While the Pennsylvania legislature considers one of the most aggressive bills in the country to force insurers to provide coverage for COVID-19 business interruption claims, Pennsylvania’s Insurance Commissioner on Monday provided insurers with an argument for denying COVID-19 liability claims. The many factors that go into insurers’ coverage decisions in Pennsylvania are changing on a daily basis.
On April 21, we wrote about two newly introduced bills in the Pennsylvania House and Senate that sought to rewrite business interruption insurance policies to cover COVID-19 losses. The first proposed bill, House Bill 2372, would require an insurer to find coverage even though its policies do not cover such claims, whether due to the required “direct physical loss or damage” condition precedent or an explicit virus exclusion.
The second proposed bill, Senate Bill 2372, similarly requires an insurer to find coverage, but this bill went even further to create coverage, particularly with respect to interpretations of the terms “property damage”1 and “covered perils.”2
Shortly thereafter, the Pennsylvania Senate introduced yet another bill: Senate Bill 1127. This bill, like the prior proposed Senate Bill 2372, focuses on the interpretation of key policy language. Yet Senate Bill 1127 goes even further than its predecessors to create coverage. The bill creates rules of construction that apply to claims for insurance for losses relating to property damage, business interruption, contingent business interruption, time element, contingent time element, or losses of a similar nature arising from the COVID-19 pandemic. Notably, the proposed bill interprets and effectively redefines key policy language as follows:
Property damage: If a person positively identified as having been infected with COVID-19 has been present in, or if the presence of the COVID-19 coronavirus has otherwise been detected in, a building, an office, a retail space, a structure, a plant, a facility, a commercial establishment or other area of business activity, that area of business activity shall be deemed to have experienced property damage. Buildings, offices, retail spaces, structures, plants, facilities, commercial establishments and other areas of business activity located in a municipality of this Commonwealth in which at least one person present in that municipality has been positively identified as having been infected with COVID-19, or in which the presence of the COVID-19 coronavirus has otherwise been detected, are deemed to have experienced property damage.
Communicable disease: If a person positively identified as having been infected with COVID-19 has been present in, or if the COVID-19 coronavirus has otherwise been detected in, a building, an office, a retail space, a structure, a plant, a facility, a commercial establishment or other area of business activity, this area of business activity shall be deemed to have experienced the actual, and not merely suspected, presence of a communicable disease. In addition, buildings, offices, retail spaces, structures, plants, facilities, commercial establishments and other areas of business activity located in a municipality of this Commonwealth in which at least one person in that municipality has been positively identified as having been infected with COVID-19, or in which the presence of the COVID-19 coronavirus has otherwise been detected, are deemed to have experienced the actual, and not merely suspected, presence of a communicable disease.
Order of civil authority: The Order of the Pennsylvania Governor, dated March 19, 2020, Regarding the Closure of All Businesses That Are Not Life Sustaining, constitutes an order of civil authority under a first-party insurance policy limiting, prohibiting or restricting access to non-life-sustaining business locations in this Commonwealth as a direct result of physical damage at or in the immediate vicinity of those locations.
Order regarding ingress and egress: The Order of the Pennsylvania Governor, dated March 19, 2020, Regarding the Closure of All Businesses That Are Not Life Sustaining, constitutes, under a first-party insurance policy, an order prohibiting ingress to and egress from all non-life-sustaining business locations in this Commonwealth as a direct result of physical damage at or in the immediate vicinity of those locations namely, the presence of the COVID-19 coronavirus.
Loss of market: The loss of market exclusion, and similar exclusions, in a first-party policy may not be interpreted to apply to preclude coverage for COVID-19-related losses if one of the reasons for reduced customer demand for a policyholder’s goods or services is the same COVID-19 pandemic that gives rise to the policyholder's losses for which coverage is sought.
The increasingly aggressive legislation that is being proposed implicitly acknowledges that most policies do not provide coverage for COVID-19 related losses, and threatens to rewrite the policies to place a burden on insurers they never intended to assume.
