Pa. Bill Offers New Approach To COVID-19 Business Insurance

By John Sylvester
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Law360 (May 5, 2020, 3:26 PM EDT) --
John Sylvester
John Sylvester
On April 30, a new bipartisan bill was introduced in the Pennsylvania state Senate to assist policyholders in their efforts to obtain business interruption coverage for business income losses arising from the COVID-19 pandemic.

While previous legislation introduced in Pennsylvania and in other states may be deemed to require insurers to cover policyholders for business interruption claims even if particular policy provisions would be negated in the process, Pa. Senate Bill 1127 takes a more nuanced approach to assisting policyholders' recovery on their claims.

In particular, S.B. 1127 does not purport to override any insurance policy terms, but rather construes relevant policy language reasonably in a manner that promotes coverage and, in so doing, renders the legislation resistant to court challenge contending that it impairs insurers' contract rights.

This alternative approach answers the critics of other proposed business interruption legislation who argue that insurers should not be compelled to provide coverage for COVID-19-related losses if the policy language expressly excludes such coverage.

The bill offers reasonable policy interpretations.

The thrust of S.B. 1127 is its focus on clarifying key policy interpretations that may be a prerequisite for business interruption coverage by declaring the law of Pennsylvania as adopting the reasonable interpretation of the phrases "direct physical loss, damage or injury to tangible property," and similar policy terms, to encompass the presence of the COVID-19 coronavirus in "a building, an office, a retail space, a structure, a plant, a facility, a commercial establishment or other area of business activity."

Moreover, S.B. 1127 declares that the presence of the COVID-19 coronavirus may be established by a policyholder's demonstration that a person infected with COVID-19 has been present either in the business location itself or in the municipality of that location, or that the presence of the coronavirus otherwise has been detected in the location.

This legislatively declared interpretation of relevant policy language is consistent with existing Pennsylvania law. In Motorists Mutual Insurance Co. v. Hardinger,[1] the U.S. Court of Appeals for the Third Circuit in 2005 applied Pennsylvania law and held that infectious bacteria existing in a household water system could constitute direct physical loss under a homeowners insurance policy to the extent it impairs or eliminates the functionality of the house.

Thus, S.B. 1127's declaration that the presence of the infectious COVID-19 coronavirus in or near a business location constitutes property damage or direct physical loss under a first-party insurance policy will avoid interpretive disputes between policyholders and insurers that might otherwise require lengthy and expensive litigation to resolve.

Another interpretive feature of S.B. 1127 is that it declares the order of Pennsylvania Gov. Tom Wolf, dated March 19, regarding closure of all businesses that are not life-sustaining to constitute, under a first-party insurance policy, an order of civil authority and/or an order restricting ingress/egress that was issued as a direct result of physical damage at and/or in the immediate vicinity of business locations impacted by the March 19 order.

This interpretation is consistent with state law, as affirmed by the April 13 Pennsylvania Supreme Court decision in Friends of DeVito v. Wolf,[2] which found that the COVID-19 pandemic constitutes a "catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life," under Pennsylvania's Emergency Code, thereby empowering the governor to issue the March 19 order.[3]

Certain insurer policy interpretations are rejected.

S.B. 1127 also addresses some other policy-interpretation coverage arguments that may be raised by insurers to avoid providing business interruption coverage for COVID-19 pandemic losses.

Specifically, to the extent that an insurance policy expressly provides such coverage if a business location experiences the actual and not suspected presence of a communicable disease in a business location, this legislation declares that a business location in which a person infected with COVID-19 either has been present in the location itself or in the municipality of that location, or if the coronavirus has otherwise been detected as being present therein, such presence satisfies the "actual and not suspected presence" condition of the policy.

This avoids an insurer arguing that, in these situations, the presence of the coronavirus is merely suspected, and not actual, and therefore coverage does not attach.

Moreover, S.B. 1127 tackles the loss-of-market exclusion defense that insurers have employed in the past to try to avoid business interruption coverage after broad-scale catastrophes, such as hurricanes, floods and earthquakes.

