Proposed COVID-19 legislation in New Jersey
The COVID-19 global pandemic and the resulting efforts to contain it are events of unprecedented scale. New Jersey is among the states seeing the most comprehensive containment measures, including the shuttering of many non-essential businesses or modifying their operations in a manner that impacts their income stream. For instance, as of March 16, 2020, bars and restaurants can no longer offer “dine in” options and can now only operate by takeout or delivery.
In response, the New Jersey legislature is looking to shift some of the impact to insurers through proposed legislation which will retroactively change policies of insurance to eliminate “virus” exclusions applicable to business interruption coverage. The exclusions sought to be eliminated are the same ones that have previously been approved by the Department of Banking and Insurance. New Jersey’s proposed law may be well-intentioned, but its methodology and attempts to impose a financial burden on insurers, instead of providing small business relief via government subsidies or other forms of government financial assistance, presents issues of constitutionality.
New Jersey Bill A3844 if enacted, would force insurers of certain businesses to provide business interruption coverage for COVID-19 losses, even if the policies have regulator-approved "virus" exclusion language. The text of the draft bill provides that “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 . . . concerning the coronavirus disease 2019 pandemic.” The bill’s effect would be limited to employers with less than 100 employees. An insurer who pays otherwise excluded business interruption benefits under the proposed law could file a claim for reimbursement with the Commissioner of Banking and Insurance. That claim would be paid out of a new "additional special purpose apportionment" to be imposed on and collected from other carriers insuring risks in New Jersey. The net effect is, thus, that business interruption loses that would be excluded but for the proposed legislation would be borne by all insurers in the state. Ultimately, the bill would shift a substantial cost burden associated with the current coronavirus response to insurers.
The bill made it out of committee on March 16, 2020, and was sent to the floor for discussion, voting, and possible amendment. In committee, the bill received some opposition from lobbying and industry groups. New Jersey Property & Casualty Insurers’ Association, New Jersey Business & Industry Association, and New Jersey Insurers’ Counsel Association all submitted written testimony in opposition to the bill when it was before the committee. The bill was not enacted as one of the 29 bills passed in an emergency session held by the legislature later in the afternoon on March 16. Instead, the bill was listed for vote as part of this emergency session, but was ultimately held for further discussion without a vote conducted. Some members of the legislature were opposed to the bill, with one assemblyman in particular commenting that bill could lead to higher premiums if enacted, and that providing subsidies would be a more rational approach to the issue.
From a legal standpoint, this proposed legislation presents novel constitutional issues given the fact that the bill, in its current state, would apply retroactively to affect policies which have already been written and issued. We have identified two provisions of the United States Constitution that are particularly relevant to the evaluation of New Jersey Bill A3844.
1) Contracts Clause
Article I of the Constitution provides that “No State shall ... pass any ... Law impairing the Obligation of Contracts.” By its plain terms, the Contract Clause would prohibit the proposed legislation. As drafted, the bill could impair insurer obligations under contracts (policies of insurance). That said, the United States Supreme Court has created a three part balancing test which provides for some gray area when analyzing whether legislation violates the Contract Clause.
“The threshold inquiry is whether the state law has, in fact, operated as a substantial impairment of a contractual relationship. The severity of the impairment is said to increase the level of scrutiny to which the legislation will be subjected.” Energy Reserves Grp., Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983). “If the state regulation constitutes a substantial impairment, the State, in justification, must have a significant and legitimate public purpose behind the regulation, such as the remedying of a broad and general social or economic problem.” Further, “once a legitimate public purpose has been identified, the next inquiry is whether the adjustment of the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation's] adoption.”
In Harleysville Mut. Ins. Co. v. State, 401 S.C. 15, 28-29 (2012), the South Carolina Supreme Court considered the constitutionality of a South Carolina statute which changed the definition of “occurrence” in CGL policies as it applied to insured entities in the construction industry. Similar to the proposed New Jersey statute, the South Carolina statute at issue in Harleysville would have applied “retroactively” and changed the definition of “occurrence” as it appeared in policies which had already been written and issued. The South Carolina Supreme Court held that because the South Carolina statute at issue “substantially impair[ed] [the insurer’s] contractual rights,” and was not issued “in order to address a pressing emergency [,]” the retroactivity provision of the statute was “neither necessary nor reasonable, and therefore, [it was] unconstitutional.” The South Carolina Supreme Court did note that the statute could be applied prospectively, but held that it would be unconstitutional under the Contract Clause to change the terms of policies which had already been written and issued.
The obvious factor distinguishing Harleysville from the present situation is that the South Carolina Supreme Court stated the legislation was not issued “in order to address a pressing emergency.” The efforts to curtail the spread of the coronavirus are likely be considered a pressing emergency and it is unclear if the proposed law would be deemed constitutional given the unprecedented nature of the coronavirus pandemic. The determination of this issue may turn on the third prong of a Contract Clause analysis; “whether the adjustment of the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation's] adoption.” Kansas Power & Light Co., 459 U.S. 400, 412. Arguably, the reasonableness of measures being undertakes to contain virus spread and the resulting impact to business owners (and ultimately insurers under the proposed legislation) cannot be fully evaluated until the pandemic subsides. In any event, Harleysville provides recent precedent supporting the possible use of the Contract Clause to invalidate legislation which retroactively, changes insurance policy terms and conditions.
2) Due Process
The Fifth and Fourteenth Amendments to the United States Constitution prohibit the taking of “life, liberty or property, without due process of law.” An argument could be made that the retroactive effect of the proposed New Jersey bill constitutes an unconstitutional deprivation of insurers’ property without due process of law.
In Gen. Motors Corp. v. Romein, 503 U.S. 181, 191 (1992), the United States Supreme Court evaluated the constitutionality of a Michigan statute which required employers to retroactively repay workers’ compensation benefits which the employers had withheld for the previous six years. General Motors challenged the retroactive nature of the statute. The Supreme Court ultimately held that the statute was constitutional, because employers who had withheld benefits knew it was a risky decision based on unsettled legal grounds. However, in so holding, the Supreme Court did note that “[r]etroactive legislation presents problems of unfairness that are more serious than those posed by prospective legislation, because it can deprive citizens of legitimate expectations and upset settled transactions. For this reason, the retroactive aspects of economic legislation, as well as the prospective aspects, must meet the test of due process: a legitimate legislative purpose furthered by rational means.”
Applying this Due Process test to the proposed New Jersey law, there is a an argument to be made that the hastily prepared legislation does not utilize “rational means.” Helping businesses interrupted by the coronavirus may be a “legitimate legislative purpose,” but forcing insurers to bear the financial burden when there is no contractual obligation to do so is not a rational method of assisting small businesses.
It is not certain that New Jersey Bill A3844 will be passed into law, but if it is, several grounds exist to challenge the law’s constitutionality. The bill, in its current form, could violate the Contract Clause and the due process provisions of the Fifth and Fourteenth Amendment. It is important to continue to monitor the progress of, and potential changes to, this proposed legislation that is likely to dramatically impact insurers in the aftermath of the coronavirus containment efforts.