1. The Proposed Retroactive Legislation

New Jersey proposed the first business-interruption-related legislation in the pandemic’s earliest days. On March 16, 2020, legislators introduced Assembly Bill No. 3844, which provided that every existing insurance policy insuring against loss or damage to property and including business-interruption coverage was to be construed to include coverage for COVID-19 interruption (subject to policy limits and durations). Notably, insurers forced to pay under the law would be eligible to apply to the state insurance commissioner for a reimbursement of the amounts paid, and the commissioner would fund these payments by levying an assessment on insurers doing business in the state. The bill was voted out of the committee on March 16, 2020, and awaits further action.[3]

As of this writing, additional bills have been introduced in California, Louisiana, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island, and South Carolina. There have also been a pair of federal bills introduced in the House of Representatives. The District of Columbia Council considered such a bill as well, but efforts stalled in May when council members expressed concern over the measure’s legality and cost.[4]

The various state bills vary in their particulars on a few important issues. For example, the bills in Massachusetts, New York, and South Carolina specifically forbid insurers from denying claims for want of physical damage.[5] The Pennsylvania bill, on the other hand, provides that “property damage” includes COVID-19-related closures.[6] In California, the bill creates a “rebuttable presumption” that COVID-19 was present at the property and caused damage.[7]

The bills generally cap the size of the business to which they apply. In Louisiana,[8] New Jersey, Michigan,[9] and Ohio, the bills apply only to insureds with 100 or fewer full-time employees. Massachusetts, Rhode Island,[10] and South Carolina set the cap at 150 employees, while in New York the proposed number is 250. Ohio[11] and Pennsylvania look at the location of the business and whether a business is eligible for U.S. Small Business Administration funding. Several states only count employees present within the state.[12]

Like the New Jersey bill, all proposed state legislations contain a mechanism to spread the cost of mandating coverage not contemplated across insurers doing business in the state. The New York, New Jersey, and South Carolina schemes impose a pro-rata levy on all licensed insurers. In Ohio and Pennsylvania, only property and casualty insurers are called on, and in Massachusetts and Rhode Island, only those businesses that write business-interruption policies need to pay up.

Most crucially for purposes of potential constitutional challenges, each of the bills has some measure of retroactivity. Most of the bills apply to policies in effect as of a given date in early March 2020. In Massachusetts, Rhode Island, and South Carolina, the bills apply to policies in force as of the date of enactment.

Finally, on April 14, 2020, Reps. Mike Thompson of California and Brian Fitzpatrick of Pennsylvania proposed a pair of federal bills concerning business-interruption insurance and the pandemic, H.R. 6494, the “Business Interruption Insurance Coverage Act of 2020” and H.R. 6497, the “Never Again Small Business Protection Act of 2020.” Both bills call for insurers offering business-interruption insurance to provide coverage for pandemic-type losses (in the case of H.R. 6494, specifically referencing a viral pandemic, and in the case of H.R. 6497, applying to situations of “national emergency”). H.R. 6494 also invalidates any existing exclusions in business-interruption policies then in force. Both bills remain in committee.

2. Potential Constitutional Challenges

Should any of these bills become law, they would effectively rewrite existing policies and, as a result, will be ripe for constitutional challenge by the insurers forced to pay for risks they say they never intended to cover. Below, we discuss the three likeliest such challenges under the federal Constitution, but there are numerous state constitutional provisions—often patterned on their federal counterpart—that could likewise be implicated.

A. Takings Clause

The Takings Clause of the Fifth Amendment generally prohibits the government from “taking” private property “for public use, [except] with[] just compensation.” The Takings Clause prevents the government “from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”[13] The paradigmatic examples of takings are physical seizures or invasions of property, but economic regulation that “adjust[s] the benefits and burdens of economic life to promote the public good” also qualify.[14] “Contract rights are a form of property and as such may be taken for a public purpose provided that just compensation is paid.”[15]

Not all government incursions on private property constitutes a taking that must be compensated, though. Courts’ analysis in this area is “essentially ad hoc and fact intensive,” turning on “whether justice and fairness require that economic injuries caused by public action must be compensated by the government.”[16] As Takings Clause jurisprudence has developed over time, courts evaluating the issue have identified three factors of “particular significance”: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation interferes with distinct, investment-backed expectations; and (3) the character of the governmental action.[17]

Applying these touchstones to the case of retroactively implemented business-interruption insurance is illustrative. The first factor, economic impact, will vary by insurer, but will in most cases, be substantial. One estimate by property and casualty insurers from late March, for example, placed the national business losses from COVID-19 insurers at $220–$383 billion—a staggering quarter to half of the total industry surplus available to pay property and casualty claims.[18]

The second factor, regarding investment-backed expectations, should also generally be satisfiable by insurers, since the insurers can reasonably argue that they had a reasonable expectation that their policies would not be forced to respond to uncovered losses. On the other hand, insurers may also face arguments that, since insurance is a heavily regulated industry, insurers should expect regulatory and legislative changes to the policies they issue to accommodate changing legislative whims and needs.[19]

Finally, as to the third factor, the fact that the government is acting in an undisputed emergency, to protect the “health, safety, morals, or general welfare of the general public,”[20] might give it substantial leeway to act without it constituting a taking, but even in emergencies, government’s ability to act without compensating is not unfettered.[21]

It is difficult to know ex ante how a Takings Clause challenge would ultimately fare, and it’s likely that the particulars of the statute at issue may matter a great deal. For example, if the insurer that pays claims is compensated from a centralized fund, that insurer will have been compensated and be without a Takings claims (except potentially over the adequacy of the compensation). The insurers forced to pay into the fund (as contemplated in several states) may have a Takings claim in that instance, but the proposed levies would be more likely to survive because they would be imposed on an entire group of heavily regulated entities.

