The Pennsylvania Senate on April 15 introduced robust business interruption loss coverage legislation in the form of its proposed COVID-19 Insurance Relief Act (General Assembly Senate Bill 1114). This LawFlash provides an overview of Senate Bill 1114 and its potential impact on how insurers are required to cover COVID-19-related business interruption losses in the state.
Senate Bill 1114 follows closely on the heels of General Assembly House Bill 2372, designed to assist policyholders with fewer than 100 eligible employees with business interruption losses, and General Assembly House Resolution 842 urging the US Congress to facilitate payment to insurance companies through federal stimulus funds for the reimbursement of costs associated with the payment of claims made on business interruption insurance policies during the coronavirus (COVID-19) pandemic. Read more on unlocking COVID-19 business interruption loss recovery.
The insurance industry generally maintains that there is no potential for coverage under a first party property policy for COVID-19-related business interruption losses if
Senate Bill 1114 directly addresses the above insurance industry positions with respect to an insured’s business interruption losses arising out of the proclamation of a disaster emergency issued by Pennsylvania’s governor on March 6 and a subsequent March 19 civil authority order prohibiting access to certain business locations.
The bill, if passed, would require coverage for insureds that experience business interruption losses in the State of Pennsylvania in connection with the governor’s civil authority order, notwithstanding insurer assertions that coverage does not apply or virus exclusions bar coverage.
The Senate’s proposed legislation would require that
a policy of insurance [issued prior to March 6, 2020] insuring against a loss related to property damage, including the loss of use and occupancy and business interruption, shall be construed to include among the covered perils coverage for loss or property damage due to COVID-19 and coverage for loss due to a civil authority order related to the declared disaster emergency and exigencies caused by the COVID-19 disaster pandemic.
The proposed legislation includes an expansive definition of what constitutes “property damage” under a property policy:
Property Damage. In a building, office, retail space, structure, plant, facility, commercial establishment or other area of business activity, the direct physical loss, damage or injury to tangible property, as a result of a covered peril, including but not limited to: (1) The presence of a person positively identified as having been infected with COVID-19. (2) The presence of at least one person positively identified as having been infected with COVID-19 in the same municipality of this Commonwealth where the property is located. (3) The presence of COVID-19 having otherwise been detected in this Commonwealth.
The bill’s proposed expanded definition of property damage is also consistent with the Pennsylvania Supreme Court’s recent decision in Devito v. Wolf,  which acknowledges that given the nature of COVID-19, the civil authority orders issued thus far are the result of property loss or damage due to the risk of spread, including from the virus’s tendency to attach to surfaces.
This proposed legislation would require the insurer to indemnify an insured that qualifies as a small business under the Small Business Administration’s criteria, for up to 100% of the insured’s losses “related to the declared emergency subject to the policy limits for loss of business or business interruption and subject to the maximum individual policy limits.” For those insureds that do not qualify as small businesses, the insurer would be required to indemnify the insured for up to 75% of covered business interruption loss.
Citing its inherent police powers, the Senate explained that such legislation is “necessary for the good of the public” even if the law “may result in an impairment of contract rights when the legislature has a significant and legitimate public purpose, such as remedying a social or economic problem.”
Pennsylvania is one of several states, including Massachusetts, Ohio, New York, Louisiana, New Jersey, and South Carolina to have exercised their inherent powers and introduced legislation to assist policyholders in accessing their business interruption coverage More states are likely to follow. Read more on state-level legislation.
If this or similar legislation is passed, policyholders would rely on liberalization and “conformity-to-statute” conditions in their policies to support their claims for coverage, at least with respect to insured locations under the policy located within the jurisdiction(s) where such legislation is passed. A typical liberalization condition provides the following:
If during the period that insurance is in force under this Policy, any filed rules or regulations affecting the same 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.
Certain policies similarly or additionally include conformity-to-statute provisions or provisions “applicable to specific jurisdictions” that provide that if the policy’s provisions “conflict” with provisions required to be in policies by statute, the policy is to be read to eliminate such conflict. For example, a typical provision states the following:
If the provisions of this Policy conflict with the laws of any jurisdictions in which this Policy applies, and if certain provisions are required by law to be stated in this Policy, this Policy will be read so as to eliminate such conflict or deemed to include such provisions for insured locations within such jurisdictions.
Many of the liberalization and conformity-to-statute provisions apply to changes in law within “any jurisdiction.” Accordingly, if (1) a policyholder is experiencing business interruption losses arising out of an insured property in Pennsylvania, (2) Pennsylvania passes Senate Bill 1114, and (3) the policyholder has losses arising out of another insured property in a jurisdiction that does not pass a similar bill, it may result in a strengthening of its claims for coverage from losses arising out of its Pennsylvania insured location as compared to its losses arising out of its other insured locations.
The fact that legislation may strengthen a policyholder’s coverage claims for losses arising out of insured locations within particular jurisdictions as compared to others is another reason that it would be prudent for companies to document, to the extent practicable, their business interruption losses and expenses arising out of their particular insured locations.
Regardless of whether a coherent singular legislative answer will ultimately emerge, it is important for policyholders confronting significant COVID-19-related business interruption losses to confer with experienced coverage counsel that can advise on a wide variety of issues integral to enhancing the prospects of recovering these losses.
We have experience assisting clients in obtaining business interruption insurance recovery in a wide range of scenarios and have consulted with clients on the implications of COVID-19. We stand ready to assist businesses in maximizing their recovery of business losses in this area. For assistance with these or any other issues, contact any of the Morgan Lewis lawyers listed below.
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
Jeffrey S. Raskin