Broad Swath of Businesses Impacted
Pritzker’s executive order defined certain activities, functions, and businesses as “essential,” meaning that they could continue to operate with some restrictions. Unlike some orders by other states and localities, the Illinois order included lawyers in services deemed essential. Lawyers here have been busy advising clients on impacts from court and government agency closures, and on a variety of other topics.
Even for essential functions and businesses, COVID-19’s economic impact has been significant. From gyms and fitness studios to restaurants and bars, from Uber to conventions, and every other industry imaginable, business revenues – and indeed, the very ways they do business – have been impacted. More and more, businesses are looking to various resources to mitigate their losses and provide some measure of relief from the substantial erosion of their business operations. One potential avenue of recovery is business interruption insurance.
Business Interruption Insurance
Business interruption insurance, or business income insurance (BI), is a form of insurance that covers the loss of income a business suffers as a result of a disaster that is covered by the particular insurance policy. Covered losses might include loss of revenue, business closures, supply chain interruptions, and loss of customers, as well as costs to rebuild or decontaminate. Typically, BI is part of a business's property insurance policy or is included in a comprehensive package policy, often known as a business owner’s policy (BOP).
Property insurance, including BI, is first party insurance. BI has several common features, often with waiting periods before the BI pays, documentation requirements for lost income, requirements of full closure in some instances, and exclusions. BI also often has a civil authority provision and a requirement that the insured suffer direct physical loss or damage to covered property.
Policy language for BI, like most coverage, varies by insurer and by policy type, such as BOP, that the insured has obtained. Many insurers subscribe to the two largest property and casualty form providers, Insurance Services Office (ISO) or the American Association of Insurance Services (AAIS), each of which provides insurance forms, rules governing the forms, and loss costs. Insurers who subscribe to ISO or AAIS often adopt the approved forms and rules that the services have submitted to the various states.
A common business income provision, whether in a standalone policy, part of a property policy, or a BOP, require that the “‘suspension’ must be caused by direct physical loss of or damage to property at premises” and that the loss result from a covered cause of loss.
Finally, many BI policies include coverage language for closures of businesses and interruption caused by order of a civil authority. A civil authority policy typically has language such as:
“We will pay for the actual loss of ‘Business Income’ you sustain and necessary ‘Extra Expense’ caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”
The purpose of the civil authority provision is to expand the business interruption coverage to apply when there is damage to the property of another business that causes civil authorities to prohibit access to the area where the insured’s property is located. For example, following a hurricane, authorities might cordon off the entire area that was hardest hit to limit exposure and subsequent damage. This area might include businesses that sustained little or no damage, but whose revenue would nevertheless be affected by the civil authority order. The civil authority provision is often invoked as well where a fire or explosion or extensive release of toxic pollutants has occurred in a business area, and other businesses are closed temporarily as a safety precaution.
Insureds have begun to file claims for BI coverage, primarily under the civil authority provisions, asserting that executive orders such as Governors Pritzker’s and Newsom’s are civil authority orders triggering BI recovery. In many instances, the insureds are filing lawsuits when the insurer has denied coverage.[5]
Science and Interpretation
In a Law360 article, Coronavirus 'Civil Authority' Coverage May Hinge On Science,[6] author Jeff Sistrunk discusses the Oceana Grill case and notes that the battle over the civil authority provision and BI coverage in general might hinge on science, with experts likely to battle over whether the coronavirus can cause physical damage, and over the question of whether the virus can cause direct physical damage to property. The arguments will center on cases such as Gregory Packaging and Bd. of Educ. of Twp. Experts will also have to analyze whether COVID-19 was contemplated by the language
Insurance Industry Response
About 15 years ago, to respond to SARS and its potential, the insurance industry got in front of potential future pandemics by adding exclusions to confirm that losses such as those now presented by COVID-19 were not covered. ISO filed form CP 01 40 07 06, entitled “Exclusion for Loss Due To Virus Or Bacteria,”[7] which provides:
“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
When ISO files policy language or forms such as the exclusion, it also files a memorandum explaining the policy language. For this exclusion, ISO filed LI-CF-2006-175,[8] which discusses in great detail the reasoning for the exclusion and insurers’ intentions with various pandemics such as COVID-19. Many policies include the specific ISO exclusion or similar language that purports to exclude situations such as the present. As the article discusses, science and interpretation will be at issue in the coming years as the insureds and insurers fight this battle.
