As the coronavirus (COVID-19) pandemic continues to evolve, regulatory and legislative authorities are taking actions, in the form of directives and orders, that could directly impact companies’ business interruption coverage. Careful review of insurance policies and insurers’ responses in light of these actions, as well as monitoring of regulatory and legislative developments, will be critical in preserving companies’ rights to coverage for COVID-19 losses.
Two key coverage issues have been a focus of how and whether policyholders’ coverage will respond to their business interruption losses relating to COVID-19: (1) whether “direct physical loss or damage” to property has happened, and (2) whether “virus” or “pollutants or contaminants” exclusions apply to preclude coverage.
A recent flurry of regulatory and legislative actions and calls to action regarding these policy terms, as well as the presence of liberalization conditions in many property insurance policies that provide business interruption coverage, may have impacts on the responsiveness of coverage.
The New York Department of Financial Services (DFS) on March 10 issued two communications to insurers regarding COVID-19. In one, DFS instructed insurers to provide explanations to their policyholders and DFS about how the coverage may respond to COVID-19. For those policyholders in New York with properties in New York, careful analysis of the insurers’ responses will be important to understanding coverage.
DFS issued a letter, “Call for Special Report Pursuant to Section 308, New York Insurance Law: Business Interruption and Related Coverage Written in New York,” in which it recognized that policyholders have “urgent questions” and that “[i]n the interest of the timely and equitable fulfillment of insurance contracts,” insurers must provide explanations to policyholders by March 18, 2020 on how their business interruption coverage may respond to COVID-19.
In its letter, DFS proclaimed that “[g]iven the potential impact of COVID-19 on business losses, particularly concentrated effects in local communities, DFS considers Insurers’ obligations to policyholders a heightened priority.” Specifically, DFS directed insurers to include in their explanations “whether contamination related to a pandemic may constitute ‘physical damage or loss’” and to “describe what type of damage or loss is sufficient for coverage under the policy.” The letter required insurers that wrote business interruption and related coverage in New York to send these explanations of coverage benefits to their New York policyholders by March 18, as well as to the DFS.
The letter required “clear and concise” explanations of benefits (i.e., admissions) from insurers to policyholders and to the DFS, including about what type of “damage or loss” is “sufficient” to establish coverage under the policy. New York policyholders that receive these explanations from their insurers, and, if the responses to DFS become publicly available, other policyholders, could consider and rely on the insurer statements and any equivocations in such statements to support arguments for coverage. Additionally, policyholders that received these required explanations that were inadequate—including about what is sufficient to establish “loss” or “damage”—should consult with coverage counsel and consider whether pressing for additional explanations is prudent.
The satisfaction of the “physical loss or damage” term will be a hotly contested coverage issue. DFS is not the only New York governmental entity that has focused on what constitutes property loss or damage in the context of the spreading of COVID-19. The Office of the Mayor for New York City has issued a series of executive orders to address the threat that COVID-19 poses to the health and welfare of New Yorkers. In its earlier orders, Emergency Exec. Order No. 100 (March 16), it stated that the orders were being given, in part, “because of the propensity of the virus to spread person to person and also because the virus physically is causing property loss and damage.”
The more recent orders, Emergency Exec. Order No. 103 (March 25), have slightly revised the language describing this basis for the orders stating that they were being given “because of the propensity of the virus to spread person-to-person and also because the actions taken to prevent such spread have led to property loss and damage . . . .”. Policyholders and insurers are studying these and other governmental entities’ proclamations of their bases for issuing their orders with respect to the preparation of communications regarding policyholder coverage claims and insurer responses.
DFS also issued Insurance Circular Letter No. 5 (2020) that instructs each regulated insurance entity to submit to DFS, by April 9, 2020, its “preparedness plan” “to manage the risk of disruption to its operations and the financial risk arising from COVID-19.” Moreover, DFS has also posted FAQs on its website with respect to COVID-19 and business interruption.
The Minnesota Department of Commerce on March 19 issued a consumer alert on business interruption and COVID-19. In the alert, the department stated that “[t]he industry trend has been to exclude business interruption coverage for viruses, but this may not be universal.” Later, it provides that “[t]he State of Emergency declaration does not change the terms of your business interruption coverage, but does indicate the seriousness with which the Governor has directed state agencies to treat the COVID-19 pandemic. . . . Declarations in and of themselves do not automatically result in a situation where business interruption claims are within the scope of the policy language.”
Several state commissioners of insurance, including those from Alaska, Arkansas, Georgia, Mississippi, Oregon, and Washington, have made statements encouraging insurer flexibility in response to the COVID-19 pandemic, and some have directed insurers to grant insureds grace periods to prevent cancellation of policies for non-payment of premium.
For example, in a March 18 notice, the California Insurance Commissioner requested that “all insurance companies provide their insureds with at least a 60-day grace period to pay insurance premiums so that insurance policies are not cancelled for nonpayment of premium during this challenging time due to circumstances beyond the control of the insured.”
In addition, on March 20, the Wisconsin Office of the Commissioner of Insurance issued a bulletin stating the following:
Insurers are encouraged to offer flexibility to insureds who are incurring economic hardship. This flexibility can include offering non-cancellation periods, deferred premium payments, premium holidays and acceleration or waiver of underwriting requirements.
Similarly, the Massachusetts Division of Insurance on March 23 issued Bulletin 2020-05, which states the following:
All Carriers (whether issuing property and casualty, life and annuity, or health products) are advised to provide employers and individuals with as much flexibility as is reasonably possible during the period of the COVID-19 public health crisis to maintain their existing coverage, despite policyholders’ growing concerns about being able to send their premiums in on time.
