The new legislation on business interruption coverage is a potential economic lifesaver for small businesses, but poses a serious financial risk for insurance companies. There have been a lot of business interruption claims against the insurance industry.
Many of these cases were denied by carriers, who claimed that there was no physical damage to their property or that they were exempted from coverage. The legislation proposed combats the increasing economic difficulties faced by small businesses as well as denial of insurance coverage. The legislation has been strongly opposed by the insurance industry, who claim that it would not cover private contracts.
California has introduced proposed legislation?
- California has no similar bill. Ricardo Lara, California’s Insurance Commissioner, wrote to Nancy Pelosi and the California Congressional Delegation to alert them to the severity of the business disruption crisis and to ask them to immediately take action to protect California’s companies.
- Also, it requires them to investigate any COVID-19-related business interruption claims fairly. If a carrier denies an insured claim in whole or in part, the carrier must give the insured written explanations of the legal and factual basis for the denial.
Possible Pitfalls in the Proposed Legislation
- Unsurprisingly, the proposed legislation has been under scrutiny. Many of the bills proposed allow carriers to apply for reimbursement from state funds specifically made available for this purpose. However, critics fear that retroactively forcing coverage would lead to the financial collapse of the insurance industry.
- The legislation, if it is enacted, will need to be able to withstand constitutionality issues that will undoubtedly be raised by the insurance sector. These challenges were supported by the Constitution (Chapter 5, 14). The “Contract Clause” bans “substantial impairment of contractual rights,” including insurance policies.
- It is only allowed if the state has a “significantly legitimate public purpose behind regulation” and that the impairment is reasonable, appropriate, and related to the public purpose.
- Although the legislation’s purpose is to provide small businesses with economic relief, it may not be implemented in time due to the lengthy legislative processes required to enact them and the long litigation that will undoubtedly arise from constitutionality issues.
- Business interruption coverage is not guaranteed without the passage of the legislation. It will be determined by the particular circumstances of each business’s loss as well as the terms of the policy.
Consider these Things. . .
- Notice provisions in insurance policies require that insureds notify the insurers promptly of any claim.
- Small businesses should file a claim under the existing business interruption coverage even though legislation is pending.
- Untimely notice may be used by insurance companies to deny coverage.
- The insured must prove that the loss is covered by the policy. It is crucial to understand the policy in order to be eligible for coverage.
Insurance companies often argue that property damage is caused by the virus spreading onto all surfaces and objects within, around, and around covered premises. Another argument is that disjunctive usage of the provision ” physical loss or property damage” covers loss of use, . In other words, physical damage is not necessary and the property can be lost.
Summarized from an article by Stubbs, Alderton & Markiles, LLP.
