With the coronavirus pandemic forcing businesses all over the country to shut down for the foreseeable future, some lawmakers are taking a fresh look at business interruption insurance policies that exclude work stoppages due to public health crises.

The most immediate debate over these policies is taking place in New Jersey, where Assemblymember Roy Freiman (D) is one of three authors of AB 3844, a bill that would require insurers to cover losses to some Garden State small businesses, defined as those with 100 or less employees working at least 25 hours a week or more. It would also be retroactive to any policies in place on March 9, when Gov. Phil Murphy (D) issued his statewide emergency order that forced non-essential businesses to go dark.

In an interview with SNCJ, Freiman said most business owners are not even aware that their policies automatically don’t cover closures caused by a public health crisis or pandemic.

“Pandemics are not a covered item in business interruption insurance,” Freiman says. “When people purchase their coverage, they are not ever given the chance to opt in or to opt out. Only underwriters knew this was excluded.”

Many business around the country are in fact only learning that they are not covered when they try to file a claim. The resulting rejection has some of those business owners seeing red.

“I’m 32 years without a claim, ever,” Aspen, Colorado restaurateur Rob Mobilian told the Denver Post. “Now they tell me the $420,000 that I’ve paid in premiums all these years, that I don’t have the coverage because it’s a virus and the policy specifically excludes virus.”

But insurers counter that businesses are seeking to be reimbursed based on coverage they didn’t pay for, a possibility that could be financially disastrous to the industry.

“Insurers recognize that American businesses are facing unprecedented disruption. Many standard event cancellation, business interruption, and travel insurance policies do not include coverage for communicable diseases such as COVID-19. Although, some businesses have purchased broader protections through specialized coverage,” said David A. Sampson, president and CEO of the American Property Casualty Insurance Association in a prepared statement on March 20. “If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted.”

Freiman – who spent over 20 years with Prudential Financial previous to his election to the Assembly in 2016 – says he understands the industry’s concerns, but that “standing on the sidelines now and quoting chapter and verse of these exemptions is just plain wrong.”

The New Jersey bill has been endorsed by the Assembly Committee on Homeland Security and State Preparedness, but Freiman later voluntarily set the bill aside after meeting with insurance industry representatives. He says he wanted to give the industry a chance to come up with an alternative plan on its own without legislation.

“I told them I would put the bill on pause, but they needed to come back with some real solutions,” he said. But after a call with insurance reps on Tuesday, he called their suggestions “insufficient.”

Part of their reticence appears to be related to a similar request made to insurers last week by a bipartisan group of lawmakers in the U.S. House of Representatives. That correspondence – signed by 12 Democrats and six Republicans – urged them to “work with your member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.”

The letter was sent to leaders of the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Independent Insurance Agents & Brokers of America, and the Council of Insurance Agents and Brokers.

The response was a pretty clear rejection letter in return that said business interruption policies “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

At issue is an element of most policies that require a business to suffer “a direct physical loss or damage” to be able to file a successful claim. That has long been interpreted to mean damage like that caused by a fire or flood that physically prevents workers from working and a business from staying open. Since the shutdowns were ordered by government decree rather than by a mangled building, insurers say they won’t pay.

This was not always the case. Another recent virus scare – the 2003 SARS outbreak – convinced insurers to seek permission from regulators to explicitly exempt pandemics from their coverage. Since 2006, most policies have done so.

What happens now is an open question. At least two lawsuits – one by a restaurant in New Orleans and one brought forth by the Chickasaw Nation in Oklahoma – have been filed seeking to force insurers to pay business interruption claims. Oregon Gov. Kate Brown (D) is also reportedly considering introducing a bill similar to the measure in New Jersey.

As for that bill, Freiman says he is still hopeful of working out something with Garden State insurers that forestalls the need for legislation. If not, he says Assembly Speaker Craig Coughlin (D) will bring AB 3844 to the full chamber for a vote “in a heartbeat.” But he says he hopes insurers will ultimately come up with something workable for all sides.

“I keep telling them that if they walk away now and let all of these businesses pay the price, they’ll make Darth Vader look like Mother Teresa,” he says. “This will come back to haunt them tenfold.”

Note: This is an ongoing and fast developing story. An updated version will appear in our April 6 issue of State Net Capitol Journal.

- By SNCJ Managing Editor Rich Ehisen