Statutes Compelling Coronavirus Business Interruption Insurance Should Face Constitutional Constraints

We previously wrote about the growing likelihood that insurance companies would face claims for business interruption and contingent business interruption insurance claims as their insureds looked to cope with the broad effects of the novel coronavirus outbreak and response. Heating Up: New Orleans-Based Oceana Grill Seeks Insurance Coverage for Coronavirus-Caused Business Interruption.  Now, state and federal governments are beginning to consider ways that they might compel such coverage.

Last week, members of the federal government wrote to insurance industry leaders urging them to expand commercial business interruption coverage for COVID-19 losses.  In response, the insurance industry leaders replied, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

The New Jersey legislature took the first steps toward enacting a law to expand coverage.  New Jersey Bill A-3844 provides: “Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic…”  New Jersey’s bill passed out of committee, but was pulled before it was more broadly considered.

A law that seeks to “compel” insurance coverage, like New Jersey Bill A-3844, might violate the Contracts Clause of the U.S. Constitution.  The Contracts Clause provides, in relevant part, “No State shall … [pass any] Law impairing the Obligation of Contracts[.]”  “Law” in this context includes constitutional provisions, statutes, administrative regulations and municipal ordinances, but not court rulings.  See Tidal Oil Co. v. Flanagan, 263 U.S. 444, 451 (1924).

Not all laws affecting contracts violate the Contracts Clause.  A court considering the issue will apply a two-step test.  The court begins by considering whether the state law has “operated as a substantial impairment of a contractual relationship.”  Sveen v. Melin, 138 S. Ct. 1815, 1821 (2018) (quotations, citations omitted).  If yes, then the court will consider whether the “state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.”  Id. (quotations, citations omitted).

As reiterated in Sveen, supra, “Government has always had a special relation to insurance.  The ways of safeguarding against the untoward manifestations of nature and other vicissitudes of life have long been withdrawn from the benefits and caprices of free competition.” This “special relation” is evident in efforts throughout the country asking insurers to suspend cancelations and nonrenewals, or at least extend grace periods.  Whether more targeted efforts, like New Jersey Bill A-3844, will continue to arise should be closely monitored.