By Procopio Senior Associate Alexandra “Sasha” Selfridge

California Assembly members James Ramos and Monique Limón have introduced a promising bill regarding business interruption insurance coverage for COVID-19-related losses in California. Legislation proposed in other states to date seeks to impose requirements that insurers pay such claims, regardless of the specific coverage provisions of the insurance policies, raising significant Constitutional concerns. In a notable departure, AB 1552 by Ramos and Limón seeks to shift the relevant burden of proof to the insurer, rather than the insured.

Every California business with a commercial insurance policy with coverage for business interruption in effect on or after March 4, 2020, will be impacted by this legislation, if it passes. This law would form the basis for reconsideration, if not immediate reversal, of the countless COVID-19-related insurance claim denials which have been issued to date. As such, it could serve its intended purpose of protecting the solvency of “businesses that were forced to close their doors or limit business due to the coronavirus disease 2019 (COVID-19) pandemic.”

Nearly all property insurance policies require direct, physical loss or damage to property to trigger coverage. In California, the policyholder bears the initial burden of proving that such loss has occurred, while it is the insurer’s burden to prove there is no coverage, such as by demonstrating an exclusion applies.

This proposed legislation shifts the burden to overcome this initial threshold. If passed, the code would impose a rebuttable 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.” The presumption would apply only to claims under those commercial insurance policies which provide coverage for business interruption, and would also apply to the related coverages for extra expense, civil authority, and ingress and egress.

As relevant to Constitutional considerations, this presumption would not affect the applicability of an express virus exclusion (if the subject policy contains such an exclusion). The proposed legislation clarifies, however, 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 exclusion policy language.”

AB 1552 seeks to add Chapter 12 (commencing with Section 10109) to Part 1 of Division 2 of the Insurance Code, as follows:

CHAPTER 12. Coverage for COVID-19

10109. (a) With respect to a policy of commercial insurance that provides coverage for business interruption, the following rebuttable presumptions affecting the burden of proof apply in a case in which the insured alleges that the business interruption was due to the coronavirus 2019 (COVID-19) pandemic and occurred during the period of the state of emergency declared by the Governor due to the COVID-19 pandemic:

(1) With respect to coverage for general business interruption and extra expenses, a rebuttable presumption applies 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 coverage for business interruption due to an order of civil authority, a rebuttable presumption applies 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) With respect to coverage for business interruption due to impairment of ingress and egress, a rebuttable presumption applies 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 egress to the insured’s property and resulted in the insured’s business interruption.

(b) For purposes of this section, “civil authority” includes any federal, state, or local government, or the governing body or duly constituted agencies of any federally recognized Indian tribe, and their instrumentalities, divisions, political subdivisions, enterprise boards, and business entities.

(c) This section does not affect the applicability of any policy provision, including any language addressing loss or damage caused by a virus. However, 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 exclusion policy language.

10109.1. The benefits of this chapter shall be retroactively applied to all commercial insurance policies that provide coverage for business interruption that were in full force and effect on and after March 4, 2020, the date the Governor declared a state of emergency related to the COVID-19 pandemic.

SEC. 2. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution and shall go into immediate effect. The facts constituting the necessity are:

In order to protect the solvency of businesses that were forced to close their doors or limit business due to the coronavirus disease 2019 (COVID-19) pandemic, it is necessary for this act to take effect immediately.

While bold, this proposed legislation is certainly not unprecedented. Governor Newsom issued an order establishing a rebuttable presumption that individuals who are infected with COVID-19 while working outside the home contracted it while working, and are therefore entitled to workers compensation coverage.

This proposed legislation has the real potential to assist businesses in California suffering economically, while their insurance claims are delayed or denied. In addition, this proposed legislation would provide clarity and guidance to the insurance industry, in the face of what some believe to be unsettled legal authority regarding insurance policy interpretation in these unique circumstances.

The bill is intended to apply retroactively to all commercial insurance policies that provide coverage for business interruption that were in full force and effect on and after March 4, 2020. This active bill is in the committee process, and it is one to watch for all policyholders facing COVID-19 related losses.