California Bill Would Create "Rebuttable Presumption" of Coverage Under First Party Policies for COVID-19 Losses

July 14, 2020

As has been well-documented, there have been a flurry of suits nationwide, approaching 600 at last count, by various businesses against their insurers seeking benefits under their property policies for COVID-19 business losses. There have also been efforts by state and federal legislators to essentially mandate such coverage through emergency statutes and bills. On July 2, 2020 the California Legislature took a dramatic step forward in that regard by way of a proposed amendment to Assembly Bill 1522 (the Bill.) In essence, the Bill (if passed) would create a "rebuttable presumption" in favor of coverage under first party policies for COVID-19 business losses, shifting the burden of proof to the insurers to establish facts defeating that presumption.

The Bill would add a new Chapter 12, entitled "Coverage for COVID-19," to the Insurance Code. According to the Legislative Counsel's Digest:

“This bill, with respect to a policy of commercial insurance that provides coverage for business interruption, would create specified rebuttable presumptions affecting the burden of proof in a case in which the insured alleges that the business interruption was due to the COVID-19 pandemic and occurred during the period of the state of emergency declared by the Governor due to the COVID-19 pandemic. Specifically, the bill would create certain rebuttable presumptions that COVID-19 was present on specified property and caused physical damage to that property which was the direct cause of the business interruption.”

Section 10109 of that new chapter would specifically provide:

1. That as to coverage for 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. That as to civil authority coverage, "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. That as to 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."
   
   
   The Bill would take effect immediately and apply retroactively to all policies that were in place on and after March 4, 2020. The Bill specifically provides that it does not affect the applicability of any policy provision, including any language addressing loss or damage caused by a virus. As such, it does not purport to apply to or invalidate the virus exclusion found in many policies. However, the Bill does state that COVID-19 shall not be construed to constitute a pollutant or contaminant with respect to any such exclusion (unless the word "virus" is specifically mentioned in the exclusion.)
   
   Under traditional coverage law analysis, the burden is on the insured to establish the existence of coverage. Where a business has not suffered a direct physical loss as a result of COVID-19, it would be very difficult for them to sustain that burden. This Bill would relieve them of that burden and place the onus on insurers to establish the lack of coverage. Given the wording of these presumptions, that may prove to be an onerous task given that these presumptions essentially establish the element of "direct physical loss" required to initially trigger coverage.
   
   David A. Sampson, president and CEO of the American Property Casualty Insurance Association, announced that the APCIA will be opposing the Bill, noting that the Bill would retroactively rewrite business interruption insurance contracts to cover losses for which insurers never collected premiums. Mr. Sampson said to expect challenges to the Bill "as an attempt to undermine contracts, or violate basic due process, government takings, and contracts clauses of the U.S Constitution, as well as the California State Constitution.”
   
   We will be monitoring the progress of the Bill and will report on any significant developments.
   
   If you have any questions regarding these issues or seek guidance with respect to COVID-19 related matters, feel free to contact me at bweiss@murchisonlaw.com. Our office remains fully operational to meet the needs of our clients during this unique time.