by a growing wave of litigation against insurance carriers. Small businesses claim that without insurer payouts, they will be unable to re-open and re-hire laid off employees after state-mandated lockdown restrictions ease and states return to business as usual.

Business interruption insurance is typically triggered when property is physically damaged or unable to be used as a result of natural disaster or fire. The majority of insurance policies issued after 2004 typically exclude coverage for viruses—an industry response after the SARS epidemic. Not all policies providing business interruption, coverage, however, contain virus exclusions. In light of the limitation of coverage based upon the plain terms of the policies, a number of state legislatures have introduced legislation requiring insurers to provide business interruption coverage, regardless of whether the policies actually provide coverage for COVID-19-related losses.

Below is an overview of legislation introduced in a number of different states aimed at compelling insurers to provide business interruption insurance accompanied by links to updated bill information.

District of Columbia

The District of Columbia City Council will consider introducing legislation compelling insurers to provide business interruption insurance when the council convenes on May 5, 2020. The draft bill states that

[e]very policy of insurance in force in the District that insures against loss of or damage to property and that includes, as of the effective date of this act, coverage for loss of use and occupancy and business interruption, shall be construed to provide coverage for business interruption directly or indirectly resulting from a public health emergency.

D.C.’s proposed bill similarly applies to policyholders with less than 100 full-time employees, who work 25 hours or more per week.

Louisiana

Louisiana’s House of Representatives and Senate introduced H.B. 858 and S.B. 477 on March 31, 2020. The proposed bills would require every policy insuring against loss or damage to property, including the loss of use or occupancy, and business interruption, to include coverage for business interruption due to global virus transmission or pandemic, as provided in the emergency proclamation. H.B. 858 applies to policies issued to an insured with less than 100 full time employees, but S.B. 477 is not so limited. In addition, S.B. 477 states that any business interruption policy issued in Louisiana after August 1, 2020, must include a “notice of all exclusions on a form prescribed by the commissioner of insurance,” which is signed by the insured. The signed form creates a “rebuttable presumption that the insured knowingly contracted for coverage with the stated exclusions.”

Massachusetts

Massachusetts introduced S.2655 on March 24, 2020. The bill aims to keep small businesses afloat by affording them business interruption coverage. If passed and enacted, the bill would require coverage under any policy written for loss of use and occupancy and business interruption to “include among the covered perils under such policy coverage for business interruption directly or indirectly resulting from the global pandemic known as COVID-19, including all mutated forms of the COVID-19 virus.” According to the bill, no insurer in the commonwealth would be able to deny a claim for the loss of use and occupancy and business interruption on account of (1) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses) or (2) there being no physical damage to the property of the insured or to any other relevant property.

If the bill becomes law, insurers who fail to comply face the possibility of civil liability under Massachusetts laws on unfair and deceptive practices in the business of instance (Mass Gen Laws 176D). Under section 7 of chapter 176D, an insurer found in violation could be subject to fines and punitive damages up to twenty-five percent of the claim, among other things. The bill was referred to the Joint Committee on Rules.

New Jersey

New Jersey was the first state to propose a bill affecting insurance coverage for certain businesses impacted by the coronavirus outbreak. On March 16, 2020, the New Jersey assembly introduced A. 3844. According to the proposed bill, any insurance policy that insures loss or damage to property, including the loss of use and occupancy, and business interruption must be construed to include coverage for business interruption due to global virus transmission or pandemic. The proposed coverage would be afforded for the duration of the declared State of Emergency. If passed, the bill will be retroactive to March 9, 2020, and apply to businesses with fewer than 100 employees working 25 hours or more per week.

The New Jersey bill sets forth that insurers could seek reimbursement for payments made while complying with the statute according to procedures established by the commissioner.

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New York

On March 27, 2020, the New York State legislature introduced A-10226. Another bill aimed at small businesses, the bill would require property insurance policies issued to companies with 250 or fewer full-time employees to be interpreted to afford coverage for losses related to COVID-19. The coverage required by the bill extends for the duration of the period of declared state emergency due to the pandemic and applies to policies issued on or before March 7, 2020. Similar to the New Jersey bill, the bill provides a process through which insurers can seek reimbursement for the payment of claims through the superintendent of financial services.

The New York bill was amended on April 8 and referred to the Insurance Committee.

Ohio

Ohio introduced H.B. 589 on March 24, 2020. The bill proposes to enforce coverage for business interruption “due to global virus transmission to pandemic during the state of emergency” in policies that insure against loss of use and occupancy and business interruption. The bill would apply to Ohio companies with 100 or fewer employees. The Ohio bill extends for the duration of the state of emergency that began on March 9, 2020.

H.B. 589 sets out a process for insurer reimbursement from the Superintendent of Insurance.

Pennsylvania

On April 3, Pennsylvania introduced House Bill No. 2372, which would require insurers providing coverage for “loss or damage to property,” including the loss of use and occupancy, and business interruption to include coverage for business interruption due to global virus transmission or pandemic. The proposed bill would apply to policies effective in the Commonwealth on March 6, 2020, and would apply to policies issued to businesses with 100 or fewer full-time employees.

The bill would provide that insurers that pay out business interruption claims in accordance with the law can apply for reimbursement from the Pennsylvania Insurance Commissioner. The proposed bill has been referred to the Committee on Insurance.

South Carolina

On April 8, 2020, South Carolina introduced Bill S.1188, which would amend the state’s 1976 property insurance code to require insurers providing coverage for property damage—including loss of use and occupancy—and business interruption, to cover claims directly or indirectly resulting from the global pandemic “including all mutated forms of the COVID-19 virus. ” If passed, this bill would apply to businesses with less 150 full-time employees.

None of the bills summarized above has been enacted and their enforceability remains in doubt since the legislation seeks to effectively rewrite insurance policies to cover losses that were not insured and for which a premium has not been collected. The proposed bills likewise face numerous constitutional challenges under the takings clause of the Fifth Amendment and the Contract Clause (Art. 1, Sec. 10) and will undoubtedly be met with strong opposition from the insurance industry.

Although viewed positively by struggling small businesses, legislative actions to mandate coverage for business interruption face many hurdles and have the potential for threatening the solvency of insurers. 

Sathima Jones is an associate at Jackson & Campbell, P.C., in Washington, D.C.


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