By: J. Nathan Cole
Massachusetts State Senator James B. Eldridge from Middlesex and Worcester Districts has introduced a bill (S.D. 2888) to rewrite and retroactively expand business interruption coverage to include losses caused by COVID-19. Typically, business interruption insurance provides coverage to replace losses, including lost net income, payroll, and other expenses incurred by a business during “periods of restoration,” meaning the time it takes a business to repair or rebuild damage to its premises. Optimally, a business’s policy would pay repair costs and reimburse it for lost operating revenue while the business remains closed.
Notably, however, policies normally require that a business prove that it suffered a direct physical loss or damage to its premises, forcing the business to suspend its operations to trigger such coverage.
Insurers have seized on the “direct physical loss” language to deny claims, arguing the Corona virus does not trigger coverage. We expect insurance carriers to aggressively defend claims for business interruption as precluded by the policy’s requirement of a “direct physical loss,” arguing that a business that voluntarily institutes a remote work policy, shuts down because an employee tests positive or was exposed to someone who has, or out of caution, cannot show a “a direct physical loss.” Even businesses that have proof their premises was exposed to the virus and, therefore, arguably physically damaged, will be met with fierce resistance by insurers.
Additionally, many policies have an “Exclusion of Loss Due to Virus or Bacteria Endorsement”, precluding coverage even where this is arguably a direct physical loss caused by a virus.
Senator Eldridge’s proposed bill, however, seeks to change that in favor of businesses suffering losses due to the Covid-19. S.D. 2888, An Act Concerning Business Interruption Insurance, would effectively rewrite certain business interruption policies to include the coronavirus pandemic as a covered cause of loss and would apply to policies sold to businesses in the Commonwealth with 150 or fewer full-time employees, as long as the policies were in place by the time Gov. Charlie Baker issued his March 10, 2020 State of Emergency Order.
The proposed act expressly requires insurers to cover Covid-19 claims, even if the policy includes the Virus Exclusion: “no insurer in the Commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.”
Insurance companies forced to pay business interruption claims pursuant to the proposed bill would be eligible for reimbursement from the Division of Insurance based on “procedures” to be determined.
Notably, neither the monetary limits of the policy nor the time limits set forth in the policy for business interruption coverage would be extended. Thus, if your policy has a limit of $1M in business interruption insurance, that would still serve as a cap to coverage.
Several other states, including New Jersey, Pennsylvania and Ohio are considering similar legislation to retroactively force coverage for Covid-19 claims despite the absence, or even exclusion, of coverage for such claims. Policyholders and businesses looking for any good news these days must appreciate that even if the Act were to become law—and it is unclear if that will happen—insurance companies will not accept this without a fight.
Opponents of the proposed legislation are likely to argue that such a law-virtually rewriting a private contract between an insurer and policyholder-would violate the constitutional provision prohibiting states from impairing the contractual obligations of private parties.
J. Nathan Cole is a Director at Kenney & Sams, P.C., and has been representing small businesses, construction contractors, subcontractors, and homeowners in Massachusetts for over a decade.