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 first statehouse debate over these policies began 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 don’t automatically 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 (APCIA) 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,” he said.

Another recent APCIA estimate pegged possible losses just for small businesses in the U.S. at between $220-$383 billion per month, with as many as 30 million claims, or 10 times the most claims it has ever handled in one year.

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 subsequent call with insurance reps, he called their suggestions “insufficient.”

Part of insurers’ reticence appears to be related to a similar request made of them in March 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 letter that said business interruption policies “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

Another statement issued on March 25 by the National Association of Insurance Commissioners said “if insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.”

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 three lawsuits have been filed – by a restaurant in New Orleans,famed California celebrity chef Thomas Keller, and the Chickasaw Nation in Oklahoma – seeking to force insurers to pay business interruption claims. Insurance commissioners in New York and California have announced they will require insurers to gather and submit data to them regarding coverage of commercial business interruptions related to COVID-19.

That could be construed as a possible precursor to legislation down the road. But in a statement, California Insurance Commissioner Ricardo Lara said his office is “currently working with the insurance industry and business groups to find creative solutions during this unprecedented crisis to make sure our businesses survive, and we need this data to define the size of the problem.”


Meanwhile, lawmakers in Ohio (HB 589), Louisiana (HB 858, SB 477), New York (A 10226) and Massachusetts (SD 2888) have introduced bills similar to the New Jersey measure, with Oregon Gov. Kate Brown (D) reportedly considering a measure as well.

Each of those proposals would allow insurers who pay interruption claims the chance to be reimbursed through a fund created and financed by special assessments imposed on those insurers that sell business interruption coverage. Whether those measures, if enacted, could survive an expected legal challenge from insurers remains to be seen.

One possibility is that insurers could file suit en masse, arguing that the measures violate the U.S. Constitution’s contracts clause, which limits the ability of governments to interfere with private contracts.

“They are rewriting contracts that were already in place,” Kaufman Dolowich & Voluck LLP general counsel Kevin Mattessich, told the LexisNexis publication Law360. “These business interruption policies are very specific in what they do and don't cover. There is no basis for the government to turn around later and upend everything.”

Back in New Jersey, Freiman says he is still hopeful of working out something with Garden State insurers that forestalls the need for his bill. 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 updated version of a story that first appeared on our site on March 25th.

- By SNCJ Managing Editor Rich Ehisen

States Consider Making Insurers Cover Coronavirus-Related Business Interruptions

Lawmakers in at least five states are considering legislation that would require business interruption insurance to cover stoppages resulting from the coronavirus pandemic, according to LexisNexis State Net’s legislative tracking system. Over half of the states have closed or imposed restrictions on non-essential businesses, including the five with pending business interruption insurance bills.


To our readers,

Given our historic national crisis, most of this edition of the State Net Capitol Journal is focused on the wide array of efforts being undertaken by state and local officials to deal with the fallout from the COVID-19 pandemic. That said, we will also do our best to keep you informed of other important actions from our statehouses while we faithfully stick to shelter-in-place requirements and other best practices aimed at flattening the curve of the spread of this deadly virus. So please be safe, be smart and let’s all work together to get through this with as little harm as possible.


 -- State Net Capitol Journal Managing Editor Rich Ehisen