IMPORTANT: Please scroll down to the Comment section. Rather than trying to constantly update this article, I will be adding additional information as I come across it. Almost immediately, I came across regulatory action being considered in Colorado and a statement from Progressive that they were not going to enforce their food delivery exclusion for the next month or so. Now Wisconsin has mandated that personal auto policies cover delivery and that CGL policies cover hired and nonowned auto delivery exposures.

 

New Jersey has a bill that would force insurers to pay for business income losses even if their policies clearly don’t cover the claims. It was thought that the bill was dead, but according to the articles below, it is alive and being voted on tomorrow.

According to the vague language of the bill, it appears that insurers who pay uncovered claims could apply for reimbursement from some sort of mechanism that would be shared by other insurers, presumably even if they don’t even write that type of coverage. Again, the proposed bill is not clear on exactly how this confiscation of funds would go down.

At the federal level, on March 18, a number of members of Congress wrote the CEOs of four industry groups asking that they voluntarily pay business income claims involving the coronavirus, again presumably whether covered or not. Two of the groups are agent and broker associations which are not parties to these insurance contracts, nor do they have any financial resources that could be brought to bear. The fact that they were included indicates that Congress lacks a fundamental understanding of how the industry works.

I am not an attorney but my understanding is that many legal experts believe that confiscatory government orders or legislation violate Article 1, Section 10, Clause 1 of the U.S. Constitution. There is an interesting Wikipedia discussion of whether a state can effectively modify a private contract in the public interest. It indicates that three tests must be met according to the U.S. Supreme Court. Another article outlines the basis for review.

Most recently, in Sveen v. Melin, 138 S. Ct. 1815 (2018), the SCOTUS ruled that such laws are void if they “substantially impair” a contract. My guess is that insurers would assert that mandating that they pay for losses not covered by their contracts substantially impairs them.

If such laws are passed, expect the industry to challenge them in court. In the case of New Jersey, this may be difficult. In researching this article, I came across my instructor notes from an old agent E&O loss control seminar which cited this 1988 New Jersey court decision:

“The underlying public policy in this area is quite clear when the potential for damage to the environment is this great. Consequently, the health, safety and welfare of the people of this state must outweigh the express provisions of the insurance policy in question.”

If such laws are passed, expect the industry to challenge them in court. In the case of New Jersey, this may be difficult. In researching this article, I came across my instructor notes from an old agent E&O loss control seminar which cited this 1988 New Jersey court decision:

“The underlying public policy in this area is quite clear when the potential for damage to the environment is this great. Consequently, the health, safety and welfare of the people of this state must outweigh the express provisions of the insurance policy in question.”

According to my notes, the court case is Summit Assoc. v. Liberty Mut. Fire Ins., 550 A.2d 1235 (N.J. Super. Ct. App. Div. 1988). As I recall, it was a claim involving a SuperFund site where the trial court admitted that the policy excluded pollution and cleanup, but cited “public policy” as the basis for overriding the language of the contract. However, on appeal, the court remanded the case with this:

“According to the judge, public policy, which recognizes the immediacy of the toxic waste cleanup problem must control over what he viewed as the plain meaning of the contract language in a situation such as this, where a private landowner is required to pay the cost of cleanup to prevent damage to the environment pursuant to the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11f(a).

“We disagree. While public policy as expressed in our statutes may have set the stage for Summit’s claim, it cannot alter clear provisions of a contract between the parties. Since the time of the trial judge’s decision in this case, we decided *64 Broadwell Realty v. Fidelity & Cas., supra, in which we interpreted insurance contract language nearly identical to this in a relevant context.

“In Broadwell, we held that an owned property exclusion did not preclude an insured from recovering under a comprehensive general liability policy for costs incurred in cleaning up its own property pursuant to a DEP directive where such costs were necessary to prevent damage to the property of third parties. It seems to us, and both parties agree, that Broadwell is the touchstone of this inquiry.

“Liberty claims that Broadwell excludes coverage in this case because no threat to the property of third parties was established. Summit claims that Broadwell precludes application of the owned property exclusion because its cleanup was to prevent damage to the environment. For our purposes, the crucial aspect of Broadwell is its reaffirmation of the applicability of traditional principles of insurance contract interpretation to this situation:

“[w]hatever the relative merits of the competing public policies identified and advanced by the parties, we perceive no legal principle which would permit us to circumvent what the contracts says. [218 N.J. Super. at 523.]

“Because the trial judge failed to apply those principles in determining the applicability of the owned property exclusion, we reverse and remand the matter to him for reconsideration of this issue.”

Confiscatory legislation targeting one industry is potentially far more dangerous to a republic than the virus itself.

Why single out the P&C insurance industry to pay for business closures or curtailments mandated by governmental entities? Why not confiscate funds from the life insurance industry? The health insurance industry?

Why not require contributions from policyholder attorneys as well? And accounting firms? And labor unions? And grocery stores? And toilet paper manufacturers? Or, for that matter, hit up any business that isn’t adversely impacted and any individual who is still employed? It makes as much sense.

And what happens when P&C insurers who are forced into insolvency can’t pay policyholders who have claims actually covered by their policies? Ah, we assess other insurers via guaranty funds…if there are any left to assess. And what about the hundreds of thousands of insurance agencies and staff members formerly employed by the industry? Who’s going to compensate them?

This is largely not an insurance issue. It’s not really a business issue. It’s a societal issue and no single industry should be expected to solve it. Probably the greatest beneficiaries of these efforts are members of the trial bar who stand to profit unless the laws confiscate their earnings too.

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information