Difficult times often invite dramatic government responses. The worldwide coronavirus pandemic has prompted far-reaching government activity on a scale usually seen only during wartime. In addition to vast amounts of government aid being pumped out to individuals and businesses, governments are also legislating changes that encroach on the purview of the private sector. In some states, legislators are examining terms and conditions of existing contracts negotiated at arm's length by private parties. When those contracts yield results that are deemed unfair, unjust, or merely undesirable as a matter of public policy, some legislatures are venturing into the world of ex post facto contract revision, mandating that certain terms are unenforceable and, by legislative decree, rewriting others.
One acutely visible instance of this trend is currently occurring in New York with respect to insurance policies that provide coverage for business interruption and property damage. For standard risk protection, companies often purchase insurance policies to protect against property loss or damage, and these policies usually include a business interruption component. Such policies normally require that the covered property suffer a "physical loss or damage" before the insurer will pay a claim for property damage and attendant business interruption. Understandably, in today's COVID-19 environment, policyholders are reviewing policy language to discern whether the government-mandated coronavirus shutdown qualifies as a covered event. To their consternation, many policyholders find that their business interruption and property damage policy contains a specific exclusion for damages caused by a virus.
In response to the hardship caused when an insured is denied business interruption damages because of a virus exclusion in policy language, the New York State legislature has introduced bills that would explicitly override this exclusion. New York is among eight U.S. states considering such changes. These bills, if enacted into law, would require insurance carriers to cover claims arising from business interruption resulting from the coronavirus lockdown. New York's bicameral legislature, consisting of a Senate and an Assembly, currently has two bills pending in each branch – for a total of four bills. Minor differences in the bills aside, the New York initiatives are targeting property damage and business interruption policies, mandating that all such policies "shall be construed to include among the covered perils . . . coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic" (2019 New York Assembly Bill 10226 (April 7, 2020)). These bills, designed to protect businesses with fewer than 250 employees, make explicit that the legislatively mandated revisions to insurance policies will control even in those instances where the insurance contract had an express carveout exclusion allowing the insurer to deny coverage where the injury was caused by a "virus, bacterium or other microorganism." If these bills are signed into law by the governor, any such exclusion for injury caused by a virus will be deemed null and void.
The New York bills would apply coverage retroactively to March 7, 2020, when the coronavirus pandemic began to take hold on New York businesses, and the state entered a shutdown. Furthermore, the New York bills would require that insurers renew any business interruption policy that expires while a state of emergency remains pending. Under these bills, new policies must be reissued without rate increases.
Given that insurance companies meticulously craft their policies to define and limit exposure, it might appear at first blush that the bills place the economic burden of the crisis solely on property and casualty carriers, which had expressly excluded coverage for injuries related to viruses. However, in order to help spread out the economic onus that would have otherwise been placed on a limited number of insurers, New York is contemplating establishing a fund, from which property and casualty insurers could seek reimbursement for claims paid under the new law. That reimbursement fund would itself be created from sums collected pro rata from all insurers licensed to do business in the state. The pro rata share paid by each insurer in New York would be based on the insurer's share of net premiums, relative to the total of all premiums collected within the state. This construct would distribute the cost across all insurers within New York, effectively mutualizing the coronavirus-related business losses. As with all insurance, some entity or entities must ultimately bear the loss. Responding to the coronavirus pandemic, New York's proposed bills would provide that small businesses, which had purchased property and business interruption insurance, will not bear the loss. Instead, the cost associated with business interruption claims will be spread among all insurers licensed to do business in the state. It remains to be seen whether some version of these bills will ultimately be enacted into law.
Matthew T. McLaughlin is a seasoned commercial litigator and the managing partner of Venable LLP's New York office.
Mark S. Vecchio, who co-chairs the New York Corporate Group, represents clients in corporate and commercial transactions.