Potential Backstops May Cover COVID-19 Pandemic Business Interruption Losses
There have been multiple recent efforts by various interested actors to provide potential backstops that may cover COVID-19 business interruption losses, which would affect Ohio businesses.
1. If Passed into Law, Ohio H.B. 589 Would Provide Business Interruption Coverage for Some Ohio-Based Companies.
First, Ohio lawmakers recently introduced a bill that, if passed into law, may provide for business interruption coverage, at least for some Ohio-based companies that purchased such insurance before the COVID-19 pandemic. On March 24, 2020, the Ohio Legislature introduced H.B. 589, which, if passed in its present form, would require insurers offering business interruption insurance to cover losses attributable to the COVID-19 pandemic regarding first-party commercial property insurance policies in place only during the state of emergency ordered by Governor Mike DeWine on March 9, 2020 in response to the COVID-19 pandemic. As drafted, H.B. 589 purports “[t]o require insurers offering business interruption insurance to cover losses attributable to viruses and pandemics ***….” As presently drafted, H.B. 589 would require that every first-party commercial property insurance policy that provides a business interruption coverage be construed to provide “coverage for business interruption due to global virus transmission or pandemic during the state of emergency,” effectively forcing the insurance industry to provide retroactive coverage to policyholders.
H.B. 589 would apply to businesses located in Ohio that have 100 or fewer eligible employees, and have been issued an insurance policy that includes coverage for business interruption. H.B. 589, in its current form, provides for reimbursement to individual insurers that pay claims for business interruptions that arise out of the COVID-19 pandemic. Funds for the reimbursements would be available through a newly-created Business Interruption Insurance Fund, which would be funded by assessments “to insurers engaged in the business of insurance Chapter 3937 of the Revised Code.”
There are, however, multiple obstacles to insureds receiving quick, if any, payment. Currently, viruses, pandemics, and contagious or infectious diseases, such as COVID-19, are generally excluded from standard form first-party commercial property policies. Generally, first-party commercial property policies also require direct physical loss to property for coverage to apply. Perhaps for that reason, H.B. 589 may be read to suggest that existing policies generally do not provide coverage. Likewise, while most first-party commercial property policies contain coverage extensions for a “civil authority” prohibiting access to a covered location, that coverage is generally contingent upon actual physical property damage to a nearby property, rather than a fear of communicable disease. Thus, while the specific provisions of each policy must be closely examined, the general expectation is that insurers are prepared to deny, have denied, and likely will deny, most COVID-19-related business interruption claims. Moreover, insurers will certainly lobby against passage. Even if passed, H.B. 589 would almost certainly face constitutional challenge.
2. If passed into Law, the Pandemic Risk Insurance Act of 2020 Would Compel Insurers to Cover Certain COVID-19 Related Losses.
Second, following state legislation, like that discussed regarding Ohio herein, that may compel insurers to retroactively cover certain COVID-19 related losses under business interruption policies currently in force, a draft of a Federal bill that, if passed in its present form, would establish a Federal backstop for COVID-19 insurance industry losses in excess of $250 Million is being circulated within Congress that may provide similar relief on a nationwide scale in the form of the so-called Pandemic Risk Insurance Act of 2020. If passed into law in its present form, this draft Federal legislation would establish the Federal Pandemic Risk Reinsurance Program to provide a “a Federal Program that provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease.” Administered by the Treasury Department, this draft bill suggests that the Pandemic Risk Reinsurance Program would act as a reinsurer for first-party property commercial insurers. The draft bill states that, in return for a federal backstop on pandemic losses, insurers would be required to provide business interruption coverage for insured losses that do not “differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than public health emergencies.”
3. Policyholders have Commenced Numerous Lawsuits Against First-Party Commercial Property Insurers Seeking Coverage for Business Interruption Losses Arising from the COVID-19 Pandemic.
Third, although insurers are expected to maintain that most first-party commercial property insurance policies do not provide coverage for business interruption losses arising from the COVID-19 pandemic, attorneys for individual policyholders have asserted, and are expected to continue to assert, contrary positions, and a growing number of lawsuits are being filed against first-party property insurance companies following the insurers’ denial of claims seeking coverage due to business loss related to COVID-19. In fact, multiple Ohio small business plaintiffs have filed lawsuits challenging the denial by their first-party commercial property insurers of business interruption coverage after they were forced to close due to the COVID-19 pandemic.
Although there is no clear path to immediate coverage, most businesses should give strong consideration to tendering a claim under their respective first-party commercial property insurance policies. If an insured fails to tender its claim, it loses its claim forever. On the other hand, tendering a claim and drawing a denial from a first-party commercial property insurer takes relatively little time and can preserve your rights should the opportunity to recover for COVID-19 business interruption coverage become available through one or more avenues, potentially including those discussed herein.
Whether the avenues of potential recovery discussed herein become available for Ohio businesses remains to be seen and is difficult to predict. In the meantime, you can view my colleagues’ excellent guidance concerning other COVID-19-related issues and contact us if we may be of assistance.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.