As the U.S. grapples with the ongoing COVID-19 pandemic, on April 16, 2020, New York’s governor extended his order requiring all non-essential businesses to remain closed until May 15 when he will decide whether to prolong the closure period. In the midst of economic uncertainty, shuttered businesses are looking to their insurance carriers to cover their losses despite exclusions and other challenges to coverage. In response, New York introduced a bill recently amended as 10226-A requiring insurers cover business interruption during the coronavirus pandemic. Below we explain the main components of the bill, recent amendments including voided exclusions and automatic renewals, and key considerations for insurers.
Mandatory Coverage for Business Interruption
The legislation's main feature is that it mandates coverage for business interruption even in the face of an exclusion or when the policy in question has expired. Specifically, the bill requires that every insurance policy insuring against loss or damage to property, including, but not limited to the loss of use and occupancy and business interruption, must include coverage for business interruption during a declared state of emergency due to COVID-19.
Significantly, the bill was amended to provide that if the policy expires during the declared state of emergency, it automatically renews at the same premium. Further, the amended bill renders null and void any clause or provision of the policy that permits an insurer to deny coverage based on a virus, bacterium or other microorganism that causes or is capable of causing disease, illness, or physical distress.
Though the bill provides broad language for coverage, it does have limits.
Four Limitations on Mandatory Business Interruption Coverage
The proposed bill does not mandate endless coverage. Rather, it imposes the following four limitations on indemnification:
- If an insurer is required to indemnify an insured, the coverage is subject to the limits under the policy.
- Coverage only pertains to a loss of business or business interruption for the duration of a declared state of emergency due to COVID-19.
- Insurers are only required to provide coverage to insureds with fewer than 250 full-time employees who work a normal work week of 25 hours or more.
AND
- The bill only applies to policies in force on March 7, 2020.
Notably, lawmakers amended the employee threshold from fewer than 100 to fewer than 250, making the bill more expansive than other states with similar legislation. For example, New Jersey’s bill requires an insured to have fewer than 100 full time employees. Even if an insurer is required to pay, it may seek reimbursement from the state, as discussed below.
Insurers Can Seek Reimbursement From the Superintendent of Financial Services
Currently, the New York Department of Financial Services is informing consumers about business interruption insurance as it pertains to COVID-19, including that the state of emergency declaration does not change the terms of a business interruption policy. If the bill becomes law, that will change. Nevertheless, an insurer has some recourse.
A carrier who indemnifies an insured pursuant to the bill may apply to the Superintendent of Financial Services for reimbursement by the department, which may impose and collect funds from companies engaged in the insurance business for funding. The bill requires the superintendent to set up procedures for the submission of such claims by insurers, including standards necessary to protect against the submission of fraudulent claims by insureds and appropriate safeguards for carriers to employ in the review and payment of such claims. Notwithstanding all of the above, if the bill is enacted, it will likely face challenges on constitutional grounds.
Constitutional Challenges to New York’s Mandatory Coverage
If the bill becomes law, it is likely to be challenged for violating the contracts clause of the U.S. Constitution. Generally, the contracts clause prohibits states from passing any law that impairs the obligations of contracts. Whether the bill passes constitutional muster is a hurdle to mandatory coverage and an issue that is certain to be litigated.
Takeaway
Citing industry sources that have indicated global virus transmission and pandemics are generally excluded from standard business interruption insurance, New York’s proposed bill requires insurers to cover losses businesses sustain because of COVID-19. Lawmakers recently amended the bill to provide coverage even if an exclusion applies or a policy expires. Insurers have some recourse, as the bill places some limits on coverage and permits reimbursement through the state. If passed, the bill will also likely be challenged on constitutional grounds.
Given the expansive rights afforded to insureds and the accompanying obligations insurers face under New York’s proposed COVID-19 business interruption bill, following its progress is important for any carrier. Stay tuned as we provide more insights to help you navigate this proposed law and other insurance legislation.
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