In particular, some insurers have argued that, even if a policyholder's business location has been physically damaged and consequently shut down by a catastrophic event, if the policyholder's customers in the same geographical area have also been incapacitated by that catastrophe, then the loss of a customer base is the actual reason for the policyholder's business income loss, and not the damage to its business location.

Hence, the insurers argue — relying on the so-called loss-of-market exclusion — that there is no coverage because the policyholder has lost the market for its goods or services. This insurer argument has been rejected as a misreading of the loss-of-market exclusion.[4] Indeed, the "loss of market" exclusion in a business interruption policy is actually designed to preclude coverage if a policyholder's goods or services are no longer competitive in the marketplace, and it should be construed as such.[5] 

Again, by declaring that the loss-of-market exclusion may not be misconstrued in the manner argued by some insurers, S.B 1127 would preempt unnecessary litigation on this point.

In short, S.B 1127, unlike other state legislative proposals, does not purport to override or negate any particular insurance policy provision in an all-risk property and business interruption policy. Rather it declares the law of Pennsylvania to be that certain arguably ambiguous policy terms shall be interpreted broadly in favor of coverage — which is consistent with well-established interpretive principles under Pennsylvania law.[6]

The advantage of S.B.1127 is that it cannot reasonably be criticized as impairing contract rights under an insurance policy. Rather, it clarifies the meaning of certain insurance policy terms and provisions that insurers have attempted to construe in a way to avoid covering business interruption claims arising from the COVID-19 pandemic.

This legislative clarification of the law of Pennsylvania, if enacted, could avoid possibly years of court litigation between policyholders and insurers to reach the same result. Hence, policyholders' coverage claims may be adjusted promptly in many instances.

Of course, the legislation, if enacted, does not mean that policyholders will obtain all the coverage they desire. There still may be other policy terms, conditions and exclusions in a particular policy that are not addressed by S.B. 1127 and that may be the subject of dispute, such as the so-called "virus exclusion." Nonetheless, certain threshold interpretive issues for coverage will be settled, which would go a long way toward prompt resolution of claims.

The bill is patterned after a successful Oregon insurance statute.

S.B. 1127 is modeled in approach after another state's insurance statute that settled disputed policy interpretive issues so as to preempt lengthy coverage litigation battles — namely, the Oregon Environmental Cleanup Assistance Act, or OECAA,[7] which was able to withstand constitutional challenges by the insurance industry in both the legislative process and in the courts.

Similar to S.B. 1127, the OECAA instructs courts to apply particular rules of construction when interpreting certain key terms of comprehensive general liability policies in the context of a coverage claim for environmental cleanup liabilities incurred by a policyholder.

For example, the OECAA provides interpretations for the policy terms "suit" and "lawsuit," which have been the subject of much litigation over whether such terms should be construed to encompass administrative actions by a governmental agency requiring cleanup of hazardous waste, and not just formal court proceedings. The OECAA declares that such administrative actions are deemed to be a "suit" or "lawsuit" as those terms are used in a general liability policy, thereby giving rise to an insurer's defense obligation.

The OECAA makes other interpretive declarations as to how the law of Oregon construes ambiguous policy provisions, with the effect of avoiding lengthy battles between policyholders and insurers and allowing them to get on with the process of resolving coverage claims.

Significantly, the OECAA does not purport to require coverage where none exists under the terms of the policy, but it recognizes that certain policy terms may have more than one reasonable meaning, and that meaning may be disputed between the policyholder and insurer. As to those disputed issues of interpretation addressed, the OECAA declares the law of Oregon to be consistent with the interpretation that construes a policy term in favor of coverage.

The bill's savings clause strengthens it against court challenge.

