Written & Edited by Janeen Koch, Esq., Kevin Kennedy, Esq. & Matt Daly, Esq.
As businesses around the world suffer dramatic declines in revenue due to the pandemic, they are turning to their insurance carriers seeking coverage for business interruption losses. However, many of these claims are being denied based upon the fact that they are either not covered or specifically excluded under the terms of the insurance policy. The requirement that insureds demonstrate “direct physical damage,” coupled with the fact that many policies include a virus and bacteria exclusion, will make it difficult for business owners to obtain coverage for these losses. Consequently, legislators in many states are proposing laws to require insurance companies to retroactively provide coverage for business interruption claims even when the policies specifically exclude such coverage.
New Jersey became the first state to initiate the trend of looking to rewrite business interruption coverage for COVID-19 into these policies with proposed bill A-3844. That bill would require business interruption claims to be honored by insurance carriers for any business with fewer than 100 full-time employees that had a business interruption policy as of March 9, 2020. It appears that New Jersey’s bill has stalled for now, but other states have brought forward similar proposals, including New York, Massachusetts, Pennsylvania, Michigan, and South Carolina, as well as the District of Columbia.
The Federal government has also drafted legislation aimed at protecting small businesses from losses sustained as a result of virus-related closures. H.R. 6494 – Business Interruption Insurance Coverage Act of 2020 – was introduced on April 14, 2020. The bill, which has bipartisan support, would nullify existing exclusions for pandemics and force insurers to cover pandemic-related losses as part of business interruption coverage. Unlike the proposals in the states, this bill would not apply retroactively, and insurers would be permitted to charge increased premiums for the additional coverage. The opposition from the insurance industry is fierce given the effects of having to rewrite so many existing policies.
Each of these proposals, from the states and the federal government, are certain to face challenges in court over constitutionality. While the prohibition against ex post facto laws in the Bill of Rights has been interpreted as applicable only to criminal laws, the Constitution also includes prohibitions against retroactive laws in the contractual context. Article I, Section 10 of the United States Constitution states “No State shall… pass any… Law impairing the Obligation of Contracts.” Many state constitutions include similar language.
How has the Supreme Court interpreted this constitutional language? While the Contracts Clause enjoyed a period of strong enforcement in the 19th century, its efficacy was severely impaired by the 1934 U.S. Supreme Court case of Home Building Loan Association v. Blaisdell. Since that 1934 decision, the Supreme Court has allowed state laws to interfere with contractual obligations if the state law has a rational purpose, the lowest standard of judicial review. More recent Supreme Court decisions have found grounds to oppose retroactive legislation in the Takings Clause. Justice Sandra Day O’Connor wrote in a 1998 decision about “the possibility that legislation might be unconstitutional if it imposes severe retroactive liability on a limited class of parties that could not have anticipated the liability, and the extent of that liability is substantially disproportionate to the parties’ experience.” E. Enters v. Apfel 524 U.S. 498, 528-29 (1998). Putting liability on insurers for a monumental risk intentionally excluded in their policies would appear to fit this criteria. However, in practice, the precedent for overturning a retroactive law on grounds of economic impact is very thin. While a Constitutional challenge to passage of these laws would be warranted, successfully overturning them would not be guaranteed.
The financial stakes are enormous and while Congress has added trillions in federal debt in the recent months, federal and local governments are looking for other sources of funds to rescue businesses from economic collapse and permanent closings. Class action lawsuits fighting denials of business interruption claims have been filed and will continue to increase in the coming weeks and months. Legislation is an enticing alternative for politicians seeking to render the lawsuits moot and win for their constituents without further taxing strained government funding. Legislating payment by insurers may bring immediate benefit to many small businesses, but the lasting impact any such legislation would have on the insurance industry cannot be overstated.
The President and CEO of the National Association of Mutual Insurance Companies (NAMIC), Charles M. Chamness, stated “If elected officials require payment for perils that were excluded, never underwritten for, and for which no premium was ever collected, catastrophic results will occur and we may deal with a second crisis: insurance insolvencies and impairments. There will also be irreparable harm done to contract law, and the impact of this will be felt by every business in America.” Evan Greenberg, the CEO of Chubb, echoed Mr. Chamness’ fears in an interview with CNBC. “Insurers have finite balance sheets and the loss from a pandemic is infinite.” The U.S. Chamber of Commerce, which lobbies on behalf of large and small businesses, issued a letter to Congress on April 29, 2020 and voiced its opposition to rewriting existing contracts. The Chamber warned “If Congress abrogates contracts for business interruption insurance policies, it could bankrupt property casualty insurers that American businesses depend on to manage a wide range of risks[.]”