While businesses across the globe have yet to understand the full economic impact of the COVID-19 pandemic, a number of emerging issues have already gained prominence. Among the biggest—and most likely to persist—is the issue of whether business interruption insurance (BII) covers lost income for businesses affected by the pandemic. This client alert provides an analysis of the ways in which this BII coverage issue is developing, including litigation, state legislation, state regulatory actions and federal legislation.
Business Interruption Litigation
A number of lawsuits have been filed across the country, with the prospect for dozens more. Litigation has been filed in a half-dozen states, including Texas, California, Illinois, Florida and Louisiana.1 Much of this litigation is being spearheaded by high-profile chefs, restaurateurs and lawyers who argue that BII policies in effect prior to the pandemic cover losses these business owners are currently incurring due to COVID-19. Lawsuits may eventually prove fruitful for litigants, but the strategy has significant downsides. Even under the most ideal circumstances, litigation can take years to reach resolution. This sort of delay will not provide the quick relief needed by businesses with tight operating margins in order to continue operations. These disputes, which potentially involve hundreds of billions of dollars, will take years to resolve.
A separate data point weighs in favor of insurers. Many insurers specifically offer coverage riders to address pandemics and communicable diseases. The existence of this separate coverage suggests insurers did not intend to cover pandemics in their BII policies. A prominent, recent example underscores this notion: For the last 17 years, the Wimbledon tennis tournament paid for an insurance policy against worldwide pandemics. The policy was not cheap, costing some $2 million annually. However, as a result of COVID-19, Wimbledon expects to receive an insurance payout of some $141 million. Insurance companies will argue that the existence of specifically applicable, standalone policy riders confirms that general BII coverage is not intended to provide reimbursement to business interruptions that are the result of a global pandemic.
There is already legislation in seven states purporting to clarify that BII applies to the current pandemic (See Six States Consider Extending Business Interruption Coverage to Coronavirus Claims and COVID-19: States Attempt to Shift Economic Burden to Insurance Industry with New Legislation on Business Interruption Coverage). As one would expect, numerous businesses are being solicited to support such state-level legislation. By way of example, Louisiana legislators have introduced House Bill 858 and Senate Bill 477. These bills would each mandate that every policy insuring against loss of property include coverage for COVID-19 business interruptions. The bills would have retroactive effective dates of March 11, 2020. In Pennsylvania, House Bill 2372 was introduced, which would construe business interruption insurance policies in effect as of the state’s disaster declaration on March 6, 2020, to cover perils pertaining to COVID-19. New York legislators introduced Assembly Bill A10226, which would require that COVID-19-related perils be covered by business interruption insurance policies for policies issued to insureds with less than 100 eligible employees in force on the effective date of the bill. The New Jersey legislature has introduced Assembly Bill 3844, which has similar contours to the bill in consideration in New York.
These bills are problematic to the extent that they are understood to retroactively change contract terms that could very well be a violation of the U.S. Constitution’s Contracts Clause. In other words, insurance companies will argue that their BII policies did not contemplate pandemic coverage and so were priced accordingly. Proponents of these bills will argue that states are provided significant leeway to exercise their police powers in an emergency and that these bills are fully within a state’s authority to regulate insurance, including the interpretation of industry-standard contract terms. Furthermore, they will argue that these bills would merely provide rules of decision that direct courts to construe contract language in a particular manner, thereby putting a finger on the scale in favor of insureds. To the extent contract clauses are ambiguous, proponents will argue such a rule of decision is dispositive with regard to the contract term in question. Either way, if enacted, these state laws will themselves be subject to years of litigation and will not be of any immediate benefit to those who need relief now.
Proponents of state legislative efforts to push insurers to pay insureds' COVID-19-related claims may point to a historical precedent: the Oregon Environmental Cleanup Assistance Act (OECAA), which, inter alia, imposed a definition of “suit” in existing insurance liability policies intended to cover a specific EPA Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action. The legislation was challenged, and the U.S. Court of Appeals for the Ninth Circuit concluded that the OECAA did not violate the Constitution’s Contracts Clause. Among other things, the court held that the OECAA provided a valid and enforceable definition of “suit” for interpreting insurance policies given the ambiguity inherent in that term. It is important to note, however, that the court explicitly stated that it would have construed the policies against the insurer regardless of the OECAA. In other words, courts interpret ambiguous insurance terms against the insurer; and because “suit” was an ambiguous term, the court would have ruled against the insurer, which means the Oregon legislature did not need to enact the OECCA to force its interpretation of the term “suit” through state law.
State insurance regulators have also joined the fray. A number of insurance regulators in various states have begun to issue bulletins intended to address BII coverage and the COVID-19 outbreak. The Arkansas Insurance Department issued Bulletin No. 9-2020, stating that certain common policy language, including business interruption insurance and civil authority coverage, generally require physical damage and often exclude communicable diseases from coverage. The Washington Office of the Insurance Commission issued a request for data from in-state insurers regarding the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage, and supply chain coverage that was in effect as of March 15, 2020. The Washington request also directed insurers to examine their policies, explain their coverage, and provide clear and concise explanations of benefits to policyholders and the regulator. West Virginia published Bulletin No. 20-04, in which the state regulator indicated it is monitoring the financial risks associated with the COVID-19 pandemic.
Possible Congressional Action
Congress is simultaneously considering legislation to both address the current crisis and prepare for future pandemics.
