California: Developments in COVID-19 Business Interruption Claims

As the shelter-in-place orders continue to impact businesses across California, California’s lawmakers are responding to the growing unrest voiced by the state’s business owners. 

Developments at the State Level 

Unlike legislatures in seven other states, there are no proposed bills in the state of California that would force insurers to retroactively cover the onslaught of COVID-19-related business interruption claims. Such an approach is arguably unconstitutional and would only heighten the country’s economic turmoil for years to come.

Rather, the California Department of Insurance (CDI) has taken practical measures to address consumer concerns by, for instance, extending claim-reporting deadlines and ordering the return of premiums for lines of insurance whose risk has significantly fallen due to shelter-in-place orders (e.g., auto, worker’s compensation, etc.).

On April 14, 2020, Insurance Commissioner Ricardo Lara issued a notice directly pertaining to business interruption insurance (the “Notice”) – the first such decree since the March 26, 2020 order directing insurers to submit business interruption insurance-related data to the CDI.

The April 14 Notice acknowledges the CDI’s receipt of complaints from various stakeholders “asserting that certain insurers, agents, brokers, and insurance company representatives are attempting to dissuade policyholders from filing a notice of claim under its Business Interruption insurance coverage, or refusing to open and investigate these claims upon receipt of a notice of claim.”

The Notice does not contain any new directives for the insurance industry but cites long-standing regulations insurers are required to follow in handling claims. The crux of the message from the CDI is straightforward – the pandemic has not changed insurers’ duties under the law, including the obligation to conduct a fair investigation of every claim submitted to them.

While the legislature and the CDI have not proposed drastic measures, some official direction should be expected given the CDI’s previous actions in the face of large-scale catastrophes. In the wake of the devastating wildfires and subsequent mudslides in the state, the CDI issued a notice in January of 2018 interpreting California law, stating “there is a substantial basis to indicate that the Thomas fire was the efficient proximate cause of the flooding, mudflow, debris flow, mudslide, landslide, and other similar events in Santa Barbara County following the Thomas fire.” This theory of causation would maximize coverage for property damage since wildfire is a commonly covered peril and earth movement is often excluded.

On April 17, 2020, Commissioner Lara hosted a “Small Business Tele-TownHall” to discuss insurance issues faced by California’s small businesses. The Commissioner was joined by a small panel of representatives from small business advocacy organizations.[1] Small business owners were invited to submit questions in advance of the townhall, which was attended by over 700 people.

During the townhall, the Commissioner re-emphasized the points made in his previous Notice regarding insurers’ obligations to fully investigate each claim, stating the CDI would be monitoring the issue, and he strongly suggested that any small business owner that has not formally submitted a business interruption claim to its insurer do so immediately. He also stated that the CDI was working hard to think creatively about broader solutions and noted that the solutions require participation from the regulated insurance market.

The Commissioner responded to some of the previously submitted questions. Some of these were general in nature.

One of the questions the Commissioner addressed was, ‘please explain why business interruption insurance does not cover COVID-19’. The Commissioner prefaced his response by stating that not all policies are the same, and one would need to look at the specific policy language and circumstances of the claim, but noted that many policies have exclusions for loss due to contamination by virus and similar perils, and many require direct physical damage to be the cause of the loss.

In response to questions about what policyholders should do if their business interruption claim was denied, the Commissioner stated they should file a request for assistance with the CDI; the CDI would then look at the facts of the claim and contact the insurance company if they determine there is an issue with the determination.

Notably, some of the questions were more pointed and sought information immediately germane to the insurance industry.

One such question, from a business owner who was told by its insurer that the loss is not covered because of the physical damage requirement, noted that the Napa County shelter-in-place order stated that COVID-19 was physical damage and asked, ‘why haven’t you as Commissioner declared that this virus causes physical damage?’.

The Commissioner, while acknowledging that the losses faced by business owners were real and alarming, responded judiciously by stating that ‘these are questions of contract that will ultimately be decided by our courts and judicial branches’ and they ‘necessarily require an investigation of the facts of each business’s loss and review of the specific contract.’

Another such question asked if California was going to do what New Jersey and other states are doing with regard to requiring retroactive coverage for business interruption claims. The Commissioner did not give a yes or no answer. Rather, he stated that the Department is monitoring what the other states are doing in the face of the crises and, if the Department identifies any ideas that will help California’s businesses, that are within the Department’s authority, the Department will act on them.

Other topics discussed at the townhall included: state and federal funding programs available for small businesses, travel insurance, and unemployment insurance.

Developments at the Federal Level

As noted in our prior blog post, California’s federal representatives are actively involved in the response to business interruption losses. For instance, Congresswoman Maxine Waters is leading the way on a potential Federal Pandemic Risk Reinsurance Program; the bill is currently in draft form but could be introduced in April 2020. The proposed program would operate much like TRIA but, unlike TRIA, insurer participation would be voluntary.

On April 14, 2020, Congressman Mike Thompson, representing California’s Fifth District (encompassing most of the state’s wine country), introduced HR 6494. The bill, referred to as the “Business interruption Insurance Coverage Act of 2020” aims to “make available insurance coverage for business interruption losses due to viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs, and for other purposes.”

Section 3 of the bill voids “any exclusion in a contract for business interruption insurance that is in force on the date of the enactment of this Act” to the extent that it excludes the business interruption losses resulting from:
  1. Any viral pandemic;
  2. Any forced closure of business, or mandatory evacuation, by law or order of any government or governmental officer or agency, including Federal, State, and local governments; or
  3. Any power shut-off conducted for public safety purposes.
The bill would also preemptively void any State’s approval of such exclusions.

Insurers could reinstate these preexisting exclusions only if:
  1. The insurer has received a written statement from the insured that affirmatively authorized such reinstatement; or
  2. If:
a. The insured fails to pay an increased premium charged by the insurer for providing such business interruption coverage; and
b. The insurer provided notice, at least 30 days before any such reinstatement of: 
i. The increased premium for such business interruption coverage; and
ii. The rights of the insured with respect to such coverage, including any date upon which the exclusion would be reinstated if no payment is received.
Most of the cosponsors of this bill are members of the California delegation: Grace Napolitano (D-CA), Jerry McNerney (D-CA), John Garamendi (D-CA), Gil Cisneros (D-CA), TJ Cox (D-CA), Alcee Hastings (D-FL), John Larson (D-CT), Mike Rogers (R-AL), and Darren Soto (D-FL).

Zelle will continue to closely follow these matters as they develop.

[1] Kevin Wynne, Public Information Officer, U.S. Small Business Administration; Isabel Guzman, Director of the Office of Small Business Advocate in Governor Newsom’s Office of Business and Economic Development; and Mark Herbert, Vice President, California, Small Business Majority.