Massachusetts is one of the latest states to propose legislation that would mandate insurers cover COVID-19 related business interruption claims despite virus exclusions in many policies.
This comes as Insurance Journal reported legislators in New Jersey and Ohio have floated similar legislation, though none of the bills have yet passed.
The Massachusetts bill – SD.2888 – is being sponsored by Senator James Eldridge, who told Insurance Journal that he consulted with restaurant and small business owners in the state in drafting the proposed legislation.
“If we don’t find a way to provide financial support for these restaurants and businesses, whether it’s the insurance industry or government, many of them will never reopen,” he said. “And that won’t be good for anyone, including the insurance industry.”
The proposed bill states insurers in Massachusetts may not deny a claim for business interruption because COVID-19 is a virus, even if the relevant insurance policy excludes losses resulting from viruses. Under the proposed bill, insurers also may not deny COVID-19 related business interruption claims if there is a lack of physical damage to the insured’s property or to any other relevant property.
“Restaurant owners and other business owners are closing and have closed, and they still have bills to pay,” Eldridge said. “They need to pay rent, they’re hoping to pay their employees and yet, in some cases, insurance companies are denying those claims because of the virus exclusion.”
Massachusetts Bill SD.2888 has been proposed as an emergency law, meaning the process of moving it through the Legislature would be expedited.
“There is a big push about relief for small businesses, including restaurants and restaurant workers, so I don’t know the exact timetable but I would like to see the Legislature act on this very quickly,” Eldridge said.
According to the bill, insurer payouts for COVID-19 claims will be subject to any monetary limits of the policy and any maximum length of time set forth in the policy for business interruption coverage. It applies only to policies issued to insureds with 150 or fewer full-time-equivalent employees in Massachusetts. If passed, the bill would be retroactive to March 10, 2020, when Massachusetts Governor Charlie Baker issued an emergency declaration.
Eldridge said that although similar bills have been filed in other states, the Massachusetts legislation was filed independently after consulting with restaurants and businesses throughout the Commonwealth.
“I personally think this kind of pandemic should be covered by insurance companies,” he said.
The insurance industry, however, has a different take. It has pushed back against legislation like this, expressing concerns that it could place too much financial strain on insurers that didn’t price for virus related losses. This is because the insurance industry initially took action nearly 15 years ago to limit insurance coverage for the next pandemic, according to a report by Philadelphia-based law firm White and Williams.
In July 2006, The Insurance Services Office (ISO) submitted an exclusion for loss due to virus or bacteria that was later approved by regulators. The exclusion states that it applies to business income, or business interruption, and makes explicit reference to SARS – another type of coronavirus, the White and Williams report explained. Similar exclusions exist in forms issued by other insurance organizations or in insurer-drafted forms, according to Paul White, attorney at Wilson Elser.
White warned earlier this month in an audio interview that if other states follow in New Jersey’s footsteps after its initial proposal of N.J. Bill A-3844 regarding business interruption insurance and the coronavirus, it could set a dangerous precedent for the insurance industry.
“If the legislation proposed in New Jersey were to become an accepted template that in essence required insurers to provide coverage for losses arising from COVID-19, irrespective of the terms of the insurance contract, I believe the consequences could be devastating for the insurance industry,” White said. “Draconian measures that preclude an insurer from being able to rely on policy exclusions and force the industry to cover losses that were not contracted for would set a horrible precedent.”
Additional concerns have been raised by the industry that legislation like this could conflict with The Contracts Clause found in Article 1 of the U.S. Constitution, which places limitations on states’ ability to interfere with private contracts.
“This isn’t a situation where insurance companies are asking for a bail out or otherwise trying to shift their financial problems to the public sector,” Kristin Cummings, attorney-at-law at Dallas, Texas-based law firm Zelle LLP, previously told Insurance Journal. “Insurance companies are simply attempting to apply the terms of the policies that were negotiated with their insureds to provide coverage for the losses they agreed to cover. Suggesting that insurance companies, along with state and federal governments, should bear the financial burden of COVID-19 losses by rewriting the terms of agreed upon contracts is effectively an impermissible governmental taking and unconstitutional.”
In a statement released by the National Association of Mutual Insurance Companies (NAMIC), President and CEO Charles M. Chamness said calls for the insurance industry to provide coverage for perils that are excluded in a business interruption policy are misguided, Insurance Journal previously reported.
“If elected officials require payment for perils that were excluded, never underwritten for, and for which no premium was ever collected, catastrophic results will occur and we may deal with a second crisis: insurance insolvencies and impairments. There will also be irreparable harm done to contract law, and the impact of this will be felt by every business in America,” Chamness said.
In light of some of these concerns, Eldridge emphasized that the proposed legislation in Massachusetts offers a mechanism that allows an insurance company to be reimbursed by the state government for any COVID-19 related payouts to business or restaurant owners, with an assessment conducted at a later time in order to spread the risk.
“I think what I really want to stress is we all need to be in this together,” he said. “I want to support restaurant and business owners and their employees and also recognize that it’s a financial burden for insurance companies. But right now is really when many of these businesses need the full support of their insurance companies.”
Indeed, the Massachusetts bill states that insurers required to provide coverage to insureds that file claims may apply to the commissioner of insurance for relief and reimbursement. The commissioner of insurance would then establish procedures for insurers’ submission and qualification of eligible claims. A spokesperson for the Massachusetts Division of Insurance said the Division doesn’t comment on pending legislation.
White said he doesn’t see the insurance industry’s role needing to change amidst the coronavirus pandemic, however, as he believes the industry is already well equipped to handle the surge of claims that are coming its way.
“I believe the insurance industry’s role will be what it has always been,” he said. “While COVID-19 is new and promises to bring with it an avalanche of claims to the insurance industry, many of the legal issues presented are not new, and insurers are equipped to address the issues. They are using their already existing knowledge and skill sets to take on a new and different problem, but one that they are very able to take on.”