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By Giulia Schaub, Editor-in-Chief
Following mandates to cease regular business operations due to the COVID-19 pandemic, businesses across the nation have suffered significant financial loss to prevent the spread of the virus. As a result, many business owners are seeking to cover these losses through filing business interruption claims with their various insurance companies. [1] While every policy is different – depending on the insurance company and the type of business – most policies include provisions that cover “direct physical loss[es] of or damage to the insured’s property” due to a disruption of the insured’s business due to an outside force. [2] As the number of claims increases, the issue then becomes what kind of loss falls under these policies; this debate has become heated quickly as insurers and their insured turned to the courts for some clarity. [3]
In April, a group of attorneys petitioned the Supreme Court of Pennsylvania in Tambellini v. Erie Insurance to use its King’s Bench powers to resolve a dispute regarding what kind of coverage would be available to businesses during the mandated closures. [4] The Court’s King’s Bench Powers grants it plenary jurisdiction over any pending matter in any Pennsylvania court. [5] The Court may only exercise these powers when there is “immediate public importance pending” on an issue that requires swift and right justice to be done. [6] These attorneys emphasized the importance of this issue in their petition, stating that a ruling from Pennsylvania’s highest court would assist hundreds of business owners, insurance companies, and their counsel in navigating the lawsuits that lie ahead. [7] However, the Court denied the opportunity to use its plenary jurisdiction to rule on this question, leaving those affected by the mandated closures left to fight it out in the lower courts. [8]
These lower courts are not completely without guidance in this realm. On July 7, 2020, a trial court in Lansing, Michigan became the first tribunal in the country to rule on business interruption coverage for COVID-19 losses, holding that, in order for insurers to be liable under such policies, a tangible altercation to the insured’s property was required. [9] “[I]t is clear from the policy coverage that only direct physical loss is covered,” stated Judge Joyce Draganchuk during the oral hearing held online. [10] “Under their common meanings and under federal case law … direct physical loss of or damage to the property has to be something with material existence, something that is tangible, … something that alters the physical integrity of the property. The Complaint here does not allege any physical loss of or damage to the property.” [11] Further, the Court clarified that, if the policy included a virus exclusion, coverage would be barred even if the insured showed that the mandated closures had resulted in tangible damage. [12] While other state courts are obviously not bound by this decision, attorneys preparing to litigate in this area anticipate a similar interpretation in the majority of other states. [13]
While the future does not look promising in securing business interruption coverage in the courts, Pennsylvania legislators are hoping to offer some kind of relief for business owners. House Bill 2372 seeks to override the common language of business interruption policies and requires COVID-19-related losses to be covered under any insurance policy that covers loss or property damage. [14] However, this coverage would be exclusively required for business with fewer than 100 employees. [15] Additionally, insurers would be able to apply for reimbursement or relief through the state’s commissioner. [16] The Senate’s approach is broader than the House’s and most proposed legislation in other states. [17] Senate Bill 1127 requires indemnification for coverage and redefines “property damage” to include: “(1) the presence of a person positively identified as having been infected with COVID-19; (2) the presence of at least one person positively identified as having been infected with COVID-19 in the same municipality where the property is located; or (3) the presence of COVID-19 having otherwise been detected in Pennsylvania.” [18]
However, such legislation provokes constitutionality concerns, particularly regarding retroactive applicability. The U.S. Constitution prevents states from passing laws that impair the “obligation of contracts.” [19] When grappling with retroactive legislation that may affect contractual obligations, the United States Supreme Court has applied a three-part test to determine whether the law in question violates this constitutional provision: “(1) whether the law has operated as a substantial impairment of a contractual relationship, (2) whether the government entity had a significant and legitimate purpose behind the regulation, and (3) whether the adjustment of the rights and responsibilities of contracting parties is based on reasonable conditions and is a sufficient justification for the legislation’s adoption.” [20] In utilizing these factors, circuit courts consider whether the retroactive legislation involves a heavily regulated industry. [21] Historically, courts have determined that if a party enters an industry that is regulated in a certain manner, then it is entering that industry subject to further legislation and changes in regulations that may affect contractual obligations are foreseeable. [22] Legal precedent shows that insurance is considered a “heavily regulated industry.” [23]
While the future of this area of litigation remains uncertain for the time being, some form of direction must come to fruition soon, as this issue while likely outlast the pandemic itself for years to come.
[1] https://www.natlawreview.com/article/first-covid-19-business-interruption-decision-sides-favor-insurers
[2] Id.
[3] Id.
[4] https://www.law.com/thelegalintelligencer/2020/05/15/pa-high-court-refuses-to-hear-covid-related-business-interruption-coverage-dispute/
[5] https://www.jdsupra.com/legalnews/king-s-bench-power-authority-sought-for-53012/
[6] In re Bruno, 101 A.3d 635, 640 (Pa. 2014).
[7] https://www.law.com/thelegalintelligencer/2020/05/15/pa-high-court-refuses-to-hear-covid-related-business-interruption-coverage-dispute/
[8] Id.
[9] https://www.insurancejournal.com/news/national/2020/07/07/574497.htm
[10] https://www.natlawreview.com/article/first-covid-19-business-interruption-decision-sides-favor-insurers
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] https://www.jdsupra.com/legalnews/proposed-legislation-for-losses-from-88695/
[15] Id.
[16] Id.
[17] https://www.jdsupra.com/legalnews/proposed-legislation-for-losses-from-88695/
[18] Id.
[19] USCS Const. Art. I, § 10, Cl 1.
[20] Energy Reserves Grp. v. Kan. Power & Light Co., 103 S. Ct. 697, 700 (1983).
[21] https://www.jdsupra.com/legalnews/proposed-legislation-for-losses-from-88695/.
[22] Id.
[23] See, e.g., Selective Ins. Co. of Am. v. Novitsky, 366 F. Supp. 3d 638 (M.D. Pa. 2019), Campanelli v. Allstate Life Ins. Co., 322 F.3d 1086 (9th Cir. 2003), Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 106 S. Ct. 1018 (1986).
