Insurers protest at New Jersey’s effort to invalidate virus exclusions from BI policies

A big battle is brewing in the US over the validity of business interruption insurance (BI) for coronavirus claims, as politicians are pushing for standard BI to be extended to cover the impact of the virus. Insurers and reinsurers are clearly horrified at the prospect of this potentially massive extension of their liability to the virus and have reportedly already registered their strong opposition to such a move. In reference to event cancellation coverage, last week the American Property Casualty Insurance Association pointed out that the insurance market is well prepared for the impact of the virus, so long as it is not forced to pay out claims that are not actually covered. “Industry solvency will only be at risk if insurers are forced to pay claims not covered by current contracts,” said the association. One option reportedly under discussion is for the BI pandemic exclusions to be lifted and the resultant mass of claims to be covered by a government backstop, as with the National Flood Insurance Program. It is likely, however, that the insurance market would strongly resist this fundamental shift as it would no doubt lead to a mountain of legal arguments that would last for years. It would also potentially be unconstitutional. This debate was sparked by members of the New Jersey legislature that seek to propose legislation that would retroactively change BI policies to eliminate virus exclusions. “The exclusions sought to be eliminated are the same ones that have previously been approved by the Department of Banking and Insurance. New Jersey’s proposed law may be well intentioned but its methodology and attempts to impose a financial burden on insurers, instead of providing small business relief via government subsidies or other forms of government financial assistance, present issues of constitutionality,” commented Tyler Pierson and Kristin Gallagher of law firm Kennedys in the US yesterday. “New Jersey Bill A3844, if enacted, would force insurers of certain businesses to provide business interruption coverage for Covid-19 losses, even if the policies have regulator-approved 'virus' exclusion language. The text of the draft bill provides that “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... concerning the coronavirus disease 2019 pandemic”. The bill’s effect would be limited to employers with less than 100 employees,” explained the lawyers. “An insurer that pays otherwise-excluded business interruption benefits under the proposed law could file a claim for reimbursement with the Commissioner of Banking and Insurance. That claim would be paid out of a new 'additional special purpose apportionment' to be imposed on and collected from other carriers insuring risks in New Jersey. The net effect is, thus, that business interruption loses that would be excluded but for the proposed legislation would be borne by all insurers in the state. Ultimately, the bill would shift a substantial cost burden associated with the current coronavirus response to insurers,” continued Kennedys. The bill passed the committee stage on 16 March 2020 and was sent to the floor for discussion, voting and possible amendment. The bill received some opposition from lobbying and industry groups. The New Jersey Property & Casualty Insurers’ Association, New Jersey Business & Industry Association, and New Jersey Insurers’ Counsel Association all reportedly submitted written testimony in opposition to the bill when it was before the committee. The bill was not enacted as one of the 29 bills passed in an emergency session held by the legislature later in the afternoon on 16 March. Instead, the bill was listed for vote as part of this emergency session, but was ultimately held for further discussion without a vote conducted. “Some members of the legislature were opposed to the bill, with one assemblyman in particular commenting that the bill could lead to higher premiums if enacted, and that providing subsidies would be a more rational approach to the issue,” explained the Kennedys lawyers. The lawyers explained that, from a legal standpoint, this proposed legislation presents “novel” constitutional issues, given the fact that the bill, in its current state, would apply retroactively to affect policies that have already been written and issued. They identified two provisions of the United States Constitution that are particularly relevant to the evaluation of New Jersey Bill A3844. These are: the Contracts Clause, which says that “no state shall... pass any... law impairing the obligation of contracts”; and the Due Process, under which the fifth and 14th amendments to the United States Constitution prohibit the taking of “life, liberty or property, without due process of law”. An argument could be made that the retroactive effect of the proposed New Jersey bill constitutes an unconstitutional deprivation of insurers’ property without due process of law, the Kennedys lawyers argued. “It is not certain that New Jersey Bill A3844 will be passed into law but if it is, several grounds exist to challenge the law’s constitutionality. The bill, in its current form, could violate the Contract Clause and the Due Process provisions of the fifth and 14th amendments. It is important to continue to monitor the progress of, and potential changes to, this proposed legislation, which is likely to dramatically impact insurers in the aftermath of the coronavirus containment efforts,” concluded the Kennedys team.

Insurers protest at New Jersey’s effort to invalidate virus exclusions from BI policies

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