While the legislative efforts to create business interruption coverage obligations have monopolized recent headlines, that trend came to an abrupt halt on May 11, 2020, when the Pennsylvania Insurance Commissioner issued a warning to policyholders that their own actions may create a coverage defense. Specifically, the Commissioner warned that businesses that are considering reopening in defiance of Gov. Wolf’s business closure orders3 may risk losing coverage based on their policies’ exclusion for illegal acts or conduct. The Commissioner pointed out that the exclusions for illegal acts or conduct may apply to property coverage, liability coverage, advertising injury coverage, and a host of other common coverages.
The Commissioner stated:
Businesses and residents rely on insurance coverage to protect them from liability, pay for covered losses, and compensate those who may be injured or harmed. It is the duty of every business and resident in Pennsylvania to ensure that they and the public at large are provided with the maximum level of protection afforded by insurance. Any actions that could potentially create coverage gaps are the antitheses of the civil duty required of all residents during these times of emergency.
The Commissioner’s warning, though not necessarily limited to business interruption coverage, nevertheless stands in stark contrast to the legislature’s efforts to force insurers to carry the burden of COVID-related losses and provide policyholders with gratis coverage. First, the Commissioner’s warning starts from a presumption that coverage may be available, whereas the legislature has acknowledged that business interruption insurance coverage is likely excluded. Second, the Insurance Commissioner reminded policyholders of their own obligations under their policies, recognizing that the parties are bound by the terms of the insurance contract and should be held to the benefit of their bargain. Third, the Commissioner used the insurance contract as a cudgel to convince businesses to observe the stay-at-home orders in effect around Pennsylvania, reminding businesses that if they open in defiance of government directives, they likely create a coverage defense that will preclude them from recovering any insurance proceeds that may otherwise be available, exacerbating the already difficult financial circumstances they are facing.
While the Commissioner’s warning is a welcome reminder that both insurers and policyholders must be mindful of their rights and obligations, it should not be construed as an edict. Whether a business’s actions trigger an illegal acts exclusion is a complicated analysis, particularly in these unorthodox times, and many questions remain unanswered.
For example, is opening pursuant to permission given by county commissioners, but against Gov. Wolf’s orders, illegal? Insurers will need to carefully analyze the extent to which state law and Gov. Wolf’s orders preempt local authority.
Further, what if a business is located in a county designated yellow by Gov. Wolf and properly reopens, but does not properly follow the restrictions for being in the yellow zone? Is that an illegal act that triggers the exclusion? Insurers will need to carefully consider the extent to which a business’s failure to follow the evolving guidance on how to safely reopen impacts their liability coverage obligations.
On the other hand, what if a business has local or even state permission to reopen, but remains closed? Is that business failing to mitigate its damages?
In short, the Commissioner’s warning added another voice to the already heated debate about the availability of insurance coverage for COVID-related losses, and highlighted an important consideration as insurance companies vet claims and make coverage decisions. It is not clear at this time if the Pennsylvania legislature will forge ahead in its efforts to create business interruption insurance coverage for COVID-19 related losses. But regardless of what happens next, the Commissioner has reminded policyholders and carriers alike that other exclusions are relevant and an insured’s failure to comply with Gov. Wolf’s orders may very well trigger one and invalidate any coverage obligation.
Pepper Hamilton and Troutman Sanders are continuing to monitor these issues closely and will continue to provide updates.
Endnotes
1 The proposed bill states that “property damage” includes loss resulting from, but not limited to, the presence of (1) a person positively identified as having been infected with COVID-19, (2) at least one person positively identified as having been infected with COVID-19 in the same municipality of Pennsylvania where the property is located, and (3) COVID-19 having otherwise been detected in Pennsylvania.
2 The proposed bill states that “covered perils” include loss or property damage due to COVID-19 and due to a civil authority order.
3 Certain Pennsylvania counties, including Beaver, Lebanon and Dauphin, have stated that they will move to the “Yellow Phase” with or without Gov. Wolf’s permission.
