“Global pandemic forcing mass shut‐down now joins ‘storm surge overtopping New Orleans levees’ and ‘earthquake/tsunami causing nuclear reactor meltdown’ as ‘unforeseen’ catastrophes that I absolutely sat through insurance conference presentations on circa 2003,” writes our friend Ray Lehmann, a longtime observer of the insurance business.
The fact that this category of risk has been widely grasped for many years is among the reasons why state legislatures should absolutely not be permitted to enact legislation retroactively rewriting insurance contracts to mandate pandemic‐related business interruption coverage neither promised nor paid for at the time.
As this White & Williams bulletin recounts, in 2006 the Insurance Services Office “submitted, and state regulators approved, form CP 01 / 40 / 07 / 06, titled ‘Exclusion for Loss Due To Virus Or Bacteria’ that bars first‐party property coverage for loss or damage, including business interruption, caused by or resulting from any virus.” That aside, it is common for business‐interruption policies to require a trigger of physical damage to property before coverage applies.
Bills filed in the New Jersey, Massachusetts, Ohio, and New York legislatures would overthrow these exclusions after the fact in whole or part. The president of the Ohio Insurance Institute told Insurance Journal the passage of such a bill “would likely wipe out a number of Ohio insurance companies,” leaving them unable to pay for unrelated perils they did promise and intend to cover, such as damage from tornadoes, house fires and auto crashes. (The Ohio bill includes a further contrivance that would require insurers as a group to cover the payouts, even those that themselves never wrote any kind of business‐interruption coverage.)
Whatever insurers succeed in making it through will also need to jack up premiums in the future to cover the risk that the reliability of contract law will unpredictably be yanked out from under them again down the road. And even though the federal courts have been sadly lax in enforcing it, such laws would also violate the clear directive of the U.S. Constitution’s Contracts Clause: “No State shall… pass any… Law impairing the Obligation of Contracts.”