Amid the COVID-19 pandemic, insurers have found themselves in the spotlight relative to business interruption (BI) coverage issues. Over the past month, these considerations have become ubiquitous and politically charged amid unprecedented shutdowns and travel restrictions.
The highest-stakes question for impacted insureds is whether potentially relevant BI coverage contains virus-related exclusions. Most policies do, but since mid-March it has become clear that policy wording may only be the prologue. Insured counsel are readying actions against the subject exclusions and some state legislatures seem prepared to expose property insurers to unanticipated COVID-19 risks as well.
The standard Insurance Services Office (ISO) “Exclusion of Loss Due to Virus or Bacteria” form states that the insurer will not pay for “loss or damage resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” In presenting this exclusion in 2006, ISO was explicit that “the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.”
Where such exclusions are enforced on their terms, insureds face insurmountable obstacles. The absence of coverage will be catastrophic for innumerable businesses, with devastating economic and employment impacts. As these concerns accelerated starting in mid-March, the insurance recovery bar and a handful of state legislatures began considering other avenues for potential recovery. So long as those efforts are pursued, along with efforts by regulators, the insurance industry faces significant and unknown exposure.
Many insurance recovery firms have previewed arguments likening the roll-out of the subject exclusion to that of the “sudden and accidental” pollution exclusions decades ago. Eventually, some courts in the United States determined that the exclusion ought not be enforced as written. These courts, most memorably the New Jersey Supreme Court in Morton International v. General Accident Insurance Co. (1993), took the view that the insurance industry was stuck with what it concluded were contradictory representations made to regulators regarding the scope and impact of the standard, “sudden and accidental” wording. As the New Jersey Supreme Court stated in the ruling:
“…[h]aving profited from that nondisclosure by maintaining pre-existing rates for substantially-reduced coverage, the [insurance] industry justly should be required to bear the burden of its omission by providing coverage at a level consistent with its representations to regulatory authorities.”
Especially given the momentous scope of business failures in the absence of BI coverage for COVID-19 losses, courts may take interest in regulatory submissions or other statements related to virus-related exclusions, as in Morton. Considerations such as those analyzed in Morton could be alluring, since the scope of problems in the absence of coverage is truly “unprecedented,” and once-inconceivable “public policy” ramifications abound. At issue would be ISO or other industry statements pertaining to the exclusion, including those referenced above.
Insurers are also preparing for scrutiny of the underwriting, negotiation and pricing of policies with virus exclusions. In addition, they can expect intense regulatory attention regarding claims handling practices and other consumer protection priorities, such as measures deployed by the New York Department of Financial Services with respect to the New York Child Victims Act. These issues should be considered by insurers now on an ongoing, state-by-state basis.
In tandem with the onset of litigation, some state legislatures introduced bills that would require payment of insurance coverage for COVID-19, regardless of whether pandemic exclusions were present. This approach has raised serious concerns among insurers including whether an insurer collecting premiums based on one set of risks should be required to provide coverage for another.
As it did with “sudden and accidental” pollution exclusion case law, New Jersey is taking a lead role, introducing an assembly bill on March 16 that would rewrite existing policies “in force in this State” as of the bill’s effective date, “to include among the covered perils…coverage for business interruption due to global virus transmission or pandemic” as referenced in state emergency declarations. New Jersey’s bill would also nullify BI policy requirements that damage be attributed to “direct physical loss of insured property.” As of this writing, bills similar to the New Jersey bill have been introduced in Pennsylvania, Louisiana, Massachusetts, Ohio and New York. Generally, these proposals are aimed at small businesses, with coverage payments funded initially by insurers, potentially reimbursable by the state, then recouped from insurers irrespective of whether they used the subject exclusion. Sixteen members of the U.S. Congress also wrote a letter on March 16 urging insurers to “recognize income losses due to COVID-19.”
If passed, laws seeking to impose new liabilities for COVID-19 may still face constitutional or other challenges, foremost under the Article I, Section 10 of the U.S. Constitution prohibiting states from passing “any law impairing the obligation of contracts. But as with so many other issues stemming from COVID-19, the fate of such legislation remains unclear.