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April 10, 2020

Legal Update
Jessica H. Park

Proposed legislation aims to rewrite business interruption coverage

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A bill recently introduced in the Massachusetts senate would substantially alter the terms of property insurance policies that provide business interruption coverage to Massachusetts small businesses, effectively requiring such policies to cover COVID-19 related business interruption losses without regard for policy terms that would otherwise preclude such coverage.

The bill, SD.2888, would apply to all property policies which include loss of use and occupancy and business interruption coverage and which are issued to insureds with “150 or fewer full-time-equivalent employees in the commonwealth.” Under the legislation, these policies would be construed to include among their covered perils “business interruption directly or indirectly resulting from the global pandemic known as COVID-19, including all mutated forms of the COVID-19 virus.” Such coverage would extend to loss of business or business interruption until such time as Governor Baker’s March 10, 2020 emergency declaration, executive order no. 591, is rescinded.

The bill would, in addition, prohibit insurers from denying coverage for COVID-19 related business interruption losses on the basis of either (1) COVID-19 being a virus or (2) a lack of physical damage to the subject property. The bill would thus nullify exclusions commonly found in property policies for losses caused by viruses that induce physical illness or disease, as well as the typical requirement that a loss result from physical loss of or damage to covered property.

The current version of SD.2888 also contemplates a relief process through which insurers who pay COVID-19 related business interruption losses could apply to the Commissioner of Insurance for reimbursement. To fund such reimbursements, the bill would authorize the Commissioner of Insurance to make assessments against insurers that issue business interruption coverage in the Commonwealth, in proportion to their net premiums written.

The introduction of SD.2888 parallels recent legislative activity in New York, New Jersey, Louisiana, and Ohio, where similar bills are now pending. Such legislative efforts, however, have drawn strong criticism from insurance regulators and industry groups. The National Association of Insurance Commissioners (NAIC), for example, issued a statement on March 25 to “caution against and oppose proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover.” The NAIC statement noted that business interruption policies typically are not designed or priced to cover the type of widespread loss associated with a global pandemic, and requiring insurers to cover such losses could create substantial solvency risks for the insurance sector, potentially impairing insurers’ ability to pay other claims and exacerbating the negative financial impacts of the COVID-19 crisis.

SD.2888 and similar bills may face another hurdle as well. Because such bills seek to alter retroactively the provisions of in-force insurance policies, they are likely to face challenges under the Contracts Clause of the U.S. Constitution, which limits states’ ability to pass laws impairing existing contractual obligations.

The future and viability of SD.2888 and similar measures thus appear far from clear. Nevertheless, it will be important to keep a close eye on the progress of these bills given the potentially wide-ranging and significant consequences that such legislation could have.