With statewide and local orders shutting down nonessential businesses, the question of whether insurance will cover business losses is now front and center. Policymakers, regulators and the courts are likely to scrutinize how insurers interpret business interruption, civil authority and similar coverages.
Business interruption insurance is an additional coverage for loss of income and can cover operating expenses for businesses after a covered event. The overall goal of these policies is to put a business in a similar position as it would have been had the event not occurred. Businesses can typically recover under these policies if they can demonstrate that a covered peril like fire, wind or lightning affected their business operations.
Civil authority coverage is additional coverage for loss of income resulting from governmental orders. A claimant must typically establish that the loss of income was due to a civil authority’s orders resulting in the claimant losing access to their business and incurring actual damages as a consequence. For example, a restaurant catches fire and damages several properties within a half-mile range, so the local fire department seals off the area affected and effectively shuts down the claimant’s and others’ undamaged businesses within the range.
Insurers are likely to argue that loss or damage arising from viruses or bacteria is excluded under certain exclusions contained within business interruption and civil authority policies. For example, one such exclusion is typically and plainly styled as “EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA.”
Recently, the New Jersey Legislature attempted to address such exclusions in A-3844, which states in part:
Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
A-3844 was heard in committee but has not been presented to the whole Assembly.
If the A-3844 approach becomes law, it will likely be challenged on constitutional grounds—the U.S. Constitution’s Contract Clause prohibits states from passing laws that impair obligations of contracts—but policymaker interest in the issue is unlikely to be dampened even if a court challenge is successful. And policymaker interest will not be limited to New Jersey given the national economic damage being wrought.
State regulators have already acted to review business interruption coverage. The California Department of Insurance (CDI) recently issued a data call requiring insurers to submit data regarding coverage of commercial business interruption related to COVID-19. According to the CDI, the data will help California policymakers understand the scope of insured and uninsured losses to businesses in order to help them recover and keep workers employed.
Another regulator, the New York State Department of Financial Services, has ordered carriers to provide policyholders with a “clear and concise explanation” of the policy’s coverage in relation to COVID-19, including applicable business interruption and civil authority clauses.
This is a critical time for companies to assess their risk, review their insurance coverage and take the steps necessary to preserve all rights for covered losses, even if they are not certain coverage exists.