On July 2, 2020, California Assembly Bill 1552 was amended and referred to the California Senate Insurance Committee. The bill is intended to regulate commercial business interruption coverage of insured businesses in light of the ongoing COVID-19 pandemic. The bill is an “urgency statute necessary for the immediate preservation of the public peace, health, or safety . . . and shall go into immediate effect.” The immediacy of the bill is intended “to protect the solvency of businesses that were forced to close their doors or limit business” due to the pandemic. The bill, if passed, would apply retroactively to all commercial insurance policies providing coverage for business interruption that were in full force and effect on and after March 4, 2020 (the date of the declared state of emergency).
The bill, if passed, would create three rebuttable presumptions affecting the burden of proof in a first-party coverage case where the insured alleges that business interruption resulted from the COVID-19 pandemic and occurred during the California Governor’s state of emergency:
(1) With respect to general business interruption and extra expense coverage, there would be a rebuttal presumption that “COVID-19 was present on the insured’s property and caused physical damage to that property which was the direct cause of the business interruption.”
(2) With respect to civil authority related business interruption coverage, there would be a rebuttable presumption that “COVID-19 was present on property located within the geographical location covered by the order of civil authority and caused physical damage to that property which was the direct cause of the insured’s business interruption.”
(3) Finally, with respect to coverage for business interruption due to impairment of ingress or egress, there would be a rebuttal presumption that “COVID-19 was present on the property of a third party and caused physical damage to that property which was the direct cause that prevented the ingress and ingress to the insured’s property and resulted in the insured’s business interruption.”
It is important to note that these rebuttal presumptions do not affect the applicability of any policy provision. However, the bill does state that COVID-19 shall not be construed as a pollutant or contaminant for purposes of any exclusion within a commercial insurance policy, unless viruses are expressly included in that exclusionary language. Thus, a virus exclusion should still prelude coverage for a business interruption claim stemming from COVID-19.
Similar bills were introduced, but not passed, in other states including New Jersey, New York, Pennsylvania, South Carolina, Louisiana, and Ohio. Those bills were challenged as unconstitutional impairments to the right to contract. However, California’s bill is different, as it would introduce rebuttable presumptions in favor of coverage rather than seek to retroactively mandated coverage as proposed by the legislation introduced in other states. Nevertheless, theses rebuttable presumptions in favor of coverage are still likely to be challenged under the contracts clauses of the U.S. Constitution and the California State Constitution for a multitude of reasons including, impairing the right to contract, violating due process, and functioning as an unlawful government taking. We will continue to monitor the California bill and its corresponding constitutional challenges.