Another key similarity between S.B. 1127 and the OECAA is that they both contain a "savings clause" that ensures that contract rights are not being impaired. In particular, the savings clause of S.B. 1127 states:

The rules of construction of insurance policy language set forth in this act do not apply if the application of a rule results in an interpretation that is contrary to the mutual intent of the parties, both policyholder and insurer, as clearly and expressly communicated to each other during the period of negotiating for, and agreeing to, the terms of the insurance policy that is the subject of the policyholder's claim for coverage for COVID-19-related losses.[8]

The OECAA faced constitutional challenges from the outset, but was able to withstand those challenges because it was held not to impair contract rights. Indeed, debate in the Oregon Senate prompted legislative counsel, Dexter Johnson, to issue an opinion holding that the proposed legislation did not constitute an unconstitutional impairment of contract under the Oregon and U.S. Constitutions.[9]

After enactment, the OECAA's constitutionality was then challenged in court. The U.S. Court of Appeals for the Ninth Circuit in 2013 held that the OECAA's provision regarding the definition of "suit" did not violate the contracts clauses of the Oregon and U.S. Constitutions because of the inclusion of the "savings clause."[10]

The court held that the insurer was required to defend a policyholder with respect to a Section 104(e) letter issued by the U.S. Environmental Protection Agency because the OECAA's interpretation of the policy term "suit" did not retroactively and materially expand the scope of the insurer's defense obligation under the policy in violation of the contracts clause.[11]

Likewise, S.B. 1127 preserves the primacy of the expressed mutual intent of the parties to an insurance contract, and does not retroactively impair contract rights that the policyholder and insurer had clearly negotiated and agreed to. If and to the extent the parties expressly agreed upon interpretations of policy terms that conflict with the interpretations set forth in S.B. 1127, the "savings clause" in S.B. 1127 provides that the expressly agreed upon policy interpretations will control. This savings clause provision should preempt some typical arguments of the insurance industry opposing business interruption insurance legislation.

The bill may serve as a model for other states.

In short, S.B. 1127 provides needed relief to policyholders in declaring certain reasonable interpretations of business interruption policies to be the law of Pennsylvania, without policyholders having to spend scarce resources litigating these issues with insurers over many years. The savings clause of the legislation ensures that insurance contracts are not impaired by its enactment and, for good measure, the legislation includes a "severability" clause stating that, if one provision would be struck down as invalid, the remaining parts of the act would continue in force.  

By adopting a legislative structure that has been used in Oregon and has been proven to withstand court scrutiny, S.B. 1127 provides many policyholders with a realistic prospect of recovering under their business interruption policies for which they had paid substantial premiums over the years. Perhaps S.B. 1127 can serve as a model for other states considering how to enact legislation that will effectively assist policyholders obtain business interruption coverage for their losses arising from the COVID-19 pandemic.

John Sylvester is a partner at K&L Gates LLP.

The author thanks Lauren Sandground, an associate at the firm, for her contribution to this article.

The opinions expressed herein are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Motorists Mutual Insurance Co. v. Hardinger , 131 Fed. Appx. 823, 825-27 (3d Cir. 2005).

[2] Friends of DeVito v. Wolf , No. 68 MM 2020, 2020 WL1847100 (Pa. Apr. 13, 2020).

[3] Friends of DeVito, 2020 WL 1847100, at *10.

[4] See Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co. , 279 F.Supp.2d 235, 240 (S.D.N.Y. 2003), aff'd, 411 F.3d 384, 388 (2d Cir. 2005).

[5] See Boyd Motors Inc. v. Employers Ins. of Wausau , 880 F.2d 270, 273 (10th Cir. 1989).

[6] See 401 Fourth Street, Inc. v. Investors Ins. Group, 879 A.3d 166, 171 (2005).

[7] Or.Rev.Stat. § 465.480, available at

[8] The similar "savings clause" in OECAA states that the OECAA's rules of construction "do not apply if the application of the rule results in an interpretation contrary to the intent of the parties to the … policy." Or.Rev.Stat. § 465.480(8).

[9] State of Oregon, Legislative Counsel Comm. Opinion Letter by Dexter Johnson of Impairment of Contract Issues under SB 814 (May 15, 2013).

[10] Anderson Brothers, Inc. v. St. Paul Fire & Marine Ins. Co. , 729 F.3d 923, 936 (9th Cir. 2013). Followed by Ash Grove Cement Co. v. Liberty Mutual Ins. Co. , 649 F. App'x 585 (9th Cir. 2016).

[11] Ash Grove Cement Co., 649 F. App'x at 588. (discussing holding of Anderson Brothers, Inc.)

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