More States Seek to Expand Business Interruption Coverage to Include COVID-19-Related Losses

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This week, legislators in Ohio and Massachusetts introduced bills to expand retroactively commercial property insurance policies to include business losses suffered from COVID-19. In Ohio, Representatives John Rogers and Jeff Crossman offered a bill that “would prohibit the denial of insurance claims made by small businesses for ‘pandemic’ or ‘viral epidemic’ reasons and allow small businesses to obtain insurance to cover their losses due to the public health emergency closures.” Similarly, in Massachusetts, Senator James B. Eldridge, offered a bill “to require certain insurance companies in the commonwealth to provide business interruption insurance coverage to their insured in connection with the COVID-19 pandemic.”

As discussed in a Legal Update published last week, in general, to obtain coverage for business interruption losses, the losses must be accompanied by a direct physical loss to the property. Meeting the requirement for a physical loss under the present circumstances may be difficult unless, for example, policyholders can demonstrate actual contamination from COVID-19 within their property. Many businesses have been forced to close due to state or local orders, not physical property losses. Those businesses may have difficulty obtaining coverage.

And, many commercial first-party property policies include exclusions eliminating coverage for losses arising from viruses. Typical is the 2006 Insurance Service Organization (“ISO”) “Exclusion for Loss Due To Virus Or Bacteria” endorsement form CP 01 40 07 06, which was developed as a result of, among other viruses, SARS, a type of coronavirus. The endorsement excludes coverage for any “loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease.” This endorsement, if enforced, eliminates coverage for COVID-19 business interruption losses.

The Ohio bill, entitled Require Certain Insurance Cover Pandemic Losses, would eliminate both the physical loss requirement and virus exclusions for small businesses. Specifically, the bill provides that

every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption . . . 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.

Coverage would be limited to policies issued to insureds that (i) are located in Ohio, (ii) employ 100 or less full-time employees, and (iii) obtained the policy before enactment of the bill. Under the bill, insurers that indemnify policyholders may seek reimbursement from Ohio’s Superintendent of Insurance. The state may fund payments through an assessment from insurers.

The Massachusetts’ bill, entitled An Act Concerning Business Interruption Insurance, similarly provides that

every policy of insurance insuring against loss or damage to property, notwithstanding the terms of such policy (including any endorsement thereto or exclusions to coverage included therewith) which includes, as of the effective date of this act, the loss of use and occupancy and business interruption in force in the commonwealth, shall be construed 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. Moreover, no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.

The Massachusetts bill applies to policyholders with up to 150 employees. It expressly provides that “no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses) or (ii) there being no physical damage to the property of the insured or to any other relevant property.” Like the Ohio bill, the Massachusetts bill provides that insurers can apply to the state for reimbursement of claims, but the state may charge an assessment broadly to insurers to recover the amounts paid pursuant to the legislation.

As discussed in last week’s alert, requiring insurers to pay for a risk that was excluded may not withstand judicial scrutiny. Courts in other jurisdictions have explained that, state action that places a financial burden on an insurer that it declined to cover would raise “grave constitutional questions,” including “the impairment of contracts and the taking of property without due process of law.” AIU Ins. Co. v. Block Marina Inv., Inc., 544 So. 2d 998, 1000 (Fla. 1989). However, a key inquiry in any constitutional challenge to such measures would be “whether a significant and legitimate public purpose justifies the regulation.” State v. All Prop. & Cas. Ins. Carriers Authorized & Licensed To Do Bus. In State, 937 So. 2d 313, 325 (La. 2006) (upholding Contracts Clause challenge to legislation that extended the prescriptive period within which insured parties could file certain claims under their insurance policies for Katrina- and Rita-related losses). Given the novelty of COVID-19, and its impact on the economy, courts may be willing to defer to legislative judgment. But, in light of insurers’ past successes in this area, businesses may not want to rely too heavily on these untested legislative initiatives.