Evaluating how legislation responds to business interruption
The proposed COVID-19 business interruption bills have arguably been the most controversial topic surrounding the pandemic.
Legislation regarding insurance coverage for COVID-19 business interruption has arguably been the most controversial topic surrounding the pandemic.
Broadly speaking, proposed legislation introduced in several states and in the U.S. House of Representatives would target pandemic policy exclusions and prevent insurers from denying business interruption coverage on the basis of “property damage.”
During a recent webinar sponsored by the National Council of Insurance Legislators (NCOIL) and the Rutgers Center for Risk and Responsibility, Adam Scales, a law professor at Rutgers Law School and co-director of the Rutgers Center for Risk and Responsibility, explained how other features of the proposed bills could impact insurers and insureds.
“A number of [the bills] restrict the benefits of their provisions to policyholders who run small businesses. Sometimes the business is defined as 100 employees or fewer, sometimes 150 employees and fewer, or just ‘small business’ with other definitions of that,” said Scales. “That actually poses some very interesting questions about certain challenges that might be made to the legislation.
“At the same time, some of these bills appear to contemplate the following mechanism: that property & casualty insurers would be liable given the elimination of [pandemic exclusions] in coverage. But there would be some opportunity for the insurers to claw this back by means of assessments [that are] defined in various ways.”
According to Scales, several bills suggest that P&C insurers will be able to recoup some of the losses they incur by paying COVID-19 claims through assessments or premium increases. However, this model is not clearly explained in the bills’ text.
At the federal level, the Business Interruption Insurance Coverage Act of 2020, which was introduced by House Rep. Mike Thompson (D-Calif.), would ensure businesses that purchase interruption insurance won’t get their claims denied because of significant events, such as the coronavirus pandemic. This legislation differs from state-level bills by offering more modest terms to insurers, said Scales, and would require insurers to provide the option of pandemic coverage in property policies moving forward.
Possible legal issues
The primary issue regarding proposed business interruption legislation is the concept of retroactivity. “At the state level, the various types of legislation would appear to attach different legal consequences to the content of insurance policies that are in existence right as oppose to future policies. Some have suggested that this would make things rife for a contract clause challenge as the federal constitution and a number of state constitutions forbid the impairment of contracts,” said Scales.
It will take a court to decide the meaning of an insurance contract to sort out how retroactivity is applied. However, Scales noted that courts more often view the concept with skepticism. “It would be one thing if [the legislation] merely changed the rule going forward, but with respect to a retroactive application, courts appear to be rather protective,” said Scales. “This has some implications for the current batch of proposed legislation.”
To watch the recording of the “Legislative Responses to Business Interruption Insurance and COVID 19″ webinar, click here.
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