B. Contract Clause

The Contract Clause, in Article I of the Constitution, provides that “[n]o State shall … pass any … Law impairing the Obligation of Contracts.”[22] The Contract Clause sounds relatively absolute, but it’s not, because the clause also must coexist with the State’s police power “to safeguard the vital interests of its people.”[23] In the Supreme Court’s Blaisdell decision, for example, the Court approved a Minnesota mortgage moratorium statute, even though the statute retroactively impaired contract rights.

As with the Takings Clause jurisprudence, the Supreme Court prescribes a three-part test for determining whether a statute or regulation violates the Contract Clause:[24]

1. Whether the law substantially impairs a contractual relationship. As the severity of an impairment rises, so too does the scrutiny courts will apply to the statute or regulation. Whether an industry is regulated factors into this analysis.

2. If the impairment is substantial, a court next considers whether a significant and legitimate public purpose exists for the law, such as remedying a broad general social or economic problem. The public purpose does not need to be emergent or temporary, but such facts are relevant.[25] Whether the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption is a fact-specific inquiry.[26] By way of example, Courts have upheld various regulatory actions against insurers following emergency events:

• The Eleventh Circuit upheld a Florida law, passed after Hurricane Andrew, that prohibited an insurer from canceling or not renewing more than 5% of its residential policies in Florida or more than 10% of its residential policies in a single Florida county during a twelve-month period.[27]
• The Louisiana Supreme Court upheld the Louisiana’s legislative act to extend statute of limitations in coverage actions against insurers.[28]

On the other hand, in less emergent situations or instances where the legislature did not adequately justify itself, courts have struck down laws that retroactively changed terms of insurance contracts.

• The Wisconsin Supreme Court, for example, held that the retroactive application of a law eliminating a 12-year statute of limitations for insurer’s workers compensation payments violated the state and federal contract clauses and insurer’s due process rights.[29] The court wrote: “The legislation here modified a basic term of an insurance contract – the extent of an insurer’s liability for traumatic injury claims – which was bargained for and reasonably relied upon by the parties, and this ‘resulted in a completely unexpected liability’ to [the insurer] after its original period of liability had expired, namely, new liability on [the insured] claim until his death,” exposing the insurer “to potentially significant losses.”)[30]
• Likewise, the South Carolina Supreme Court struck a statute that defined “occurrence” to include “faulty workmanship” as violating the state and federal contract clause if applied retroactively to then existing commercial general liability policies.[31]

Ultimately, the Contract Clause may be a barrier to the survival of the proposed statutes, but if the states do a sufficient job articulating the gravity of the situation and the overriding need to act, the statutes could stand a good chance of survival.

C. Due Process Clause

Finally, the Due Process Clause of the Fourteenth Amendment prevents a State from arbitrarily denying citizens of their property.[32] To establish a Due Process claim related to these proposed statutes, an insurer would need to establish a constitutionally protected property interest that has been “arbitrarily” denied by the governmental action.[33] “Arbitrariness” is a difficult standard to meet and means the law must not be rationally related to any legitimate government interest.[34]

Given this landscape and gravity of the pandemic’s shock to the economy, any insurers attempting to argue a Due Process violation will therefore generally face a difficult road. Courts do, however, occasionally strike down statutes under the Due Process Clause where they conclude that the governmental action does not rationally help further the government’s goal. For example, in a 2006 Fifth Circuit case, the court of appeals struck down a municipality’s refusal to connect utilities to beach houses. Though the city had a legitimate interest in protecting the public’s access to the water, the court concluded that the methods the city used were not rationally calculated to further the goal.[35] Likewise, the Wisconsin legislature’s attempt to retroactively change the statute of limitations for workers’ compensation statute was held by the state supreme court to violate due process because the act did not “demonstrate[] a rational legislative purpose justifying retroactive application of the statute”.[36]

Insurers might, therefore, be able to argue that while the ends of the statute to help distressed businesses during the pandemic are legitimate, the means by which the statute attains those goals are irrational. 

While as lawyers we are interested in seeing answers to these pressing constitutional questions, we remain cautiously optimistic that the above-referenced bills, put together by legislators with the well-being of small businesses in mind, do not become law as that could have a far reaching economic effect on the key industry supporting all of the U.S. economy. The solution (whether an insurance product for future pandemic losses and/or compensation for past losses) must come from the government’s fiscal powers applied to all of the subjects, as opposed to just one industry.