Should States Force Property Insurers To Cover Virus Losses?

By Linda Hsu and Savannah Montanez
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Law360 (April 3, 2020, 5:06 PM EDT) --
Linda Hsu
Linda Hsu
Savannah Montanez
Savannah Montanez
To slow the transmission of the novel coronavirus, state and local governments are mandating social distance. Residents must stay at home. Nonessential businesses must close or limit operations. American businesses, particularly small businesses, are struggling to survive in the face of such orders. Many businesses are looking to the business interruption coverage in their commercial property insurance policies for a lifeline.

Generally, commercial property insurance covers direct physical loss of or damage to insured property caused by or resulting from a covered cause of loss. Most policies do not define "direct physical loss" or "direct physical damage." But most policies define "covered cause of loss" as any direct physical loss not specifically excluded under the policy.

As an add-on, some commercial property insurance policies also cover the insured's business income losses sustained while the insured's property is being restored. This is business interruption coverage.

There are specialized forms of business interruption coverage. For instance, civil authority coverage covers the insured's business income losses sustained when a civil authority, like a state or local government, prevents the insured from accessing its property because of damage to a nearby property. And contingent business interruption coverage covers the insured's losses sustained when its suppliers or customers suffer property damage.

To invoke any type of business interruption coverage, however, there must be (1) direct physical loss of or damage to property and (2) a covered cause of such loss of or damage. Businesses face two obstacles in invoking business interruption coverage of coronavirus-related losses.

First, the coronavirus's presence in or on property is generally not considered direct physical loss of or damage to property. Oceana Grill, the plaintiff in the first coronavirus-related insurance coverage lawsuit, Cajun Conti LLC v. Certain Underwriters at Lloyd's London, argues coronavirus causes direct physical loss because it can survive on surfaces for several days.

Oceana Grill cites Widder v. Louisiana Citizens Property Insurance Corp., which found direct physical loss where lead contamination rendered a home uninhabitable.[1] Other policyholders cite similar cases involving ammonia or asbestos.[2] However, coronavirus does not render properties uninhabitable like lead, ammonia and asbestos. The Centers for Disease Control and Prevention advises that coronavirus can be eliminated using household cleaners and disinfectants. Coronavirus-related losses are more attributable to social distance mandates, rather than the virus itself.

Second, most commercial property insurance policies specifically exclude viruses as a covered cause of loss. In fact, the Insurance Services Office created its exclusion of loss due to virus or bacteria form in the wake of the SARS coronavirus outbreak.

Recognizing that viruses are usually excluded as a covered cause of loss, New Jersey lawmakers have proposed A.B. 3844, which would require all policies providing business interruption coverage to businesses with less than 100 full-time employees to be construed as including global virus transmission or pandemic as a covered cause of loss.

Under such policies, business income losses sustained during New Jersey's coronavirus state of emergency would be covered. A.B. 3844 would apply retroactively to policies in effect on March 9, when the state of emergency was declared.

New Jersey lawmakers are currently reworking A.B. 3844 after receiving pushback from insurers. But Massachusetts and Ohio are already following New Jersey's lead. This proposed legislation begs the question whether states can require existing policies to cover losses otherwise not covered or specifically excluded. In other words, do states have the power to retroactively rewrite policies? At least two constitutional limitations on such state action are immediately apparent.

The contract clause of the U.S. Constitution limits the states' ability to retroactively interfere with existing contracts. When a state law substantially impairs an existing contract, the law is only constitutional if (1) the state has a significant and legitimate public purpose for the law and (2) the impairment is reasonable and appropriate in light of that public purpose.[3]

Insurers have challenged state laws affecting policy terms in the disaster context before. The Oregon Environmental Cleanup Assistance Act, for instance, expanded the definition of "suit" in commercial general liability policies to include instances where the government merely directs or requests a policyholder to remediate environmental contamination.

