By James S. Hultz | Lexology
Business interruption coverage stemming from the COVID-19 pandemic is a matter of intense debate. The number of policyholder lawsuits continues to rise sharply and an increasing number of state legislatures are considering laws to specifically address such coverage.
Now, additional proposed legislation at the federal level could completely and definitively resolve the debate in favor of coverage for policyholders.
The Business Interruption Insurance Coverage Act of 2020
On April 14, Congress introduced the Business Interruption Insurance Coverage Act of 2020 (the “Act”) which, if passed, would require insurance companies to cover business interruption losses due to “viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs.” The bill further states:
Any exclusion in a contract for business interruption insurance that is in force on the date of the enactment of this Act shall be void to the extent that it excludes losses specified . . . .
The draft legislation also specifies that it preempts state approval of any contrary exclusion and renders such approval “void to the extent that it excludes losses specified.”
Potential Issues with the Act
However, in its current form, the draft legislation may provide a loophole that would allow some insurers to reinstate exclusions barring such coverage. They could reinstate such exclusions if the policyholder approves, which is highly unlikely. Contrary exclusions can also be reinstated if the policyholder fails to pay an increased premium for such coverage. However, the current version of the Act does not address when or how much the insurers could charge for such increased premiums. Some insurers will capitalize on the lack of clarity to avoid the intended impact of the Act.
Another potential problem is the fact that most policies: (i) require an insured to wait a specified number of days before the coverage kicks in; and (ii) limit coverage to specified dollar amounts and/or a maximum number of days. Carriers have already argued that these limitations effectively negate coverage given that some studies suggest the virus has limited surface viability and can be quickly eliminated from a property with minimal business disruption. This argument fails to recognize the impact of the shut-down orders, which policyholders argue cause requisite “direct physical loss or damage” to their property. Had the Act addressed the issue, it could have foreclosed further debate and prevented delay in achieving the desired clarity of coverage.
Other Expected Challenges to the Act
Insurers view COVID-19 business interruption claims as an existential threat to an entire sector of their industry. In a letter objecting to the Act, several industry groups argued that “[r]ecent estimates show that business continuity losses just for small businesses of 100 employees or fewer could amount to between $220 billion to $383 billion per month.” They claim that their total reserves of only $800 billion are woefully insufficient to withstand such losses. They claim that the Act could “end the very existence of the business interruption insurance market as we know it.” However, their tales of woe are likely highly exaggerated, especially given recently introduced companion legislation (“Pandemic Risk Insurance Act of 2020”) which would contribute hundreds of billions of federal funds to offset losses sustained by insurers who actually pay business interruption claims. Nonetheless, insurance carriers will undoubtedly devote vast resources to preventing the passage of the Act.
And, should it become law, there is no doubt that the insurers will challenge its constitutionality in the courts.
While the Act was just recently introduced and it is unclear whether it will survive insurance industry challenges, policyholders should comply with all policy notice requirements and carefully document their business interruption losses in order to preserve their rights and options. If the Act passes as written, look out for increased premium notices, especially if the particular policy at issue has an exclusion that would otherwise seem to prevent coverage.