While numerous states have considered legislation that would require insurance coverage for business losses due to the COVID-19 pandemic (including New Jersey, New York, Massachusetts, Ohio, and Louisiana, a bill before the South Carolina legislature would go even further, eliminating insurers’ key coverage defenses to COVID-19 losses.
A bipartisan group of three South Carolina state senators introduced legislation on April 8, 2020 that would require insurers to pay certain COVID-19 claims in the state. S.B. 1188 requires that any insurance policy in effect in South Carolina provide coverage for any loss resulting from the COVID-19 pandemic for (1) loss of use and occupancy or (2) business interruption. The bill does provide a significant limitation on its effect, however: by its terms, the law would only apply to policies issued to policyholders with 150 or fewer full-time equivalent employees in the state.
The bill specifically prohibits insurers from relying on key arguments against coverage that have been raised against pandemic claims to date. Most notably, the bill would prohibit insurers from denying claims on the basis that COVID-19 is caused by a virus, even where that insurer’s policy included a clear virus exclusion. The bill would also prohibit insurers from denying claims based upon the absence of physical damage to property or on the issuance of an order by a government authority (known commonly as “civil authority” coverage). The bill specifically mentions these arguments, likely because at this early stage they are the most common grounds raised by insurers in denying such claims, but also notes that denial of COVID-19 claims is not acceptable for any other reason. As a result, the bill is not clear as to whether denying a COVID-19 claim would be acceptable on the grounds that, for example, the insured had violated a condition precedent to coverage.
The bill also provides that the South Carolina Department of Insurance will establish a fund to reimburse insurers who pay COVID-19 claims that would not otherwise have been covered under their policies. The bill directs the Department to develop procedures for verifying such claims, so at this stage it is unclear what the reimbursement process will look like. The bill suggests that the state would appropriate money to fund the reimbursement, but that the Department of Insurance would be empowered to make assessments against all licensed insurers operating in South Carolina to reimburse the state for any payments it makes. Thus, under the text of the proposed legislation, it is possible that all or a portion of payments made by insurers to cover these losses would be reimbursed by insurers themselves.
The bill raises some potential constitutional issues, most notably the contracts clause. The contracts clause at Article 1, Section 10 of the United States constitution, generally prohibits states from passing any law “impairing the Obligation of Contracts.” The South Carolina constitution contains a similar prohibition. Since this proposed statute would clearly substantially impair pre-existing contracts by prohibiting insurers from enforcing the terms of their policies, the focus of any contract clause litigation would likely surround whether the law is reasonable and necessary to accomplish a legitimate public purpose.
As of the date of this writing, the bill has only been referred to the committee on banking and insurance, and still faces some hurdles before becoming law. However, this development will be one for insurers issuing policies or covering risks in South Carolina to follow as the COVID-19 pandemic continues.
Pennsylvania joins New Jersey, New York, Ohio, Massachusetts, South Carolina, and Louisiana in proposing legislation requiring insurers that issue policies providing business interruption coverage to provide coverage for COVID-19 related losses. House Bill No. 2372 provides:
Notwithstanding any other law, rule or regulation, an insurance policy that insures against loss or damage to property, which includes the loss of use and occupancy and business interruption, in force in this Commonwealth on March 6, 2020…shall be construed to include among the covered perils under the insurance policy coverage for business interruption due to global virus transmission or pandemic.
Like other states, the proposed legislation applies to policies that are issued to insureds with fewer than 100 eligible employees, and permits reimbursement from the Insurance Department via a special purpose apportionment that will be funded by the commissioner’s collection of additional funds from insurers providing property and casualty insurance within the state.
We have previously reported on New York’s proposed legislation that would require property/casualty insurers to retroactively cover business interruption claims related to the COVID-19 pandemic. As originally drafted, the bill, A. 10226, provided that every policy of insurance “insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.” The bill required insurers to indemnify for losses during “the duration of a period of a declared state emergency due to the pandemic,” and was retroactive to March 7, 2020. A. 10226 applied to policyholders with 100 or fewer “eligible” employees (employees working at least 25 hours per week) and allowed carriers to seek reimbursement from a fund collected from all insurers operating in New York.
On April 8, 2020, the bill was substantially amended and reintroduced as A. 10226A. A. 10226A expands the class of policyholders from those with 100 or fewer eligible employees to those with 250 or fewer eligible employees. The new bill clarifies that it applies to policies insuring against loss or damage to property, “which includes, but is not limited to,” the loss of use and occupancy and business interruption. A. 10226A also contains two new provisions. The first provides that any subject policy of insurance set to expire during the state of emergency is automatically renewed at the same rate of charge. The second new provision states that any policy provision “which allows the insurer to deny coverage based on a virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease illness, or physical distress shall be null and void.”
If enacted, A. 10226A would broadly expand coverage for COVID-19-related losses. First, the increase of the bill’s applicability to policyholders with 250 or fewer eligible employees would bring a great number of the state’s larger small businesses within the bill’s ambit. Additionally, by stating that it applies to policies including, but not limited to, coverage for loss of use and occupancy and business interruption, the bill is arguably applicable to any policy that insures against loss or damage to property, regardless of whether coverage for business interruption and similar hazards was ever contemplated. Moreover, for the length of the state of emergency, carriers would be unable to allow policies to expire or increase premiums when renewing. Finally, while the original language of the bill arguably would have broadened only the scope of insuring agreements, A. 10226A would expressly void any virus exclusions or similar efforts to preclude coverage for the COVID-19 pandemic.
Governor Phil Murphy of New Jersey signed Executive Order 123 regarding relief for policyholders residing in the state. The state government mandated a statewide shutdown on March 16, 2020, followed by additional restrictions designed to mitigate the spread of COVID-19 and orders to combat the economic effects of the economic shutdown.
On March 19, 2020, the Commissioner of Banking and Insurance issued a bulletin in which insurance carriers were encouraged to take steps to assist policyholders affected by job loss and other effects of the recent shutdown orders.
Governor Murphy’s most recent order now mandates that property and casualty insurance carriers provide a 90-day grace period to policyholders to pay premiums during which time the carrier cannot cancel or refuse to renew a policy for non-payment of premiums. Health and dental insurance carriers must provide a 60-day grace period, but employer-funded health plans are exempt. The Order requires all carriers to waive interest, penalties, and certain fees related to late payment or nonpayment of premiums.
Importantly, the affected carriers must pay claims incurred during the grace period that would otherwise be covered by the policy. Carriers cannot seek reimbursement from its insured for any claims paid during the grace period based on non-payment of premiums. Moreover, at the end of the applicable grace period, carriers must amortize the balance of the premiums over the remaining term of the policy or one year, at the direction of the carrier.
The order vests authority in the Commissioner of the Department of Banking and Insurance to extend the grace periods as she deems appropriate.
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