Trade Associations and Legislatures Respond
Various non-trade associations, such as the International Council of Shopping Centers, have urged Congress to guarantee or pay for business interruption coverage. In addition, some state legislatures, beginning with New Jersey, have introduced legislation that would mandate coverage for the pandemic regardless of policy language or exclusions. The insurance industry has pushed back and is closely monitoring such activity, arguing that such actions would raise constitutional and contractual issues. At his April 10th press briefing, when asked about what businesses should do, President Donald Trump said that generally, insurers should cover insureds’ BI claims.[9]
Liberalization clauses in states such as New Jersey typically read something along the following lines:
“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.”
To date, New Jersey, Massachusetts, Ohio, New York, Louisiana, Pennsylvania, South Carolina, and the District of Columbia have introduced proposals. While some have passed one chamber, none to date have been enacted. New Jersey’s language provides:
“Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic . . . concerning the coronavirus disease 2019 pandemic.”[10]
(Emphasis added.)
These liberalization clauses, if enacted, would raise significant questions of overriding of contracts that have been entered into by insureds and insurers. While there are instances of some minor changes to policies in certain catastrophic situations, such as grace periods for payment of premiums and cancellations,[11] a complete override of policy language, especially when an exclusion is part of the policy, these clauses would raise questions of contract and also potential constitutional questions. Article I, Section 10, Clause 1 of the United States Constitution provides:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.[12]
(Emphasis added.)
The United States Congress has also introduced several pieces of legislation in the last few months, none of which appear likely to become law any time soon.[13] One of the more recent federal pieces of legislation introduced was by Rep. Carolyn Maloney, D-N.Y., a senior member of the House Financial Services Committee, who officially announced the introduction of the Pandemic Risk Insurance Act of 2020 (“PRIA”),[14] which would establish a federal backstop for business interruption and event cancellation losses resulting from a future pandemic or public health emergency declared on or after January 1, 2021. It would not apply retroactively to the instant COVID-19 pandemic, unlike some of the state efforts.
In response, the National Association of Mutual Insurance Companies (“NAMIC”), APCIA, and the Independent Insurance Agents & Brokers of America Inc. have offered an alternative to the proposed federal PRIA legislation, the Business Continuity Protection Program (“BCPP”), which would provide immediate revenue relief for payroll, employee benefits, and operating expenses, following a viral emergency declaration by the President.[15] The program would be run by the Federal Emergency Management Agency (“FEMA”) and funded by taxpayer dollars. Businesses would purchase revenue replacement for three months' relief–for up to 80% of payroll and other expenses—through insurers that voluntarily participate in the BCPP. Protection must be purchased at least 90 days before the presidential declaration, according to the proposal.[16] Businesses would be required to certify that they would use any funds received for retaining employees and paying necessary operating expenses and that they would follow federal pandemic guidelines.
In addition to state legislatures, some insurance regulators have issued data calls to better understand what commercial insurers’ positions are on business interruption claims. To date, the New York Department of Financial Services and the California Department of Insurance have issued such requests, asking property and casualty insurers to provide information on their BI policy language and positions they are taking.
There are no easy answers to the coverage storm brewing over BI and whether insurers must respond to claims. The legislative responses at the state level raise serious issues of insurers having to potentially pay for losses not contemplated when the policies were written and contrary to what the policy wording provides and the intent of the coverages. The property and casualty industry is strong, with surplus of more than $890 billion at December 31, 2019,[17] not including reinsurance. At the same time, the lines of insurance most likely to respond to BI claims, such as commercial property and commercial multi-peril, account for a small percentage of premiums collected by the P&C insurers.[18]. The estimated BI if all claims (submitted or potential) were fully covered is $200 to $300 billion per month,[19] which would wipe out the surplus of the industry in a single quarter.
Conclusion
The unique circumstances of the COVID-19 crisis will lead to many disputes in the coming years. The BI dispute arena is one area where lawyers will have a cottage industry. When facing catastrophic destruction of a business, potentially never to reopen, affected individuals and businesses look to every potential source, including potential insurance recoveries. Insurers will argue credibly – and with basis in express language as well as interpretation – that pandemic situations were never the type of risk contemplated or priced by the industry. Any efforts to change the policy wording and interpretation will be defended rigorously, as too much as it stake. Thousands of coverage suits are possible in the Chicago area alone. Policyholders and insurers will be fighting over facts, policy interpretation, and science, for decades to come. A pandemic was not allowed to walk into a legislative body on the business interruption side and prevail – but the punchline awaits us.
Daniel A. Cotter is an attorney and counselor with Howard & Howard Attorneys PLLC focused on the needs of insurance companies and other financial institutions, IT and consulting companies, and nonprofits.