Although this interpretation retroactively expanded insurers' duty to defend under existing policies, courts held it did not substantially impair such policies because, under the OECAA's savings clause, the interpretation only applied to policies that did not provide a contrary definition of "suit."[4]

After the Northridge earthquake, California created a statute extending the time for policyholders to bring claims under their policies. The statute survived scrutiny under the contract clause even though it revived claims otherwise time-barred under existing policies. Courts found the statute sufficiently limited in scope, balancing the interference with existing policies against California's need to protect policyholders.

The statute only revived claims for one year, only applied to claims arising out of the Northridge earthquake and only applied to policyholders who met certain qualifications. Moreover, the statute affected the policy's remedies, not its core provisions.[5] A similar Louisiana statute enacted after Hurricane Katrina also survived a contract clause challenge.[6]

It is not clear whether A.B. 3844 would pass muster under the contract clause. Like the Northridge earthquake statute, A.B. 3844 is arguably limited in scope. It applies only to policies providing business interruption coverage, only to losses sustained during New Jersey's coronavirus state of emergency and only to businesses with fewer than 100 full-time employees.

Supporting New Jersey's policyholders during the coronavirus pandemic would likely be considered a significant and legitimate public purpose. However, A.B. 3844 goes further than legislation previously considered under the contract clause; it would effectively rewrite commercial property insurance policies by adding coverage or overriding specific exclusions. This significantly expands insurers' indemnity obligations under existing policies.

The U.S. Constitution also prohibits the states from retroactively interfering with vested contractual rights without due process. However, such an interference will be upheld so long as it is rationally related to a legitimate state interest.[7] Like other insurance laws in the disaster context, A.B. 3844 would apply retroactively. If insurers deny coronavirus-related business interruption claims, retroactively requiring those insurers to provide coverage would arguably interfere with their right to repose after denying a claim based on the terms of existing policies.

But because protecting policyholders during the pandemic is a legitimate government interest, A.B. 3844 would only need to be rationally related to achieving that interest to withstand constitutional scrutiny. This standard is highly deferential to the state.

Under these constitutional provisions, it seems at least plausible for a state to argue it has the power to retroactively mandate business interruption coverage of coronavirus-related losses under existing policies. But regardless whether a state has the power to do so, the broader question is whether a state should do so.

Allowing a state to effectively rewrite the core provisions of commercial property insurance policies would set a dangerous precedent. Could a state add any type of coverage into any type of policy? Could it do so under less severe circumstances? Besides, there are likely more efficient ways to protect American businesses and spread coronavirus-related losses.

Indeed, the Senate and the White House recently agreed on a nearly $2 trillion coronavirus economic stabilization package that includes interruption loans to small and midsize businesses. The ISO also recently created advisory civil authority endorsements which would cover coronavirus-related business income losses. These measures seem to be more appropriate solutions to the current coronavirus coverage issues.



Linda Wendell Hsu is a partner and Savannah Montanez is a former associate at Selman Breitman LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or 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] 82 So.3d 294 (La. App. 2011).

[2] See, e.g., Gregory Packing, Inc. v. Travelers Prop. Cas. Co. of America , Civ. No. 2:12-CV-04418 (D.N.J. Nov. 25, 2014); Port Authority of N.Y. and N.J. v. Affiliated FM Insurance Co., 311 F.3d 226 (3d Cir. 2002).

[3] Energy Reserves Group v. Kansas Power & Light Co. , 459 U.S. 400, 410-13 (1983).

[4] See Anderson Bros., Inc. v. St. Paul Fire & Marine Ins. Co. , 729 F.3d 923 (9th Cir. 2013);Century Indem. Co. v. Marine Group, LLC, 848 F.Supp.2d 1238 (D. Or. 2012).

[5] Hellinger v. Farmers Group, Inc. , 91 Cal.App.4th 1049, 1066 (2001);see also Campanelli v. Allstate Life Ins. Co., 322 F.3d 1086 (9th Cir. 2003);20th Century Ins. Co. v. Superior Court, 90 Cal.App.4th 1247 (2001).

[6] See State v. All Property & Cas. Ins. Carriers Authorized and Licensed to Do Business In State , 937 So.2d 313 (La. 2006).

[7] General Motors Corp. v. Romein , 503 U.S. 181, 191 (1992).

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