State Governments Look to Property Insurers for Small Business Relief

The economic realities brought on by the COVID-19 pandemic have forced our government at both the federal and state level to take unprecedented action.  And, despite congressional passage of the Coronavirus Aid, Relief, and Economic Security Act (Cares Act), with its corresponding infusion of $2 trillion into the national economy, governors and other state officials, fearing that that it is not enough, are searching for ways to provide additional funding, especially to small businesses.

One place that state governments are looking to for help is the property insurance industry. New York Assemblyman Robert Carroll this week introduced Bill A. 10226, which seeks to compel certain commercial insurers to pay business interruption claims, despite the fact that many of the policies held by small businesses unambiguously exclude coverage for these losses. In taking this action, New York joins three other states – New Jersey, Ohio and Massachusetts – that have introduced similar proposals. The proposed legislation does not address the fact that “direct physical loss or damage” is required to trigger coverage in the first instance, nor does it confront the specific exclusion relating to losses caused by bacteria and virus. The text of the bill states, in part, as follows:

Notwithstanding any provisions of 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, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic.

In order to qualify, a business entity must have maintained an insurance policy providing coverage for business interruption that was in force as of March 7, 2020, which is the date that Governor Cuomo declared a Public Health Emergency in Executive Order 202.  The bill would apply only to businesses with fewer than 100 “eligible employees,” which is defined as full-time employees who work a normal work week of 25 or more hours.

Insurers that are required to make payments can potentially recover from a fund to be created by the Department of Financial Services.  The fund will be financed by a “special purpose apportionment” levied against all insurers doing business in the state.  The bill, as currently written, appears to require contributions to the “special purpose fund” by all insurers, even those that do not include business interruption coverage in their policies. The required fund payments will be assessed proportionally based on the dollar amount of net premiums received by each insurer in 2019 compared to the amount of net premiums received by all insurers doing business in the state.

The concerns raised by this proposed legislation are readily apparent. In lobbying against the bill, the insurance industry will likely contend that it constitutes the state’s unlawful interference with a private contract, which violates the Contracts Clause of the U.S. Constitution.  Also, compliance will require insurers to provide coverage for risks they did not assume and for which they did not collect premiums. The bill has been referred to the Insurance Committee of the New York State Assembly for further consideration.  We will continue to monitor these developments.  Please feel free to contact any member of the Rivkin Radler Insurance Coverage team if you have any questions about this proposed legislation or related coverage matters.