On March 16, New Jersey Assembly members introduced proposed legislation, A-3844, that per its “Statement,” “provides a mechanism by which certain businesses that suffer losses due to interruption as a result of the coronavirus disease 2019 pandemic may recover those losses from their insurer if they had a policy of business interruption insurance in force on March 9, 2020, the date on which the Governor declared a Public Health Emergency and State of Emergency in Executive Order 103.” The bill would apply to policies issued to “insureds with less than 100 eligible employees, in the State of New Jersey, and in force on the effective date of this act.” However, it was reportedly held from a floor vote.
On March 24 and 27, Massachusetts, Ohio, and New York state representatives proposed similar legislation, Massachusetts Senate Docket No. 2888, Ohio House Bill 589, and New York Assembly Bill A10226 that, if enacted, would require insurers to provide business interruption coverage in connection with the COVID-19 pandemic. The Massachusetts bill, for example, provides further 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.”
If this or similar legislation is passed, policyholders would rely on liberalization conditions in their policies to support their claims for coverage. A typical liberalization condition provides the following:
If during the period that insurance is in force under this Policy, any filed rules or regulations are revised by statute so as to broaden this insurance without additional premium charge, such extended or broadened insurance will inure to the benefit of the Insured within such jurisdiction, effective the date of the change specified in such statute.
Several members of Congress sent a letter on March 18 to trade association leaders for insurers urging them to work with their member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage. The signatories include members from several states, including New York, New Jersey, Pennsylvania, California, Texas, Ohio, Florida, Michigan, Minnesota, Kentucky, and Arkansas. In the letter, they state the following:
Business interruption insurance is intended to protect businesses against income losses as a result of disruptions to their operations and recognizing income losses due to COVID-19 will help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees of payroll.
On March 20, the trade association leaders responded by sending a joint letter to Rep. Velazquez (D-NY), the first signatory and chair of the House Committee on Small Business. They state that, among other things, “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. . . .The U.S. insurance industry remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.”
On March 25, the National Association of Insurance Commissioners (NAIC) issued a public statement “cautioning” Congress from expanding business interruption insurance. The NAIC stated the following:
Business interruption policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19 and therefore include exclusions for that risk. Insurance works well and remains affordable when a relatively small number of claims are spread across a broader group, and therefore it is not typically well suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period.
The NAIC specifically noted the insolvency risk facing insurers by what the NAIC characterized as retroactive changes in coverage.
The National Restaurant Association on March 18 wrote a letter urging a series of proposals, including $100 billion in federally-backed business interruption insurance. Specifically, the letter states the following:
While many businesses have invested in Business Interruption Insurance and Contingent Business Interruption Insurance, most policies can deny claims due to a ‘Virus’ exclusion. . . .Rather than engage in a protracted dispute and arbitration process, Congress must approve a timely insurance program through the U.S. Treasury Department that allows for businesses to receive their insured benefit under an expedited time frame. As we enter a 12-to-18 month period of tremendous uncertainty in the hospitality industry, these insurance claims must be approved quickly and utilize a federal backstop similar to the program created for airlines after 9/11/2001.
The House Financial Services Committee reportedly is considering the idea of a Pandemic Risk Insurance Act that would, among other things, create a reinsurance program similar to the Terrorism Risk Insurance Act for pandemics that would provide a partial federally funded backstop to respond to losses arising from pandemics. For more, read “P/C Insurers Put a Price Tag on Uncovered Coronavirus Business Interruption Losses.”
Apparently a number of ideas are being discussed, including whether the act only would concern losses from future pandemics or, as the National Restaurant Association and others are seeking, would include current COVID-19-related losses.
Chair of the UK Treasury Select Committee (TSC) Mel Stride on March 25 wrote a letter to the Association of British Insurers (ABI) requesting information on how the industry plans to respond to COVID-19 losses. Chair Stride wrote, “It is a concerning time for all of us in the face of the Coronavirus threat. As such, many will be looking to their insurer for both flexibility and assurance.” The TSC requested detailed information from insurers about their response, including estimates on how much they expect to pay out for business disruption in the face of COVID-19 as well as details on their approach with respect to business interruption insurance. Chair Stride requested a “swift response.”
In a response to the TSC letter, ABI spokesperson reportedly has said the following:
This is an unprecedented challenge and no country in the world offers extensive pandemic insurance to business. Governments need to work with insurers on solutions to this global issue. Insurance to cover all pandemics would be too expensive for most firms to afford. Millions of firms, large and small, rely on insurers to protect them against the day to day risks like fire, flood, and workplace injuries, on which insurers pay out over £22 million every day to help UK businesses continue trading.
Historically, changes in circumstances have resulted in tremendous increases of liabilities or losses for policyholders, an insurance industry response that insurance was not intended to respond to such losses, and a subsequent consideration by courts of “public policy” concerns or “equity” in resolving the resulting coverage disputes.
The emergence of enterprise liability in the law and the adoption of federal and state environmental laws in the 1970s and 1980s resulted in dramatic and continuing-to-this-day asbestos-related and environmental-related liabilities for many businesses, insurer arguments that coverage was not available or was limited, and considerations of public policy including with respect to what the insured had to demonstrate in terms of injury or property damage to trigger coverage. Policyholders and their insurers are confronting similar circumstances today.
Additionally, many governmental entities or actors within them are being asked to consider legislation that would impact the responsiveness of business interruption coverage for COVID-19-related losses or to back the insurance industries’ acceptance and processing of claims with additional federal funding.
In light of these circumstances, policyholders confronting significant COVID-19-related business interruption losses should confer with coverage counsel, in addition to brokers, including specifically with respect to communications to insurers including notices in a manner that is mindful of how insurers may seek to frame the claim as uncovered, and document their losses.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Scott T. Schutte
Lauren A. McCulloch Semlinger