Analysis

Coronavirus Business Loss Bills Face Constitutional Hurdles

By Jeff Sistrunk
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Law360 (March 26, 2020, 6:59 PM EDT) -- Lawmakers in Ohio and Massachusetts have followed in New Jersey legislators' footsteps and proposed bills that would retroactively expand business interruption insurance policies to cover losses due to the coronavirus outbreak, but the measures could face stiff constitutional challenges from insurers if they are passed into law.

On Tuesday, Ohio state Reps. Jeffrey A. Crossman and John M. Rogers, both Democrats, introduced H.B. 589, while Massachusetts state Sen. James B. Eldridge, also a Democrat, introduced S.D. 2888. Among other things, both measures would retroactively mandate that certain business interruption policies include the coronavirus pandemic as a covered cause of loss. The bills follow a similar measure proposed by New Jersey lawmakers earlier this month.

Eldridge told Law360 on Thursday that he drafted the Massachusetts bill after speaking with restaurant owners who have suffered major financial losses due to government-mandated closures and reductions in operations aimed at stemming the spread of COVID-19.

"From a public policy point of view, policyholders who are purchasing this business interruption insurance really should be covered for their costs throughout the crisis and be able to ensure their workers are paid," Eldridge said. 

Rogers and Crossman also said constituents' concerns over losing their businesses spurred them to introduce legislation. 

"This legislative proposal is an attempt to put in place a safety net for our business community, in large measure made up of small businesses, who without assistance may realistically see their demise," Rogers said.

However, attorneys who represent insurers told Law360 they are concerned that bills like those proposed in Massachusetts, Ohio and New Jersey could unconstitutionally restrict the "freedom of contract" by effectively overriding or deleting certain provisions in business interruption policies, such as a common exclusion for losses caused by viruses. As a result, the measures would likely face protracted court challenges if passed into law.

"The concept of forcing a single industry to shoulder so much of the financial burden of a global crisis is truly breathtaking," said Hinshaw & Culbertson LLP partner Judy Selby. 

The legislative trend began on March 13, when a trio of New Jersey General Assembly members introduced a first-of-its-kind bill designed to help struggling small businesses by broadening business interruption coverage for losses related to COVID-19.

The Garden State measure was set for a vote by the full General Assembly on March 16 but was pulled at the last second so lawmakers could engage in discussions with insurance industry representatives, according to a spokeswoman for one of the primary sponsors, Democratic Assemblyman Roy Freiman. As of Thursday, no further action had been taken on the bill.

The key provisions of the Ohio and Massachusetts bills are similar to those in the New Jersey measure, with some differences.

Each of the bills would apply retroactively to business interruption policies purchased by companies of a specific size by the date the state's governor issued an emergency declaration — March 9 for New Jersey and Ohio, and March 10 for Massachusetts. The New Jersey bill would apply to companies with fewer than 100 full-time employees. In the Ohio bill, that number is 100 or fewer, and in the Massachusetts bill, 150 or fewer.

The Ohio and New Jersey bills would implicitly override certain common terms contained in many business interruption policies, such as the virus exclusion that was adopted by the Insurance Services Office in 2006 in the wake of the SARS outbreak.

The Massachusetts measure is even more explicit, stating insurers cannot deny business interruption claims on the grounds that COVID-19 is "a virus, even if the relevant insurance policy excludes losses resulting from viruses" or "there being no physical damage to the property of the insured or to any other relevant property."

Insurers that don't comply could be subject to penalties under Chapter 176D of Massahusetts' general laws, which regulates unfair practices in the insurance business.

Eldridge said he wanted to include the clearest possible language in his bill to leave no question about its intended reach.

"That was partly in response to my conversations with restaurant owners, who said that often, when putting in claims with insurance agents or companies, it is 'surprise, surprise' — there can be a delay of response or a suggestion that a claim is not valid or doesn't meet the criteria," he said. "We wanted to have very explicit language to help an industry that has been very hard-hit."

But White and Williams LLP partner and Temple University Law School adjunct professor Randy Maniloff, who represents insurance companies, asserted that the recent legislative proposals show a "disconnect between perception and reality" over what business interruption policies actually cover. Policyholders have developed an expectation that the policies are an "ideal tool" to address coronavirus-related losses, despite clear terms and exclusions indicating otherwise, he said. 

If one or more of the bills garner final approval, insurance companies could file suit en masse, alleging the measures run afoul of the contracts clause of the U.S. Constitution, which curtails states' ability to interfere with private contracts, according to attorneys.

"They are rewriting contracts that were already in place," said Kaufman Dolowich & Voluck LLP general counsel Kevin Mattessich, who also represents insurers. "These business interruption policies are very specific in what they do and don't cover. There is no basis for the government to turn around later and upend everything."

Erin Collins, vice president of state affairs at the National Association of Mutual Insurance Cos., said in an emailed statement that measures that rewrite policy language could set a troubling precedent. 

"While all industries want to be partners in ensuring against economic distress during this time, retroactively requiring contractual changes for which no premium was collected is a dangerous, unprecedented and unconstitutional proposal," Collins said. 

Lathrop GPM LLP partner Alexandra Roje, who represents policyholders, said she was troubled but "not surprised" by the insurance industry's response to the legislative proposals. Time is not on companies' side as they experience mounting financial losses due to the coronavirus outbreak, she said. 

"When there is a massive loss, for those holding the money, delay is the name of the game, and I don't think there has ever been as much money at stake as there is with these coronavirus issues," she said. "Most of the policyholders affected by this loss don't have time. They are not Fortune 500 companies that have cash on hand. Forcing them to shoulder this burden for months is just a recipe for additional failures and bankruptcies."

Eldridge acknowledged the potential constitutional challenges to his bill, but said he is hopeful that insurance industry representatives will work with him to address companies' coverage needs. He emphasized that S.D. 2888, like the Ohio and New Jersey bills, offers a means for insurers to obtain reimbursement of claims payments.

Each of the three state legislative proposals provides that insurers paying out business interruption claims would potentially be eligible for reimbursement from that state's regulatory agency, pursuant to as-yet-undetermined standards that the regulator would have to develop. Under each bill, these reimbursements would be paid out of a fund financed by special assessments imposed on insurers that sell business interruption coverage.

"That funding would make the insurance company whole and then, down the line, they could readjust the premiums — obviously, making sure there isn't too much of an increase — to address those costs," Eldridge said. "I do think it is a reasonable proposal. What I am trying to say to insurance companies is, if we don't find a way to support restaurants right now, some may never reopen. That is not good for anyone, including the insurance industry, so we need to be innovative in this time of crisis."

Crossman and Rogers, the co-sponsors of the Ohio bill, said they are merely asking that insurers help contribute to a solution to businesses' woes amid the growing coronavirus crisis. 

"If this proposal boils down to bringing parties to the table, to iron out a better solution, we all succeed," Rogers said. 

--Editing by Philip Shea.

Correction: A previous version of this story misidentified Alexandra Roje's law firm. The error has been corrected.

For a reprint of this article, please contact reprints@law360.com.

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