A proposed New Jersey bill, which aims to create business interruption insurance coverage for COVID-19 related claims despite virus exclusions in many policies, has drawn concern about the constitutionality of legislation like this.

“The New Jersey legislation would alter multiple policy provisions that the parties had agreed to, including in some policies a specific exclusion for loss or damage caused by any virus,” said Kirstin Cummings, attorney-at-law at Dallas, Texas-based law firm Zelle LLP. “That’s a very dangerous precedent.”

The bill – New Jersey Bill A-3844 – provides a framework for businesses that endure business interruption losses due to the COVID-19 pandemic to recover those losses from their insurer. If enacted, it will be retroactive for any insured with a business interruption policy in place from March 9, 2020, when New Jersey Governor Phil Murphy first declared a public health emergency and a state of emergency due to the virus. The bill would apply to New Jersey businesses with less than 100 eligible employees, meaning full-time employees working a normal week of 25 hours or more.

This proposed legislation has set off a conflict within the insurance industry, however, which initially took action nearly 15 years ago to limit insurance coverage for the next pandemic, according to a report by Philadelphia-based law firm White and Williams.

In July 2006, The Insurance Services Office (ISO) submitted an exclusion for loss due to virus or bacteria that was later approved by regulators. The exclusion states that it applies to business income, or business interruption, and makes explicit reference to SARS – another type of coronavirus, the White and Williams report explained. Similar exclusions exist in forms issued by other insurance organizations or in insurer-drafted forms, according to Paul White, attorney at Wilson Elser.

Constitutional Questions Raised

With this in mind, the proposed bill has led to concern among the insurance industry about an overreach by state legislators that could threaten the integrity of legally binding private contractual arrangements with insureds.

“In essence, the proposed law would require insurers to provide coverage for business interruption losses, possibly reaching into hundreds of billions of dollars, in circumstances where relevant contracts do not cover, and expressly exclude, such losses arising from a virus,” White said. “Such a law, on its face, would appear to substantially impair the rights and obligations of the parties to such a contract in violation of Article I of the United States Constitution.”

The Contracts Clause, found in Article 1 of the U.S. Constitution, places limitations on states’ ability to interfere with private contracts. According to White, the Supreme Court has employed a two-part test to determine this constitutional limit. It aims to first determine whether a particular state law is seen as a “substantial impairment” of a contract, and if so, the court will review the purpose and necessity of that law.

“This isn’t a situation where insurance companies are asking for a bailout or otherwise trying to shift their financial problems to the public sector,” Cummings added. “Insurance companies are simply attempting to apply the terms of the policies that were negotiated with their insureds to provide coverage for the losses they agreed to cover. Suggesting that insurance companies, along with state and federal governments, should bear the financial burden of COVID-19 losses by rewriting the terms of agreed upon contracts is effectively an impermissible governmental taking and unconstitutional.”

Possible Economic Impact

Beyond the constitutional questions that have arisen in light of this proposed legislation, some have expressed further concern that it could have a negative ripple effect on the overall economy.

“We are currently seeing the damaging effects on some business sectors and their employees of national, state and local government restrictions on ‘bending’ the COVID-19 incidence curve,” said Clifford Rossi, professor for the Robert H. Smith School of Business at the University of Maryland. “This is an example of knee-jerk reaction to a crisis that caught governments flat-footed, and on the surface, feels good.”

However, Rossi explained that he believes this legislation, if passed, could have a chilling effect on the provision of viable business insurance policies going forward in New Jersey, with some property and casualty companies reconsidering their underwriting of these policies in the state altogether.

Cummings agreed, adding that insurers could be required to raise premiums to cover claims they were not financially prepared to insure if this legislation passes, which she believes could hurt consumers in the long run.

“Insurance companies set premiums and purchase reinsurance based on the risks their policies intended to cover and the potential loss exposure for those covered risks,” she said. “This legislation will have disastrous effects on the insurance industry, and in turn, for consumers seeking insurance in the future. Insurance companies could be forced out of business.”

