Federal and State Proposals for COVID-19 Business Interruption Coverage

As the first Coronavirus business interruption trial begins this week in New Orleans and virus cases surge across the United States, business interruption insurance related to COVID-19 business shutdowns and pending litigation continues to be a significant concern to the insurance industry. While additional lawsuits make their way through the court system—we are aware of fewer than 40 rulings out of more than 1,000 pending suits—federal and state legislatures have proposed legislation that, if enacted, could have a significant impact on carriers and consumers alike. Below is a brief synopsis of key legislative measures set in motion since the beginning of the pandemic.

Pandemic Risk Insurance Act. On May 26, 2020, the U.S. government introduced H.R.7011 – Pandemic Risk Insurance Act of 2020 (the “Act”) modeled after the Terrorism Risk Insurance Act. If enacted, the Act would allow for the establishment of a federal loss-sharing program – Pandemic Risk Reinsurance Program (the “Program”), to provide compensation for business interruption losses resulting from a pandemic or any other communicable disease outbreaks. The Program is designed to be a temporary measure set to terminate at the end of 2027.

The main goals of the Act are to (1) protect consumers by ensuring availability and affordability of the business interruption insurance that will offer coverage for claims caused by a pandemic or similar outbreak, (2) allow time for carriers to prepare and build capacity for providing coverage for such losses.

Participation in the Program would be voluntary for the eligible insurers as defined by the Act and is not intended to affect any currently in-force business interruption policies. However, for insurers who choose to participate in the Program, exclusions in effect on the date of enactment specific to business interruption coverage addressed by the Act, will be void (certain exceptions may apply).

There are several key provisions that carriers might need to consider prior to participating in the Program: (1) the insurer will be responsible for the first $250M in aggregate losses before the Program is triggered (additional reinsurance coverage may be purchased in the private market), (2) the Program will be responsible for 95% of insured losses after applying carrier’s deductible (5% of direct earned premiums in the preceding year); the carrier will be responsible for the pro-rata share of losses after the Program meets its $750M cap.

Reaction to the Act in its initial form has been mixed, but since it was introduced, no action has been taken on this bill as it was set to move through the Congress.

Other federal pandemic-related bills. H.R. 6494 – Business Interruption Insurance Coverage Act of 2020 was introduced on April 14, 2020. The bill will require carriers to offer coverage for losses from a viral pandemic, government-ordered business closure or evacuation, or a power disruption conducted for public safety purposes. It will also nullify provisions that exclude such events from coverage in an in-force policy on the date of enactment. Carriers may reinstate such an exclusion if (1) the insured authorizes the reinstatement in writing, or (2) the insured fails to pay the corresponding premium increase after adequate notice by the insurer of such an increase.

H.R. 7412 – Business Interruption Relief Act of 2020 introduced on June 29, 2020. The bill will establish the Business Interruption Relief Program within the Department of the Treasury to provide financial assistance to carriers that voluntarily pay benefits under certain policies for COVID-19 losses. Carriers may qualify for the program if they have at least one existing policy for business interruption coverage that (1) expressly covers losses during a civil authority shutdown as a result of the COVID-19 pandemic, and (2) expressly excludes coverage for a virus. Participation in the program is voluntary.

As with H.R 7011, there was no movement on any of these bills since they were introduced.

Will states be more proactive? As of the end of September, about ten states have introduced legislation that will affect how carriers handle claims related to COVID-19 shutdowns, and most are aiming at forcing carriers to offer pandemic coverage in the future. However, similarly to the bills discussed above, even though the legislature was introduced, not much action was taken. Below is a list of some of the state legislatures and their status as of the day of this article:

• NJ A3844 – Introduced in New Jersey Assembly March 16, 2020. Passed Homeland Security Committee. No action taken since.
• Ohio HB 589 – Introduced in House on March 24, 2020. Referred to Insurance Committee on May 5, 2020. Initial hearing on June 9, 2020. No action taken since.
• Massachusetts SD 2888 – Referred to rules committee on April 6, 2020. Referred to Financial Services committee on April 21, 2020. No action taken since.
• NY A10226 – Introduced and referred to insurance committed on March 27, 2020. Amended and referred back to committee on April 8, 2020. Amended and referred back to committee on April 29, 2020. No action taken since.
• Pennsylvania HB 2372 – Referred to insurance committee on April 3, 2020. No action taken since.
• CA AB 685 & CA SB 1159 – Introduced February 20,2020. Signed into law September 17, 2020.

California specific. It may be beneficial for those in California to become familiar with the provisions of AB 685 and SB 1159, as AB 685 will become effective on January 1, 2021, and SB 1159 is already in effect. Both laws are quite extensive and amend the existing laws. SB 1159 amends existing workers’ compensation laws to address the impact of employees who contract COVID-19 and the extent that such illness is considered industrial, and therefore entitles the employee to workers’ compensation benefits. AB 685 amends the Labor Code in several areas to require employers to adhere to stricter occupational health and safety rules and empowers Cal/OSHA with expanded enforcement powers to address such standards. Employers still have some time to prepare for the new notice and reporting requirements by reviewing and revising their existing procedures related to the notification of COVID-19 exposures in the workplace, so they are ready to comply with the new requirements imposed by AB 685.

Government’s role in past and future insurance contracts. Opinions vary about whether legislation is necessary to solve for business interruption coverage during the current and possible future pandemics. Regardless of one’s opinion, it’s crucial to understand the effects of the ultimate outcome of pending legislation, which is why we continue to monitor these legislative developments and provide relevant updates as they become available.