April 6, 2020
By Lawrence C. Weiner and Boris Peyzner
On March 9, 2020, a State of Emergency was declared by Governor Murphy and just twelve days later on March 21, 2020, Governor Murphy signed Executive Order 107 (the “Order”). The Order, among other things, mandates all non-essential businesses in New Jersey to close, thereby requiring these businesses to operate remotely, if possible. Many other states have passed substantially similar orders. These so called “stay at home orders” immediately and severely interrupted many businesses’ operations and will continue to do so in the weeks to come. As a result, the news is filled with businesses announcing furloughs, layoffs and/or pay reductions for employees. It is anticipated that this unsettling trend will continue.
As New Jersey businesses struggle, many business owners will look to their insurance policies to see if there is coverage for business interruption in light of the COVID-19 pandemic and mandated government shutdowns.
Business Interruption Insurance
Business interruption coverage insures against losses sustained due to suspended business operations. Generally, in New Jersey, business interruption insurance limits covered losses due to “physical damage” incurred as a result of an accident or natural disaster, such as a fire or a flood, that impacts the operation of the business.
Compounding the “physical damage” limitation of business interruption insurance in New Jersey is that many policies have a specific exclusion if the business interruption claim is a result of a “virus.”
The 2006 ISO Exclusion
After the SARS outbreak, the Insurance Services Offices, Inc., (“ISO”) successfully obtained the passage of legislation in New Jersey that permits insurers to exclude losses resulting from a “virus.” ISO Form CP 01 40 07 06, which is captioned “Exclusion for Loss Due To Virus Or Bacteria,” provides in pertinent part: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease” (the “Virus Exclusion”). The Virus Exclusion certainly applies to business interruption, as it specifically applies to “business income.”
Businesses have already started filing business interruption claims due to the COVID-19 pandemic. As expected, our firm has already seen insurers decline business interruption claims as a result of the Virus Exclusion. In one such declination letter, the insurer states in pertinent part: “As SARS-CoV-2, the virus that carries COVID-19, is a virus that induces or is capable of inducing physical distress, illness or disease, the virus or bacteria exclusion…applies.”
Proposed Assembly Bill No. 3844
In response to this unprecedented pandemic, and the severe economic damages it has already caused, on March 16, 2020, the New Jersey legislature proposed a new bill which would require insurers providing business interruption coverage to pay for losses, even when the terms of the policy contain the Virus Exclusion.
The proposed bill would only apply to policies in effect on March 9, 2020, the date of the announced State of Emergency and issued to an insured with less than 100 “eligible employees” in the State of New Jersey. The bill would provide coverage as follows:
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, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
The proposed bill further states that the coverage “shall indemnify the insured” – within the policy limits – for “any loss of business or business interruption during the declared State of Emergency.” Assembly Bill No. 3844 can be viewed here. Accordingly, this bill will require insurance carriers to provide business interruption coverage due to COVID-19 related losses even though such policies may specifically contain the Virus Exclusion that was approved by our legislature over 14 years ago. Further, given the proposed bill’s clear purpose, it would certainly obviate any need to show “physical damage” that is typically common in many of these policies.
The proposed bill will allow insurers who pay business interruption claims to apply to the New Jersey Department of Banking and Insurance for reimbursement from a fund all insurers are already required to contribute to as part of being licensed to issue insurance policies in the State of New Jersey. Thus, the proposed legislation intends for these payments to be shared by all insurers doing business in the State of New Jersey. New York, Massachusetts and Ohio have proposed similar legislation.
To say there will be major pushback from the insurance industry is an understatement. “In a statement released by the National Association of Mutual Insurance Companies (NAMIC), President and CEO Charles M. Chamness said: ‘If elected officials require payment for perils that were excluded, never underwritten for, and for which no premium was ever collected, catastrophic results will occur and we may deal with a second crisis: insurance insolvencies and impairments. There will also be irreparable harm done to contract law, and the impact of this will be felt by every business in America. ’” If the insurance industry is unsuccessful in defeating the proposed legislation in committee, you can be sure there will be litigation challenging the validity of the law if passed.
Should You Pursue a Business Interruption Claim?
Before deciding to file a claim for business interruption coverage, you must review your policy very carefully to determine what is covered and what is not covered. Claims are very fact specific and time sensitive. Given the legislature’s response to the unprecedented COVID-19 pandemic, in proposing Assembly Bill No. 3844, the issue remains fluid. We will be diligently monitoring the situation for relevant updates and new information. If you have any questions regarding your potential business interruption claim, please contact Lawrence Weiner at firstname.lastname@example.org or 973.585.3154, or Boris Peyzner at email@example.com or 973.327.6605.