Recent Proposed State Legislation Concerning Business Interruption Coverage for COVID-19 Claims
A number of state legislators in New York, New Jersey, Ohio, and Massachusetts have proposed bills which would require insurers on some business interruption policies—those covering businesses with less than a specified number of employees—to retroactively cover and pay claims even though the policy terms may exclude coverage for pandemics like COVID-19.
The New York legislation, in particular, would relegate those insurers to seeking reimbursement from a fund to which all New York-licensed insurers would be required to contribute. The fund would be administered by the Superintendent of Financial Services. See A. 10226 (introduced March 27, 2020).
Insurer trade groups are expected to challenge the constitutionality of such laws, claiming impairment of valid contracts, denial of due process and taking of their property without just compensation. It is not at all clear at this juncture whether any of these bills will actually be enacted. The New Jersey bill, for instance, was tabled in committee last week because of potential legal challenges, and the prospect for passage of the other bills is highly uncertain at this juncture.
The constitutional issues involved are quite thorny. There is case law that supports and undercuts the arguments that insurers would likely make. Three points will likely be key:
Courts will likely evaluate the seriousness, from a general economic standpoint, the problem of small businesses losing business interruption coverage because of policy exclusions.
Courts will likely weigh how much hardship the insurers would suffer if they cannot rely upon clearly applicable exclusions, and that will involve assessing the reasonableness of any mechanisms designed to allow insurers to recoup their losses in whole or in part, like those proposed in A. 10226 pending in New York.
Courts will also likely consider whether insurers should have reasonably expected retroactive legislative changes to their policies, in light of the highly regulated nature of the industry, among other factors.
The U.S. Supreme Court has adopted a multi-step test for determining when such a state law unconstitutionally impairs contracts. The first question is whether the state law has operated as a substantial impairment of a contractual relationship. Courts must assess the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating its rights. The U.S. Constitution restricts the power of States to disrupt contractual arrangements, but it does not prohibit all laws affecting pre-existing contracts. If such factors show a substantial impairment, then the inquiry turns to whether the state law is drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.” See Allied Structural Steel v. Spannaus, 438 U.S. 234 (1978); Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411–12 (1983).
In Energy Reserves, a natural gas supplier contended that a Kansas law, which prevented it from terminating contracts with a public utility after price controls were imposed, violated the Contracts Clause of the U.S. Constitution, and denied it due process. The Court stressed that plaintiff insurers were already operating in a “heavily regulated industry” at the time that the challenged Kansas law was enacted, and that the Kansas statute was “prompted by significant and legitimate state interests.” 459 U.S. at 413, 416
Insurance is one of the most heavily regulated industries in the United States, and insurers mounting constitutional challenges to these kinds of laws will have to overcome the arguments made by state officials that the Energy Reserves decision and its progeny are controlling. In the insurance context, some state courts have been resistant to such claims. See, e.g., American Economy Ins. Co. v. State of New York , 30 N.Y.3d 136, (2017), cert. den., 138 S.Ct. 2601 (2018) (statutory amendment changing liabilities of workers’ compensation insurers after specified date held not to impair workers’ compensation policies); Medical Malpractice Ins. Assn. v. Corcoran, 72 N.Y.2d 753 (1988), cert. den., 490 U.S. 1080 (1989) (challenge to New York statute empowering Superintendent of Insurance to set rates for medical malpractice liability insurance rejected); State v. All Property & Casualty Ins. Carriers Authorized & Licensed To Do Business In State, 937 So. 2d 313 (La. 2006) (following Hurricanes Katrina and Irene, Louisiana law upheld which retroactively extended the statute of limitations for insureds to sue their insurers to cover hurricane losses).
On the other hand, courts have also invalidated state laws which have attempted to retroactively affect insurance policies and adversely affect insurers. For example, in Harleysville Mut. Ins. Co. v. State, 736 S.E.2d 651 (S.C. 2012), the South Carolina Supreme Court struck down a state statute that purported to retroactively define “occurrence” in insurance policies to include “faulty workmanship” as a violation of the state and federal Contracts Clauses. Also, the New York Court of Appeals stated in Health Ins. Assn. of Am. v. Harnett, 44 N.Y.2d 302 (1978), that legislation which mandated the inclusion of maternity care coverage in health and accident insurance policies issued after January 1, 1977 could not constitutionally be applied to policies which the insurer could not legally terminate. 44 N.Y.2d at 306.
It is worthy to note that Richard G. Liskov, the author of this insurance alert, was the Assistant Attorney General who defended the State of New York in 1985 and 1989 against constitutional challenges to remedial legislation affecting insurance policies. In Methodist Hosp. of Brooklyn v. State Ins. Fund, 64 N.Y.2d 365 (1985), app. dism., 474 U.S. 801 (1985), policyholders of the State Insurance Fund (“SIF”) alleged that a law which transferred $190 million from the SIF into the State’s General Fund violated the Contracts Clause of the U.S. Constitution. The policyholders lost, and the U.S. Supreme Court summarily affirmed the New York Court of Appeals’ decision, holding that no such violation had occurred. In Medical Malpractice Ins. Assn. v. Corcoran, 72 N.Y.2d 753 (1988), cert. den., 490 U.S. 1080 (1989), the Medical Malpractice Insurance Association (“Association”) claimed that (1) a state law authorizing the Superintendent of Insurance to set rates for medical malpractice insurance, and (2) a N.Y. Insurance Department order that limited rate increases far below that which the Association sought, resulted in a denial of due process and an illegal taking of the Association’s property without just compensation. The N.Y. Court of Appeals, the highest court in the State of New York, held that the state law and N.Y. Insurance Department order both constituted reasonable measures to prevent medical providers from being priced out of coverage. The U.S. Supreme Court denied certiorari. Mr. Liskov argued both of these cases in the New York Court of Appeals, and wrote the briefs on behalf of the State of New York submitted to the U.S. Supreme Court.
We will monitor the progress of legislation intended to retroactively prevent insurers from invoking COVID-19 exclusions, and any litigation over such legislation which ensues, and we will continue to report developments in this arena.