With the continued disruptions to businesses and the economy generally resulting from the COVID-19 pandemic, the legal landscape is continually changing, and insurance is no exception. Since the beginning of the outbreak, insureds have routinely engaged knowledgeable advisors to review their insurance policies to help them understand and evaluate potential coverage for first-party and third-party losses as the situation evolves. Based on the legal and legislative developments discussed in this client alert, insureds have, and likely will continue, to err on the side of caution and submit claims notices and proofs of loss in order to preserve their right to potential recovery that may be available now, or in the future.
Small businesses make up a sizeable portion of the U.S. economy and employ approximately 47% of the private workforce. In some cases, these small businesses may have difficulty staying afloat or opening back up if they don’t make use of every potential avenue to offset the losses they have suffered as a result of forced closures due to infected employees or government orders limiting operations of non-essential businesses. However, determining whether coverage for COVID-19 exists under a small business owner’s Commercial Property policies, and the Business Interruption Coverage clause specifically, is not always straightforward. In some cases, coverage may not appear to be triggered because, under the policy’s wording or jurisdictional interpretation, a contagious disease may not be sufficient to establish physical loss or property damage. In other cases, the policies may have specific exclusions for viruses or communicable diseases.
In China, which is ahead of the U.S. and other countries around the globe in the progression of the outbreak, there have been reports of insurers broadly offering coverage for business interruptions resulting from COVID-19. In the U.S., we are now seeing a number of declaratory judgment actions being filed, and states attempting to pass legislation to force insurers to shoulder some of the losses that small businesses are currently facing as a result of the effects of COVID-19.
Legal Coverage Actions
Just a few weeks have passed since businesses have been ordered to shut down due to the COVID-19 pandemic. Yet businesses have already started to file suit in courts across the U.S., alleging that insurers wrongfully denied their claims. The cases thus far have been smaller-sized businesses ranging from restaurants, movie theaters, medical practices, retail establishments, to providers of recreational services. In most of the cases filed to date, the insurance policies at issue do not have virus exclusions; rather, carriers allegedly denied claims because COVID-19 did not cause a direct physical loss to the business — which is a prerequisite to coverage under the policy.
In some cases, businesses have alleged bad faith, on the basis that carriers issued blanket denials without regard to the circumstances of the business at issue. In one case, the carrier denied coverage despite the alleged presence of an endorsement covering mutations and variations of SARS-CoV diseases, because COVID-19 itself was not specifically listed in the “Covered Diseases” section of the policy. In another case, the insured did not wait to receive the insurer’s coverage position letter before filing suit, instead alleging that the carrier had issued denials in other “similar” policies. Although many of the cases filed to date have similar fact patterns, it is certain that the number of cases will increase in volume and variety over the coming weeks and months.
In response to the potential absence of coverage, a number of states have recently proposed legislation to compel insurers to pay claims even when coverage may not exist. As of the date of the publication of this Client Alert, four states have proposed such legislation—New Jersey, Ohio, Massachusetts and New York. A summary of the proposed legislation is as follows (we also break down the current status and salient features of each proposed bill in the chart at the end of this alert, which will be updated regularly):
- On March 16, 2020, New Jersey became the first state to propose legislation aimed at Commercial Property policies, providing loss of use and occupancy, as well as business interruption coverage (“the New Jersey Proposal”). Under the New Jersey Proposal, policies for Insureds with less than 100 employees will be construed to include coverage for business interruptions due to global virus transmission or pandemic among the covered perils, as provided by the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
- On March 24, 2020, Ohio followed suit with proposed legislation (“the Ohio Proposal”). The Ohio Proposal is substantially similar to the New Jersey Proposal in terms of its application to lines of insurance, qualifications on size of business, and how it construes policies to cover COVID-19-related business interruptions.
- Massachusetts also proposed legislation to expand coverage for COVID-19 related losses on March 24 (“the Massachusetts Proposal”). The Massachusetts Proposal expands the size of businesses covered to Insureds with 150 or fewer “full-time equivalent” employees. In addition, it specifically renders exclusions for viruses or communicable diseases inapplicable, to the extent that they would otherwise exclude coverage for a COVID-19-related business interruption.
- On March 27, 2020, New York followed suit by proposing its version of this potentially insurance-broadening legislation (“the New York Proposal”). The New York Proposal—like the Ohio and New Jersey Proposals—proposes to expand the scope of coverage under property policies with business interruption and loss of use and occupancy coverages for businesses with less than 100 eligible employees on the effective date of the act. It defines “eligible employees” as a full-time employee working more than 25 or more hours a week.