In order to address current business losses, a few proposals are circulating that would either purport to require insurers to pay current BII policy claims resulting from the pandemic, or would create a new federal program to address pandemic-related losses otherwise not covered by current BIl policies. As an example, Sen. Steve Daines (R-MT) has proposed his Workplace Recovery Act (WRA). The WRA would create a fund with payouts intended to remedy operation losses, but not lost profits. The fund would seek to reimburse businesses for operating losses of 90% of lost revenues—the difference between current monthly revenues and average revenues for the six months preceding March—and the payments would cover payroll, operating expenses, rent, and debt servicing costs through the end of 2020. A different approach has been introduced in the House of Representatives by Rep. Mike Thompson (D-CA) that aims to make BII available for, inter alia, viral pandemics, forced business closures, and mandatory evaluations. This bill, the Business Interruption Insurance Coverage Act of 2020, requires that any insurer offering BII include in those policies coverage for viral pandemics, forced business closures and other COVID-19 effects. And the legislation would require that BII policies already in effect cover those same losses. This particular piece of legislation is already being opposed by parts of the insurance industry, who claim that this approach is especially aggressive because it forces a particular interpretation with significant financial ramifications on existing insurance policies.
Looking forward past this current pandemic, there is also growing support for a federally backstopped program to ensure future pandemic insurance claims are covered. There are multiple preexisting models for structuring federally backed pandemic coverage. Drafts modeled after the Terrorism Risk Insurance Act (TRIA) have been circulated for stakeholder comment. Under TRIA, the government shares covered losses with private insurers on a sliding scale, depending on the size of the loss. Although TRIA provides a seemingly reasonable model to address future broad-based pandemic claims, it may not be sufficiently scalable. An alternative might be structured similarly to the “Write Your Own” Flood Insurance program (“WYO Flood Insurance”) managed by FEMA. Under such a program, private insurance companies are paid to issue and service insurance policies, while the federal government backstops the underlying risk of losses.
Notwithstanding these efforts, the insurance regulatory community has taken a public position opposing federal intervention to address BII pandemic-related claims. In letters to members of Congress and various state delegations, insurance industry groups have emphasized that drastic reinterpretations of existing contracts could destabilize countless insurance companies. The legislative fate of these various proposals remains unclear, as does their timing. In the short term, Congress is focused on relief and stimulus packages to deal with current losses being endured by individuals and businesses across the country.
What to Watch for in a BII Federal Legislative Solution
Political support is building for a federal legislative solution to address current and future BII pandemic claims. As Congress continues to review these issues, here are a few considerations to keep in mind:
- Defining Eligibility Will Not Be as Easy as It May Seem – If Congress believes additional business relief is needed, it may consider whether it would be more efficient to simply broaden the current eligibility criteria and increase funding for the newly created CARES Act programs rather than establish an entirely new program to address unpaid BII claims. Were they to create a new program, however, questions might arise as to whether the relief it may offer should be available only to current holders of unpaid BII policies, or to anyone who otherwise was not able to access CARES Act loans or grants.
- Protecting the Solvency of Insurers Is Critical – Because insurance is vital to the economy, any federal legislative framework should provide reasonable protections safeguarding the solvency and future viability of insurance providers.
- We Need to Prepare for the Next Pandemic – A backstop to safeguard against pandemic-related losses in the future is imperative. Congress should consider a framework for future pandemic-related insurance events consistent with existing programs such as WYO Flood Insurance and TRIA. None of these examples are themselves perfect solutions for managing future pandemic issues, although each has elements that could inform policy decisions.
- Any Solution Needs to Be Scalable – Retrospectively or prospectively, any serious solution must take into account current and future losses the likes of which have never been seen—trillions of dollars. The federal government must be prepared to fund any proposed solution sufficiently to manage the unprecedented scale that could be required to remediate.
What Does This Mean for Your Business?
Business interruption insurance coverage is now front and center in the legal and policy debates attendant to COVID-19. The issue is now under review in the courts, among state insurance regulators, in state houses and in Congress. The availability of pandemic coverage, both today and tomorrow, will almost certainly be impacted as these policies are tested in court, and as states and the federal government weigh in legislatively. In short, this is an evolving situation and one that needs to be monitored closely. We suggest contacting an attorney to advise on the facts and policy language unique to your particular situation.
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This document is intended to provide you with general information regarding how business interruption insurance during the COVID-19 pandemic. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.
Barbara Lane Snowden d/b/a Hair Goals Club v. Twin City Fire Insurance Company, 2020-19538 (Harris County, Texas); Scratch Restaurants LLC v. Farmers Group Inc. & Truck Insurance Exchange, 20STCP01233 (Superior Court, County of Los Angeles, California); Big Onion Tavern Group LLC et al. v. Society Insurance, Inc., No. 20-cv-02005 (N.D. Ill.); Billy Goat Tavern I, Inc. et al. v. Society Insurance, No. 20-cv-02068 (N.D. Ill.) Prime Time Sports Grill, Inc. v. Certain Underwriters at Lloyd’s London, No. 20-cv-00771 (M.D. Fla.) y; Chickasaw Nation Department of Commerce v. Lexington Insurance Co. et al., No. CV-20-35 (District Court, Pontotoc County, Oklahoma); French Laundry Partners LP et al. v. Hartford Fire Insurance Co. et al., No. T20-1 (Superior Court, County of Napa, California).