New Jersey Considers COVID-19 Legislation Compelling Insurers to Pay Business Interruption Coverage Due to Coronavirus

Introduction

New Jersey recently introduced Assembly Bill 3844, which would require insurers to provide business interruption coverage to companies with less than 100 eligible employees, defined as those who work at least 25 hours a week, as a result of coronavirus.  After making payments, insurers could then apply for relief and reimbursement from the state’s Commissioner of Banking and Insurance.  The proposed legislation would apply to all policies having business interruption insurance in force in New Jersey on March 9, 2020, the date on which Governor Phil Murphy declared a Public Health Emergency, and would indemnify policyholders for business interruption loss for the duration of the declared State of Emergency.  The legislation was designed to support policyholders, specifically small business owners, whose companies will be seriously jeopardized due to COVID-19.  Amid insurance industry concerns, the bill was placed on hold shortly after it was introduced, but there are efforts to amend the bill, and it may be voted upon in the coming days.

Analysis

The insurance industry contends that the legislation’s application would be contrary to typical business interruption coverage, which excludes loss or damage caused by virus.  For example, ISO Form CP 01 40 07 06, “Exclusion for Loss Due To Virus Or Bacteria,” states that the insurer will not pay for loss or damage “caused by or resulting from virus that induces or is capable of inducing physical distress, illness or disease.”  The proposed bill would rewrite such policies to include business interruption coverage resulting from “global virus transmission or pandemic.”  Accordingly, some legal experts have raised constitutionality questions, noting that the Contracts Clause in Article 1 of the U.S. Constitution limits a state’s ability to interfere with private contracts. Insurers have also noted that pandemic coverage is separately available for policyholders willing to purchase the coverage for a premium. 

In addition to the virus exclusion, insurance industry representatives say the proposed legislation runs counter to the basic policy requirement of “direct physical loss or damage” to the insured’s property.  Policyholders will likely take the position that coronavirus in a building satisfies the “direct physical loss or damage” requirement.  For example, in Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, No. 12-cv-04418, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014), a New Jersey federal district court found that ammonia release from a refrigeration system which rendered the insured’s buildings uninhabitable constituted direct physical loss sufficient to invoke business interruption coverage.  Other courts have held that substances such as mold and bacteria that can be removed by cleaning do not constitute physical loss or damage sufficient to trigger coverage.  See, e.g. Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008); Universal Image Prods. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010).  Regardless of whether the presence of coronavirus constitutes physical loss or damage, many businesses will close because of state or local mandates requiring employees to work from home to avoid spread of the virus.  In other words, most companies will not close due to the physical presence of the coronavirus on the premises, but as a result of efforts to curb its spread.

Learning Point:

The proposed legislation, if enacted, would expand the business interruption coverage available under existing policies to New Jersey companies with less than 100 employees.  We will keep you updated on the status of this legislation and any future developments.