When the COVID-19 pandemic hit last year, restaurants and other businesses were forced to shut down. In response, they turned to business interruption clauses in their commercial property insurance policies. But many insurers refused to apply the clauses to the pandemic. And courts typically sided with insurers, noting that business interruption usually means physical disasters like fires.
There’s a movement to require insurers to cover pandemics under business interruption insurance. These proposals actually started last year after businesses were declined payouts. To date, several states have put forth legislation that would require this coverage. According to the American Property Casualty Insurance Association, 16 states have rejected such legislation or failed to act upon it. But the movement hasn’t gone away. Legislating is still pending in New York and elsewhere.
The specifics of each proposal vary from one state to another. Generally, however, the idea is to require any commercial property insurance policy to cover business interruption from viruses and pandemics. But the legislation goes further than that in many cases. If enacted, coverage would apply retroactively to COVID-related losses from 2020. By some estimates, the insurance industry would stand to lose billions or even hundreds of billions of dollars. Some states want to create funds to reimburse insurers for these losses.
A bill in New York would require insurers to cover COVID-19 related business interruption losses. The legislation would also void any virus exclusions contained in commercial property insurance policies.
The fact that legislation continues to be filed in this area is worrisome to insurers. But particularly problematic are proposals to make coverage retroactive to last year. Insurers oppose this movement and argue that pandemics are essentially uninsurable. The more feasible idea, according to some industry groups, is to make the federal government responsible for these business losses.
For now, insurers continue to deny business interruption claims related to COVID-19. And, of course, lawsuits continue to be filed. So far, insurers have succeeded in approximately 80% of these cases. Physical damage to property has traditionally been required before business interruption coverage can be activated. And virus exclusions clearly drive home this point. Insurers have typically prevailed where their policies expressly excluded viruses. But insureds have won in cases in which their policies did not exclude viruses.
No matter what happens with this legislation, insurers are going to need exceptional legal representation. A knowledgeable New York business attorney can assist with transactional and litigation matters related to this. On the transactional side, an attorney can help with drafting and revising commercial property insurance policies. As far as litigation, a skilled lawyer can defend your insurance company’s interests in court. That will also be the case if new laws are passed to require business interruption clauses to cover pandemics. Undoubtedly, there will be instances in which insurers will have the right to turn down claims. Those denials will then be challenged in court in many cases.
If your insurance company has questions about business interruption clauses and COVID-19, turn to Rosenbaum & Taylor. We represent New York insurance companies and defend them against lawsuits. We can also help your organization draft or revise policies in light of last year’s legal action over the virus. Give us a call today to find out more.