All of the proposed legislation provide that insurers may seek reimbursement for claims paid from the state insurance regulator. The insurance regulator, in turn, would have the ability to fund such reimbursement through pro rata assessments to all insurers doing business in the state, as determined by the net percentage of premiums collected by insurers in 2019.
The legislation proposed to date, if enacted, will have a significant impact on the insurance industry, and the intention of it is, as in China, to lessen the blow on small businesses and allocate the losses across insurers and the state insurance regulators that back-stop them. Given the substantial impact of such a regulatory scheme, it is certain that the constitutionality of such bills will be challenged. As the COVID-19 crisis continues to worsen, more legal coverage actions are filed, and states move forward in their legislative proposals, we expect to see other states take a similar approach.
The state of the insurance market for coverage of COVID-19 is highly individual to each client based on their policy wording, the circumstances and type of loss they have suffered, the jurisdiction they are located in and, as described above, the advances in legal developments in courts and state legislatures. Some insureds have clear paths to coverage, while others face hurdles by way of the scope of coverage issues or exclusions noted above. However, based on the rapidly changing legal environment, insureds are actively preparing and providing notice to insurers so that they can make every effort possible to maximize their recovery. It is a rapidly evolving situation that merits close scrutiny as events continue to unfold between insureds, insurers, legislators, and regulators.
COVID-19 Insurance – State Law Tracking Chart
(Chart Most Recently Updated onMay 4, 2020)
Size Limitations on Companies
Type of Policy Coverage
Does proposed legislation alter coverage grant?
Does proposed legislation negate specific virus exclusions?
Can Insurers apply for reimbursement?
|New Jersey||Introduced 3/16, remains pending||< 100 employees||Property (business interruption and loss of use)||Yes||No||Yes|
|Ohio||Introduced 3/24, remains pending||< 100 “eligible” employees (“eligible” employees are full-time employees who work 25 or more hours per week)||Property (business interruption and loss of use)||Yes||No||Yes|
|Massachusetts||Introduced 3/24, referred to Rules committee on 4/6; referred to Financial Services committee (Senate) on 4/21; House concurred 4/23; remains pending
||< 150 full time equivalent employees||Property (business interruption and loss of use)||Yes||Yes||Yes|
|New York||Introduced 3/27, amended and referred back to committee on 4/8 & 4/29; remains pending
||< 100 “eligible” employees (“eligible” employees are full-time employees who work 25 or more hours per week)||Property (business interruption and loss of use)||Yes||No||Yes|
|Louisiana||Separate Senate and House bills introduced 3/31; second reading 5/4||< 100 full time employees (“full time employees” not defined||Property (business interruption and loss of use)||Yes||No||No|
|South Carolina||Introduced 4/8||No specific limit on business size||Property (business interruption and loss of use)||Yes||Yes||Yes|
|Pennsylvania||Introduced 4/3||< 100 “eligible” employees (“eligible” employees are full-time employees who work 25 or more hours per week)||Property (business interruption and loss of use)||Yes||No||Yes|
|Michigan||Introduced 4/24||Property (business interruption and loss of use)||Yes||No||No|
Opponents will likely challenge the proposed bills under the Contract Clause of the United States Constitution, which provides in relevant part that “[n]o State … shall pass any … Law impairing the Obligation of Contracts.” Over the years, the US Supreme Court has developed a three-part test for determining the constitutionality of such legislation. See Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-12 (1983) (citing Allied Structural Steel v. Spannaus, 438 U.S. 234, 244-45 (1978). The first part of the test is to determine whether the law substantially impairs a contractual relationship. Energy Reserves Group, Inc., 459 U.S. at 411. Next, the Court must consider whether there is a significant and legitimate purpose for the law, “such as the remedying of a broad and general social or economic problem.” Id. at 411-412. Finally, the Court will determine whether the adjustment of the rights and obligations under the contract is reasonable and appropriate given the public purpose justifying the law. Id. at 412. For businesses that are heavily regulated, such as insurance, the Court may give the challenged law a relaxed level of scrutiny. Id. at 413; see also e.g., State v. All Property & Casualty Insurance Carriers Authorized & Licensed To Do Business In State, 937 So. 2d 313, 323-326 (La. 2006) (Louisiana law extending the statute of limitations for insureds to sue their insurers to cover damage from Hurricane Katrina found to be valid).
* * *
Visit Goodwin’s Coronavirus Knowledge Center, where firm lawyers from across the globe are issuing new guidance and insights to help clients fully understand and assess the ramifications of COVID-19 and navigate the potential effects of the outbreak on their businesses.