Whether insurance coverage is available for coronavirus-related claims may often depend on the actions of lawmakers who are jumping into the fray with proposed changes to insurance coverage laws.  Businesses seeking coverage may want to consider these developments when making their claims.

I. Background

Insurance companies may fear the prospect of potentially billions of dollars in claims from businesses and organizations suffering from the economic slowdown brought on by the coronavirus.  The industry appears to believe such claims are not covered and will be denied.  Several lawsuits have already been filed where coverage is in dispute.

One type of insurance policy that may provide coverage is a “business interruption policy.”  Under some circumstances, the policy would pay policyholder economic losses when a certain type of event causes lost profits.

The insurance industry has generally gone on the offensive to attempt to fend off claims for coronavirus-related losses.  Some insurers point out that most business interruption coverage requires physical damage or physical loss to the business’s property and that there is no such damage with the coronavirus shutdown. They also point out that many business interruption policies also have exclusions for losses caused by viruses or pandemics.  Beyond simply arguing policy language, some insurance companies contend that forcing them to pay these claims would destabilize the industry and jeopardize payment of claims that the industry sees as actually covered.

Recognizing the amount of money at stake and expecting that insurers will reject most claims, legislatures are getting involved. Federal and state lawmakers have proposed various legislation that tries to balance the needs and expectations of businesses that purchased insurance coverage with the economic realities of forcing the insurance industry to pay hundreds of billions of dollars in claims.

II. A Proposed Reinsurance Fund in Congress to Incentivize Insurance Companies to Provide Coverage

A draft bill is being circulated in the Finance Committee of the House of Representatives that would create a “reinsurance” fund for claims related to a pandemic, such as the COVID-19 outbreak.  Reinsurance is a type of insurance policy for the insurance companies themselves to buy when they may have to pay out huge claims.

The proposed federal law would create a voluntary program for insurance companies. If an insurance company takes part in the program, it cannot deny a business interruption loss based on a pandemic exclusion.  The insurance company would also pay into a reinsurance fund that would manage the reimbursement to insurance companies that pay on these claims. 

The Treasury Department would reimburse the insurance companies when they pay policyholders who submit coronavirus-related claims under business interruption policies. The costs, therefore, would be shared by the insurance companies and the federal government.

The bill, called the “Pandemic Risk Insurance Act of 2020,” is in the early draft phase.  The details of any final bill are yet to be seen.

Under the current proposed legislation, the federal reinsurance coverage would kick in when industry-wide losses reached $250 million, which is likely to happen if companies pay coronavirus-related claims.  The insurance industry, as a whole, would not have to pay more than $500 billion in claims.  The reinsurance fund would no longer be available after that amount is spent.

For organizations with business interruption coverage, this type of bill could be good news because it may incentivize insurance companies to pay coronavirus claims and help secure enough funding to pay a half of a trillion dollars. However, in the current draft, the effective date of “voiding” any virus or pandemic exclusions is not included. 

III. Efforts in State Legislatures to Require Coverage

Some state lawmakers are considering bills to guarantee coverage for policyholders with business interruption coverage losses related to the coronavirus outbreak.  Proposals are at various stages in New York, New Jersey, Pennsylvania, Ohio, Massachusetts, Louisiana, South Carolina and possibly other states.  None of these proposals has become law.  Unlike the bill in Congress, the proposed state legislation would not be voluntary for insurance companies. 

Currently proposed state bills would do away with two major hurdles for coverage: (1) the requirement for physical loss or damage and (2) exclusions for a virus.  The proposals have some other general things in common.  The insurance companies generally have an avenue for reimbursement from the state, and the benefits would only extend to businesses of a certain size.  They are usually retroactive to the beginning of the public health emergency in their respective states.  In many instances, states would assess insurance companies to pay for the fund.

Insurance industry lawyers may seek injunctive relief to prohibit these legislative efforts to change the terms of the insurance contracts. They claim the legislation could be unconstitutional because the United States Constitution has a “contracts clause” that limits the government’s ability to modify the terms of private contracts.  They also warn that forcing them to pay coverage would destabilize the industry, leave them unable to pay on other insurance policies, and drive up the costs of all types of insurance.

The California Insurance Commissioner has not taken a position on coverage, but has warned insurance carriers not to discourage coronavirus-related claims and not to reject claims as a matter of course without full investigations.  An April 14, 2020 “Notice” from Commissioner Ricardo Lara orders insurance companies to “fairly investigate” the claims submitted for business interruption.  His Notice has specific instructions for staying in contact with the insureds and working with them to make a coverage determination within 40 days. It also prohibits insurers from discouraging claims.

IV. What does this Mean to Businesses

Lawmakers, the insurance industry, policyholders and others are trying to figure out how to handle the onslaught of claims.  Creating funds to pay for coronavirus business losses through business interruption policies is one option, albeit one to likely be hotly contested.

Coverage decisions are based on the precise policy language, case law interpreting such language, and the facts giving rise to the claim.  With coronavirus-related claims, coverage could also hinge on the future actions of lawmakers, regulatory boards and others.

Regardless, to obtain coverage, submitting claims is a must.  A policy that today seemingly does not apply may actually provide coverage based on the right arguments or the developing law.