On April 30, 2020, the Pennsylvania Senate introduced a fourth bill aimed at addressing COVID-19 business interruption coverage. However, the bill takes a different approach from its predecessors. Senate Bill 1127, titled the COVID-19 Property and Business Interruption Insurance Act, purports to merely clarify Pennsylvania law regarding the interpretation of ambiguous insurance policy wording dealing with COVID-19 related losses, not rewrite insurance contracts. If enacted, the proposed legislation could be a significant step in ultimately compelling insurance companies to honor claims for business income losses caused by the pandemic.
Rather than mandating coverage regardless of insurance policy language like previous bills, SB 1127 interprets common policy terms and exclusions in a way that will provide coverage for COVID-19 losses absent other exclusionary language. Specifically, the legislation provides that businesses or organizations located within municipalities where the presence of a person with COVID-19 has been identified, or in which the presence of the coronavirus has otherwise been detected, are deemed to have experienced property damage and “to have experienced the actual, and not merely suspected, presence of a communicable disease.” It further provides that Governor Wolf’s March 19, 2020 Order, requiring the closure of non-essential businesses in the Commonwealth, constitutes “an order prohibiting ingress to and egress from all non-life sustaining business locations” and “an order of civil authority under a first-party insurance policy limiting, prohibiting or restricting access to non-life-sustaining business locations.” The proposed legislation also provides that the “loss of market” exclusion and “similar exclusions” are deemed to not apply to claims for coronavirus-related business income claims.
However, the biggest difference between SB 1127 and other proposed Pennsylvania legislation is the inclusion of a “savings clause” which states that the rules of interpretation in the legislation may be superseded by the mutual intent of the parties as clearly and expressly communicated to each other. In other words, the legislation acknowledges that insurers may still deny claims if based on unambiguous clearly worded policy language such as an exclusion for loss due to virus or bacteria.
By concentrating the legislation on the creation of rules of interpretation applicable to first-party insurance policy provisions, it appears the bill was carefully drafted for the purpose of withstanding the certain challenge to its constitutionality under the Contracts Clause. Further proof of this motive can be found in the fact that the bill provides the Pennsylvania Supreme Court exclusive jurisdiction to hear any challenges to its validity.
The Contracts Clauses of the United States and Pennsylvania Constitutions protect contracts freely arrived at by the parties to them from subsequent legislative impairment or abridgment. At the same time, not all laws affecting pre-existing contracts violate the contracts clause. The contracts clause does not prohibit a state from exercising its police power, even if contractual relationships are altered.
To determine when such a law crosses the constitutional line, the threshold issue is whether the state law has “operated as a substantial impairment of a contractual relationship.” In answering that question, courts have considered the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights.
Proponents of the proposed Pennsylvania legislation will argue that SB 1127 does not “impair” a preexisting insurance policy based on the inclusion of the “savings clause.” By including a “savings clause”, if any provision of the proposed bill modifies a right or duty to a preexisting policy, the terms of the policy control. The policy interpretations in the proposed legislation only apply if the preexisting policy is silent or ambiguous on matters addressed in the legislation and there is no other evidence that the contracting parties had intended a different result. Therefore, proponents of the legislation will insist that, by its terms, SB 1127 is only capable of clarifying the terms of an existing contract, and cannot impair the underlying obligations of that contract, thus passing constitutional muster.
While inclusion of the “savings clause” may place the proposed legislation in a better position to withstand constitutional scrutiny, it will do little to eliminate coverage disputes and fast track payments related to COVID-19 losses like other proposed legislation. Rather, it would make the focus of the dispute whether the policy language relied upon to deny a claim constitutes a clear and express communication of mutual intent between policyholder and insurer. It has generally been understood by the industry that a standard commercial property policy does not provide coverage for business interruption resulting from a pandemic. The insurance industry has developed products specifically intended to cover business losses arising from pandemics. Therefore, even if the proposed legislation is enacted, policyholders will likely still need to seek court intervention for coverage determinations thus protracting payment of claims.
It remains to be seen whether this bill or any of the prior bills will become law.
Beaver County Building and Loan Ass'n v. Winowich, 323 Pa. 483, 492-94, 187 A. 481, 485-86 (1936).
See El Paso v. Simmons, 379 U.S. 497, 506-507, 85 S. Ct. 577, 13 L. Ed. 2d 446 (1965).
Allied Structural Steel Co., 438 U.S., at 244, 98 S. Ct. 2716, 57 L. Ed .2d 727.
See “FAQ: COVID-19 Business Interruption Insurance,” Pennsylvania Department of Insurance website, available at https://www.insurance.pa.gov/coronavirus/Pages/COVID-Business-Insurance.aspx (“Business interruption insurance does not usually cover communicable diseases, such as COVID-19. This insurance coverage replaces lost income if a business is closed for a reason related to property damage to the location, like a fire," and generally, business interruption insurance "was not designed or priced to cover communicable diseases, such as COVID-19.")