By: Michael Lambert
March 23, 2020
An insurance policy is a contract between the insured and the insurance company. The terms of that contract, and the obligations of both parties, are set forth in detail in the insurance policy. While the government can legislate what can and cannot be included in these contracts on a going-forward basis, there are constitutional limits on legislation affecting insurance policies already in place. The Contracts Clause, found in Article 1 of the U.S. Constitution, places limitations on the states’ ability to interfere with private contracts. Legislation that places the financial burden of COVID-19 losses on insurance companies by rewriting the terms of agreed upon insurance contracts will run into these constitutional problems.
There has been significant political grandstanding by legislative members regarding the COVID-19 crisis and suggestions of legislation that would require coverage for the losses piling up for affected businesses. The actual options available to the government, however, are limited. A bipartisan group of U.S. House members recently asked insurers to retroactively recognize financial losses relating to COVID-19 under commercial business interruption coverage for policyholders. This was not a bill introduced to require coverage. This was an “ask.” In a joint letter in response, the presidents of four industry groups (APCIA, NAMIC, IIABA and CIAB) said they’re working to provide relief to policyholders, but not through the business interruption coverage in question. Their letter stated “[t]he U.S. insurance industry remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.” This “we will provide coverage where coverage exists” directs the legislature, and all insureds, straight back to the specific terms of the policies in question.
In New Jersey, a bill has been proposed that aims to create business interruption insurance coverage for COVID-19 related claims despite virus exclusions in many policies. This bill (New Jersey Bill A-3844), is facing strong opposition from the insurance industry and raises similar concerns about the constitutionality of interfering with the integrity of legally binding private contractual arrangements.
State governments have also attempted to pressure the insurance industry on the business interruption coverage and applicable exclusions. The New York State Department of Financial Services has instructed insurers to submit details of business interruption policies that have been provided to insureds, as well as the coverage each policy offers regarding COVID-19. The instructions required each insurer to provide the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage the insurer wrote as of March 10. Insurance companies are also required to examine the policies they issued and explain the coverage each policy offers in regard to COVID-19, both presently and in the future if there is potential for COVID-19 coverage as the situation could develop. For each policy type, insurers are required to prepare information in a clear and concise explanation of benefits suitable for policyholder review.
Even with the pressures created by the introduction of legislation and insurance department requirements, it is unlikely that insurers will relax business income provisions in their policies going forward in light of COVID-19. Coverage under these policies will turn not on what changes the government thinks it can make, but on the terms of the specific policies. This will required business to carefully review their policies, determine a claims strategy and advance the best arguments in favor of coverage under their particular circumstances.