Opposing Views

That said, not all share this outlook. Alexander Roje, partner in Kansas City, Mo.-based Lathrop GPM’s insurance recovery practice, said she believes legislation like this is a necessary first step in supporting policyholders, particularly small business owners who are facing severe threats to their businesses due to COVID-19.

“Because the pandemic touches virtually every commercial property policyholder in this country, insurers are not going to restructure their policies unless they are forced to do so,” she said. “To the contrary, business interruption policies issued going forward are likely to expressly exclude any loss relating to COVID-19. Unless the legislatures act now, or until litigation over COVID-19 insurance claims is resolved in the courts years from now, one can expect no reimbursement from insurers for loss of business income.”

Roje added she believes removing virus exclusions from business interruption policies is not necessarily going to result in coverage for any businesses. This is because she sees the requirement in many business interruption policies for direct physical loss or damage to property as the primary impediment to insurance coverage. With this in mind, Roje is calling for even broader legislation that deals with both the direct physical loss requirement and virus exclusion component of many business interruption policies.

“This legislation, while certainly a step in the right direction, is not necessarily going to result in coverage for small businesses,” she said. “Policyholders have arguments to make in that regard, but they will likely have to make them in court to get a favorable resolution of their claim.”

The challenge is, unlike big businesses, many small businesses may not have the financial ability to fund coverage litigation or to absorb the loss of income they are facing, she said.

“It remains to be seen how long big business can absorb losses in the current environment, but it is clear that if small businesses do not get help from their representatives, they and their employees will face dire consequences,” she said.

Details of the Proposed Bill

The proposed New Jersey legislation states that every insurance policy for loss or damage to property, which includes business interruption, in force from March 9 will be understood to include coverage for business interruption due to a global virus transmission or pandemic. The coverage provided would be subject to the limits under the policy and would reimburse the insured for business interruption losses during the state of emergency.

The bill also states insurers that reimburse insureds for business interruption claims can apply with the New Jersey Commissioner of Banking and Insurance for relief and reimbursement from a collection of funds made available for this purpose.

According to the proposed legislation, global virus transmission and pandemic are generally excluded from the list of covered perils under the existing standard business interruption insurance policy. Although ISO has developed a rider to provide an insured with the option of purchasing coverage, no states have yet approved the form to date, the proposed bill states.

“This bill is intended to hold harmless a certain portion of the business sector, which had the foresight to purchase business interruption insurance, for losses sustained as a result of the current health emergency, but for which no such coverage is currently offered,” according to the proposed legislation.

The bill’s primary sponsors are Assemblyman Roy Frieman, Assemblyman Louis Greenwald and Assemblywoman Annette Chaparro. It underwent an initial vote in the New Jersey Assembly Homeland Security and State Preparedness Committee on March 16, in which it was approved to be considered on an emergency basis, meaning the process of moving it through the legislature will be expedited. It received four votes in favor of this move, while one assemblyman – Antwan McClellan – voted unfavorably. The bill is now awaiting a full Assembly vote before it can be scheduled for a vote in the full Senate. Assemblywoman Chaparro told Insurance Journal this is because there are still some details to work out.

“A-3844 is a work in progress,” Chaparro said. “We are working on finalizing the legislation to ensure it is the fairest and most responsible bill possible.” Calls to Assemblymen Freiman and Greenwald were not immediately returned by press time.

Cummings cautioned that while small businesses will undoubtedly have business interruption losses due to COVID-19, she believes these financial costs are better addressed by the public rather than the private sector.

“The desire for government to help private businesses cover their COVID-19 losses is admirable,” she said. “But by forcing insurance companies to pay claims not otherwise covered, government is simply shifting those losses to another private business sector. That’s not right.”

Roje, however, had a different word of caution.

“Time is not on the side of small business, and any delay in government action may not only be deadly from a health standpoint but from an economic standpoint as well,” she said.

*This story appeared previously in our sister publication Insurance Journal.