In an effort to curb the spread of the Coronavirus (COVID-19), federal, state and local governments are asking people to stay home. New Jersey, for instance, declared a state of emergency on March 9, 2020 and cities and townships have followed suit, imposing restrictions on local gatherings and business hours. Such mandates – and the general effort to flatten the curve – will impact small businesses as fewer people venture out and otherwise limit non-essential activities. In turn, businesses will suffer financial losses, some forced or opting to close; and, inevitably, will look to their insurance policies for coverage for this business interruption.
Standard insurance policies, however, are not designed to cover such claims, i.e. financial loss caused by COVID-19. Neither the carriers, nor the insureds, bargained for such coverage. First, there is a question as to whether a policy’s insuring agreement is even triggered – i.e., is there “direct physical loss of or damage to” the insured property. Even if this initial prong is satisfied, many policies covering business interruption include an exclusion that explicitly bars such coverage for virus-related losses. Namely, ISO form CP 01 40 07 06, “Exclusion for Loss Due to Virus or Bacteria,” which provides, in pertinent part:
“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
Nonetheless, New Jersey’s legislature is considering a bill that would require property insurers covering risks in New Jersey to pay for business interruption losses due to the Coronavirus, even if their policies expressly exclude coverage for losses due to virus or bacteria, which is inherently clear and unambiguous and would likely be enforced by the courts as written.
The proposed law – Assembly Bill 3844 – would require every property policy that provides coverage of the loss of use of property and for occupancy and business interruption to be construed to include coverage for business interruption due to the Coronavirus. The law would require indemnification of insureds for any loss of business or business interruption for the duration of the state of emergency declared by the governor on March 9, 2020, subject to the policy limits.
The law would apply to policies in effect in New Jersey on March 9, 2020 issued to insureds with less than 100 eligible employees in New Jersey. The term “eligible employee” is defined as “a full-time employee who works a normal work week of 25 or more hours”.
An insurer that indemnifies an insured for a loss presented under the law may apply to the Commissioner of Banking and Insurance for relief and reimbursement by the commissioner for the amounts paid. In turn,these costs will be passed on by the commissioner to insurers operating in New Jersey (other than life and health insurers) through the established annual special purpose apportionment distributed among these insurers and through the commissioner’s authority under the law to collect from these insurers additional monies necessary to recover amounts it pays for Coronavirus claims.
The law would take effect immediately, and would be retroactive to March 9, 2020.
While clearly aimed at reducing the financial impact of the Coronavirus on New Jersey’s medium and small businesses, if enacted, the law would rewrite those implicated property policies that exclude coverage for losses due to virus or bacteria, changing the parties’ private agreements without additional consideration. Ultimately, however, the financial burden for this unilateral change in coverage will be borne by insurers writing coverage in New Jersey, even those insurers who do not issue property policies. Insurers face further uncertainty regarding the extent of their potential exposure for business interruption claims under the law, given the indefinite length of the state of emergency. If the law is passed, we would expect constitutional challenges by the targeted insurers, and potentially also by the insurers ultimately responsible for the claims, particularly given the law’s retroactive application.