Should insurance companies have to cover small businesses’ pandemic losses?

As the coronavirus pandemic rages in New York, more and more businesses are shuttering, both temporarily and permanently. The federal government has been providing relief across multiple aid packages, but for some struggling small-business owners, it hasn’t been enough.

Some owners are turning to their business interruption insurance policy for a payout to keep them afloat, only to find out that type of insurance doesn’t cover pandemics. Lawmakers in New York say insurance companies are trying to game the system during an unprecedented crisis. The state Legislature is considering legislation that would force insurance companies to make claim payments even when the contract doesn’t include, or even explicitly excludes, pandemics. But members of the insurance industry say business interruption insurance was never intended for the kind of situation the country is facing, and forcing payments would be an illegal move that could bankrupt the industry.

Business interruption insurance is one type of policy that small businesses can purchase to help safeguard them against tough times. As the name implies, policyholders can make a claim when their business operations get interrupted due to some form of natural or man-made disaster. Following the SARS outbreak nearly two decades ago, most policies began to say that viral or bacterial outbreaks were not covered. And even when the contract doesn’t mention pandemics, insurers are still refusing to pay out claims.

Assemblyman Robert Carroll, the sponsor of legislation that would make small-business policyholders retroactively covered, said this is unconscionable. “The reasonable small business purchases this insurance for times just like this when, at no fault of their own, because of a natural disaster, their business is interrupted,” Carroll told City & State. He said even though many policies exclude pandemics, these small-business owners have no negotiating power to change the terms of their contracts. Carroll added that even if someone asked for additional coverage in the case of a viral or bacterial outbreak, such a policy doesn’t exist. In other words, small-business owners who have been paying premiums for years are now being blindsided by a disaster that their insurers say they have no responsibility to cover, Carroll said.

But the insurance industry believes those arguments are flawed, and that Carroll’s legislation could have dire consequences for the industry. Laura Foggan, who leads the insurance group at the law firm Crowell & Moring LLP, said that business interruption insurance is specifically intended for when there is physical or structural damage to a business as the result of a natural disaster like a hurricane. This is explained clearly on the website for the state Department of Financial Services, the state agency that regulates insurance. In an FAQ for small-business owners about the coronavirus, the agency wrote that “any claim would still need to be related to your property damage for coverage to be triggered,” even if the contract doesn’t explicitly exclude pandemics. Foggan said that when that language was added following the SARS outbreak, it was more for clarification – she argued that business interruption insurance would never have covered such a situation since it doesn’t cause property damage. “It is not designed to respond to the risk of bodily injury,” Foggan said. “That’s a different kind of risk and a pandemic is, by its nature, a very different kind of exposure.”

“When you purchase business interruption insurance, you reasonably expect that if your business is closed down by the government because of some natural disaster … that you’re going to get paid.” – Assemblyman Robert Carroll

While sympathetic to the plight of small-business owners that Carroll’s legislation would help, Foggan said that forcing insurance companies to pay claims for situations that are not covered is not the solution. “These kinds of bills definitely present serious constitutional questions,” Foggan said. “And enacting a bill that would retroactively alter the terms of coverage to force insurers that didn’t insure these claims to pay them would have very serious implications.” She suggested it could bankrupt the industry because it’s not prepared to make payments for claims it never intended to insure.

Carroll pushed back on that assertion, saying that the industry is sitting on $900 billion in reserves, so it can afford to pay these claims. “Just because this natural disaster is gigantic, doesn’t mean we should let the insurance industry off the hook,” Carroll said. His legislation would also create a fund to help insurers if the companies encounter financial hardships as a result of the new coronavirus-related payments. Carroll added that there are legal arguments that the coronavirus constitutes property damage because it rests on surfaces, even if it’s invisible. “When we look at contracts, one of the standards we look at is what did the parties reasonably expect to get from that contract,” Carroll said. “And when you purchase business interruption insurance, you reasonably expect that if your business is closed down by the government because of some natural disaster … that you’re going to get paid.”

“How can you impose upon them an obligation to pay for claims for which they never accepted a premium?” – Dan Kohane, Hurwitz & Fine P.C. senior partner

Foggan said that the insurance industry’s reserves are there to pay the thousands of other claims it receives, and that if it gets depleted under this legislation, other policyholders requesting payouts would be punished. She also dismissed the argument that the virus is causing physical damage, saying that advocates’ arguments are a stretch that existing case law does not support. Foggan also said that existing policies don’t offer coverage for forced government closures in any sort of situation. Even with something called contingent business interruption insurance, which covers businesses forced to close without sustaining property damage, there must be damage to nearby businesses that has caused the interruption.

Dan Kohane, a senior partner at the law firm Hurwitz & Fine P.C., said that legislation like Carroll’s is trying to solve a massive problem with no easy solution by laying it unfairly at the feet of the insurance companies. “How can you impose upon them an obligation to pay for claims for which they never accepted a premium?” Kohane asked. He said that all policies sold in the state needed approval from the state Department of Financial Services, which has known for years that many business interruption contracts explicitly exclude pandemics. Carroll said that this is a problem the agency should have addressed long ago, but said the regulators who “allowed” that to happen had “no idea” a situation like the one we’re facing now would happen. The department did not return a request for comment about why it did not previously take action on this issue and whether it would step in with new regulations now.

Carroll’s legislation, first introduced in March, recently gained a sponsor in state Sen. Andrew Gounardes to carry the bill in that chamber and has support from members of the hospitality and nonprofit industries. But given the potential legal implications and strong opposition from the insurance industry, small-business owners looking for relief may not find it through his bill.