BUSINESS INTERRUPTION INSURANCE FOR SMALL BUSINESSES CLOSED BY THE CORONAVIRUS PANDEMIC – IT’S TIME FOR A “NEW DEAL”

By Michael A. Ciaffa, Joseph V. Cuomo and Danielle B. Gatto

The coronavirus pandemic has sickened and killed too many individuals in our community on Long Island. It has also devastated many small businesses. At a time when many local businesses are on life support and failing, our government leaders have to act, decisively, to protect the businesses that remain. We are lawyers, not doctors, so we cannot intelligently comment on the heath-related safeguards that may be needed for business operations to continue in the upcoming year. But we can encourage our legislators to enact a small piece of legislation that might help save hundreds of small businesses that are so vital to our life here on Long Island.

The idea is simple. Most small businesses have insurance for their businesses. This insurance typically includes business interruption coverage. By government mandate, all non-essential businesses have been closed, and many other businesses can operate only on a restricted and limited basis. Does business interruption insurance provide coverage for the forced closures? Does it provide a means to recoup, in part, any business losses?

Looking at the literal terms of most business interruption insurance policies, business operations that are interrupted due to a virus pandemic are not typically covered or may appear to fall within one or more policy exclusions. The affected businesses in that event presumably would have no direct recourse for covering their losses. In this time of dire need, the federal government, the state legislature, and local government entities, are each struggling to find viable economic solutions to the coronavirus crisis. Funds are scarce. Assets are spread thin. Small businesses have received little help, to date. Bankruptcy will follow for many. But bankruptcy will do little practical good for small business owners, and will provide only limited help for the creditors of the small businesses.

In recent weeks, a creative idea has emerged: emergency legislation requiring insurance coverage for business interruptions caused by government mandate at a time of a declared emergency. At least one such proposed law has been introduced in our State Legislature (A10226-A and S8211). Can legislation like this, perhaps, be a partial solution? Can it be done legally?

Many recent legal commentators assume, under the Contracts Clause of the US Constitution, that state legislation may not retroactively require insurance coverage of business interruptions related to the coronavirus crisis because it would “impair the obligation of contracts.” We disagree. As practicing lawyers with decades of experience litigating constitutional law questions, we have seen, time and time again, how our courts can shape the broad words of the Constitution to the exigencies of the moment. During the Great Depression, and again in the aftermath of devastating hurricanes, courts have sustained emergency legislation that alters and impairs contractual obligations, at least temporarily, for the greater public good.

In one Depression era case, Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934), the Supreme Court, by a 5-4 vote (Chief Justice Hughes, joined by Justices Brandeis, Cardozo, Roberts and Stone, in the majority), upheld the constitutionality of a state statute allowing the postponement of foreclosure sales and the extension of redemption periods in contravention of the terms of written mortgage instruments. The majority set forth five factors for analyzing whether a government act violates the Contract Clause: (1) was the act an emergency measure? (2) was it designed to protect a basic societal interest rather than particular individuals? (3) was it tailored appropriately to its purpose? (4) did it impose reasonable conditions? (5) was it limited to the duration of the emergency?

Apart from cases involving “emergency” legislation, the Supreme Court has refused to apply the Contracts Clause literally when a “heavily regulated” industry is subjected to special state legislation affecting contractual rights and obligations. The key question comes down to whether the state law is drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.” Sveen v Melin, 138 S. Ct. 1815 (2018), quoting Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411–412 (1983). This is a very flexible, pragmatic balancing test, perfectly adaptable to governmental regulations affecting the terms and conditions of a governmentally regulated insurance policy.

Not surprisingly, state legislatures have often used their police powers, liberally, in the face of devastating losses following hurricanes. Courts in both Louisiana and Florida have upheld such state laws even when they retroactively modified the terms of existing insurance policies in ways that benefitted policy holders and altered the insurers’ contractual rights. See State of Louisiana v All Prop. & Cas. Ins. Carriers, 937 So.2d 313 (La. 2006); Vesta Fire Ins Corp v State of Florida, 141 F3d 1427 (11th Cir. 1998).

Both cases vividly illustrate how the Contracts Clause will likely be applied when insurance policy terms are altered by legislation in the face of a catastrophic emergency. In the Louisiana case, in the aftermath of Hurricane Katrina and Hurricane Rita, the legislature retroactively extended the prescriptive period for damage claims under insurance policies covering homes and businesses, based on findings that the hurricanes had “created a statewide emergency” and had “inflicted immediate undue and unimaginable hardships on hundreds of thousands of Louisiana citizens.” Although the court found that the new law was a “substantial” impairment of the insurers’ contractual rights, the court noted that state law had traditionally regulated the insurance industry as a matter of public policy. Since the impairment at issue did not amount to a “total” destruction of the insurers’ contractual expectations, and had been passed in order to protect the health and general welfare of citizens who had suffered “staggering” losses of life and property, it did not amount to an unconstitutional impairment of the insurance contracts. State of Louisiana v All Prop. & Cas. Ins. Carriers, supra.

Likewise, in the Florida case, after Hurricane Andrew hit in 1992, insurers’ contract rights were impaired when they were forced by the state legislature to pay annual premiums into a reinsurance fund and to “continue contractual relationships that otherwise, pursuant to the terms of the contracts, could be terminated.” Brushing aside the insurers’ constitutional claims, the court concluded that the state had demonstrated “a legitimate public purpose” for the impairment of the insurers’ contracts: “protection and stabilization of the Florida economy.” Vesta Fire Ins Corp v State of Florida, supra.

The same general principles should apply here. In the face of the current coronavirus pandemic, and upon due consideration of the decisions in Blaisdell and the other cases cited, we have no doubt there is room under the umbrella of our “living, breathing Constitution” for narrowly drawn legislation altering the terms of existing business interruption insurance policies in ways that can provide emergency aid to affected businesses. The insurance industry is heavily regulated in New York. The emergency need is real and immediate.

Will such a law be passed in the face of insurance company objections? Can such a law be upheld under the Contracts Clause of the US Constitution? The key factor, we suspect, is how our state legislature structures the law. So long as the measure is “temporary” and narrowly geared to the “emergency” need for an insurance stimulus infusion and includes a means for the insurers to recoup payments beyond those contemplated by the original policies, the measure should pass constitutional muster. The proposed legislation introduced in Albany includes provisions allowing insurers to seek reimbursement for payments made to affected businesses pursuant to the new law. In the long run, the insurance companies, themselves, may not lose any money. Moreover, insurers, as a rule, have to maintain large reserves to account for a possible catastrophic emergency. Those reserves are an available monetary source that is desperately needed, today, to meet an urgent public need.

If such a law is passed in New York, we can expect a legal challenge from insurance companies. The battle in the lower courts will be critical in the short term. Will courts require the insurers to cover and pay for business interruption losses at least initially? The presumption of constitutionality, combined with a liberal reading of precedent and a balance of equities, tilts in favor of businesses on the verge of insolvency. Add public interest considerations and the emergency needs of the economy, and it’s not hard to imagine court rulings requiring insurers to pay business interruption benefits while litigation continues.

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