Comment Letter on Business Interruption Legislation

SUMMARY

The Insurance Law Committee submitted comments on legislation relating to business interruption insurance, which passed both houses of the Legislature and is pending Governor Hochul’s action. The Bill “would allow insurers to sell business interruption insurance that is not tied to physical damage, which businesses could purchase in the event of future pandemics or other events where there may not be physical damage to the property, such as an active shooter threat.” The Committee supports adding business interruption insurance as a stand-alone kind of insurance.  However, the Committee writes to raise a concern with the Bill’s definition of business interruption insurance that appears to be inconsistent with the Memorandum of Support and that could lead to confusion or unintended loss of coverage. Specifically, the Bill defines business interruption insurance as insurance against certain kinds of loss “resulting from a business closure,” whereas the Memorandum in Support describes it as coverage for losses resulting from a “closure or a reduction in business.” The Committee believes that if the elimination of “a reduction” in business was unintentional, then the wording of the Bill should be amended as soon as practicable; and if it was intentional, it would be helpful to the insurance community and its customers to understand the reasoning behind this narrowing of the customary definition of business interruption insurance.

BILL INFORMATION

A.10342 (AM Burgos) / S.9481 (Sen. Mayer) – Authorizes stand-alone business interruption insurance (NYS 2023-24).

REPORT

REPORT ON LEGISLATION BY THE INSURANCE LAW COMMITTEE

A.10342 (AM Burgos)
S.9481 (Sen. Mayer)

AN ACT to amend the insurance law, in relation to authorizing stand-alone business interruption insurance

THIS BILL IS SUPPORTED IF AMENDED

The Insurance Law Committee of the New York City Bar Association (the “Committee”) welcomes this opportunity to comment on Department Bill #110 of the Department of Financial Services relating to business interruption insurance, which recently passed both houses of the Legislature as Assembly Bill A.10342 (AM Burgos) and Senate Bill S.9481 (Sen. Mayer) (the “Bill”) and is pending Governor Hochul’s action.

The Bill “amend[s] Insurance Law § 1113(a) to add business interruption insurance as an authorized kind of insurance that does not need to be tied to physical damage and would amend Insurance Law § 2105 to permit this insurance to be written in the excess line market if it is unavailable from authorized insurers.  As a result, the bill would allow insurers to sell business interruption insurance that is not tied to physical damage, which businesses could purchase in the event of future pandemics or other events where there may not be physical damage to the property, such as an active shooter threat.”[1]

The Committee supports adding business interruption insurance as a stand-alone kind of insurance.  However, we write to raise a concern with the Bill’s definition of business interruption insurance that appears to be inconsistent with the Memorandum of Support and that could lead to confusion or unintended loss of coverage.

Under the Bill as passed by the Legislature, “Business interruption insurance” is defined as follows (emphasis added):

“(34) “Business interruption insurance” means insurance against loss of use and occupancy, rents, and profits resulting from a business closure due to: (A) loss of or damage to insured or neighboring property; (B) an act or threatened act of violence while the perpetrator is on the business premises; or (C) a government order.”

However, the Justification paragraph of the Memorandum in Support describes business interruption coverage, correctly we believe, as follows (emphasis added):

“Currently, business interruption insurance typically covers loss of net profits when a covered peril, such as a fire, causes “direct physical loss of or damage to” insured property resulting in a closure or a reduction in business.”

There is no statement in the record explaining whether the elimination of “reduction in business” was intentional or not, and if intentional, what the reasoning was for narrowing coverage from the industry norm.  The Committee is concerned that requiring closure of a business could result in a significant reduction of coverage for entities that are capable of continuing a business at a reduced capacity even in the event of a major loss.  Further, insureds have the obligation to mitigate losses and the Committee is concerned that, absent the reduction of business language, an insured fulfilling its duty to mitigate by opening at reduced capacity could be faced with a total loss of coverage that would only remain available if the insured’s business was “closed.”

The Committee believes that if the elimination of “a reduction” in business was unintentional, then the wording should be amended as soon as practicable, possibly through a chapter amendment. If it was intentional, we believe it would be helpful to the insurance community and its customers to understand the reasoning behind this narrowing of the customary definition of business interruption insurance.

Insurance Law Committee
Peter Bickford, Member

July 2024