Proposed New Requirements for Insurers Could Result in Constitutional Challenges

COVID-19 Update

While some congressional voices are raising a clamor for new immunities from COVID-19 liability, state legislators and regulators across the nation are pushing hard in the opposite direction, and continue to assess more liability and shift more economic responsibility to insurers since the outbreak of COVID-19. For every motorist, small or large business owner, and essential worker on the front lines of the pandemic, there seems to be an insurance policy provision currently under review by a state executive, legislator or regulator. Many policymakers across the country have announced they are considering new legislative mandates or have already issued regulatory orders to insurance companies in response to COVID-19-related situations. Some of those requirements will likely raise strong legal challenges on constitutional and other issues.

In auto insurance, for example, the California Department of Insurance (CDI) ordered property casualty insurers to refund insurance premiums to consumers and businesses for at least the months of March and April because state and local stay-at-home restrictions have greatly reduced overall miles driven and vehicle-involved accidents. The CDI directive is the first such order in the nation, and could likely be followed with similar orders in other jurisdictions. However, the order is susceptible to a legal challenge as the order is silent on regulatory authority.

For commercial insurance policies, a consequential issue that has gained much traction nationwide is business interruption or civil authority coverage. Both are additional coverages for loss of income and can reimburse operating expenses for businesses after a covered event. A typical policy provision requires demonstration of physical damage to the policyholder’s business property (e.g., fire damage) and generally excludes losses resulting from communicable diseases or any viruses such as COVID-19.

In today’s COVID-19 policymaking environment, many discussions are focused on efforts to retroactively require insurers to cover COVID-19 business interruption claims even if they were not included in the policy, as proposed in New Jersey (A-3844):

Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic. [Emphasis added.]

Other states have either followed the New Jersey approach or are considering something similar: Massachusetts S2888, Ohio HB 589, Louisiana SB 477, New York A10226, Pennsylvania HB 2372.

If such laws are enacted, they are likely to be challenged on constitutional grounds. In particular, the U.S. Constitution’s Contract Clause prohibits states from passing laws that impair the obligations of contracts (Article I, Section 10, Clause 1), and the proposed laws mentioned above appear to do just that by requiring current business interruption policies to cover COVID-19 losses notwithstanding existing contract exclusions for communicable diseases such as COVID-19.

In the area of workers’ compensation insurance, policymakers continue to discuss what rules should govern provision of workers’ compensation benefits to essential workers who contract COVID-19. Under a workers’ compensation system, an employee’s injury or illness is presumed work-related based on some factual medical evidence. The presumption arises from an assumption that the injury is of a type that was caused in the workplace. In some jurisdictions, the presumption does not normally attach to “ordinary diseases of life.” See 4 Larson’s Workers’ Compensation Law, Section 52.03 D. Insurers and employers are then given the opportunity to rebut a determination that the employee’s injury or illness is work-related. One of the core issues today is how insurers and employers can rebut a presumption that an essential worker’s COVID-19 injury or illness occurred at work.

The Illinois Workers’ Compensation Commission (Commission) recently issued emergency regulations directing that any essential worker who becomes ill with COVID-19 (e.g., firefighters, healthcare providers, law enforcement and others as defined by the state) is rebuttably presumed to have contracted the disease at work and therefore eligible for benefits under workers’ compensation. Because a communicable disease such as COVID-19 can easily result from infection other than in the workplace, insurers are concerned that such a presumption would effectively be conclusive because it would be very difficult to rebut or overcome, and to cover such unanticipated claims could add many billions of dollars in costs to the system for which premiums have never been projected or paid.

On April 22, 2020, the Illinois Manufacturer’s Association and Illinois Retail Merchants Association filed a lawsuit to challenge the Commission’s rulemaking authority in issuing the emergency regulation. On April 24, 2020, Sangamon County Circuit Judge John M. Madonia issued a temporary restraining order against the Commission, halting its emergency regulations, which the Commission subsequently withdrew on April 27, 2020.

In California, broader workers’ compensation policy discussions are also taking place. At one point, Governor Newsom considered requiring that all COVID-19-related injury or illness would carry a conclusive presumption of work causation for all essential employees. A conclusive presumption effectively eliminates altogether the ability of insurers and self-insured employers to rebut any COVID-19 injury or illness.

In terms of costs associated with a conclusive presumption approach, the California Workers’ Compensation Insurance Rating Bureau (WCIRB) provided the following estimate:

On this basis, the WCIRB estimates that the annual cost of COVID-19 claims on ECI workers under a conclusive presumption ranges from $2.2 billion to $33.6 billion with an approximate mid-range estimate of $11.2 billion, or 61% of the annual estimated cost of the total workers’ compensation system prior to the impact of the pandemic.

This week, Governor Newsom instead issued Executive Order N-62-20 (Order), which takes a rebuttable presumption approach, and not the previously considered conclusive presumption standard. In particular, the Order requires that “any COVID-19-related illness of an employee shall be presumed to arise out of and in the course of the employment for purposes of awarding workers’ compensation benefits….” For an employee to satisfy the presumption, the employee must have performed work at the employee’s place of employment (not the employee’s home) and either tested positive or was diagnosed with COVID-19 within 14 days after March 19, 2020 (the day Governor Newsom issued the order to stay home).

Insurers and self-insureds (including the State of California) may rebut the presumption with other evidence, but absent such evidence, the Workers’ Compensation Appeals Board must uphold the presumption. The presumption stays in effect for 60 days from May 6, 2020. For a complete copy of the Order, click on this link.

Governor Newsom’s Order is based on the California Emergency Services Act (Government Code Sections 8567, 8571, and 8627), which gives the executive branch broad powers in issuing executive orders during a state of emergency. However, those who disagree with the Governor are likely to argue that the Order constitutes an unlawful regulatory overreach because California’s Constitution gives the state legislature—not the executive branch—plenary powers in the creation and enforcement of the workers’ compensation system (Article XIV, Section 4). Also, similar to business interruption issues, opponents may argue that such a proposal would likely run afoul of the U.S. Constitution’s Contract Clause because it could impair existing workers’ compensation contracts by retroactively modifying them with the establishment of a COVID-19 rebuttable presumption of workplace causation.

Policymaker decisions in light of the current pandemic may well be firmly rooted in good intent and compelled by the need to respond to COVID-19 with good public policy, but as these measures move forward and grow more expansive, they are likely to encounter growing public controversy and draw litigation.

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