By Brian Casey and Zachary Lerner

Law360 (March 30, 2020, 3:11 PM EDT )

Brian Casey

Zachary Lerner

Now that COVID-19 has been declared a pandemic as of March 10, state insurance departments are reacting quickly to address this serious public health emergency. This outbreak affects almost every type of insurance company (as well as their retail, wholesale and managing general agents and reinsurers) and line of insurance business, both personal and commercial.

This article examines what exactly are the powers of state insurance regulators to address a crisis such as the current COVID-19 situation and what they are doing about it, but a deep dive into the constitutional police powers reserved to the states and the gloss of the McCarran-Ferguson Act, which leaves the regulation of the business of insurance to the states, is beyond the scope of this article.

When disasters occur or other emergencies affecting the public at large emerge, historically such as the occurrence of natural catastrophes like earthquakes, floods, hurricanes and tornadoes, state insurance regulators sometimes take actions to protect their insured constituents. The extent of an insurance regulator's emergency powers is not the same in each jurisdiction and can derive from a state governor's executive policy powers or general police powers statutes or specific police powers statutes found in state insurance codes.

In the case of a public health emergency like the one we are now experiencing, these state powers could not be more important. Where a state insurance regulator does not have a solid basis for requiring insurance companies subject to the regulator's jurisdiction to take action or refraining from taking action, usually an insurance department will simply request or strongly suggest such action or nonaction, or ask for leniency from insurers for the protection of insureds, and seek cooperation from insurers or issue bulletins reminding insurers of their existing regulatory compliance duties and contractual obligations to insureds.

In some cases, these bulletins reflect new interpretations of applicable insurance laws or regulations or provisions of insurance policy or endorsement forms aimed at relieving adverse insurance coverage circumstances of insureds. If all else fails, an insurance commissioner can in many cases resort to issuing new administrative regulations on an expedited or emergency basis or simply suspend enforcement of insurance laws and regulations if the suspension achieves the goal of protecting insureds during a crisis.

The COVID-19 public health threat is certainly one of the major tests of state insurance regulator's emergency powers, quite possibly the first to be used in response to a U.S. pandemic, the harm of which, unlike natural catastrophes, is not limited to only a few contiguous states.

State insurance regulators are now wrestling with issues such as exclusion from coverage under business interruption and travel insurance policies for viruses, extension of insurance coverage while some insureds face severe financial distress inhibiting their ability to make timely premium payments and, as a result, receiving notices of cancellation of insurance policies and their ability to bear the cost of insurance deductibles, to name a few.

However, surplus lines insurers are largely exempt from these regulatory pronouncements because surplus lines insurance policies are generally exempt from policy form and rate filing and approval requirements, except that some states impose their notice of insurance cancellation and non-renewal statutes on surplus lines insurers. In addition, the COVID-19 reality is significantly impacting the operations of state insurance departments just like any other state government agency and private businesses.

Some state insurance codes have express legislative authorization for an insurance commissioner to exercise emergency powers for protecting the public. As an example, on March 5, the Washington insurance commissioner issued Emergency Order No. 20-01, which piggybacked on the Washington governor's Proclamation No. 20-05 issued in response to the coronavirus 2019 outbreak in that state.

This emergency order requires health insurance companies operating in that state to (1) cover health care provider costs for COVID-19 testing without applying an insurance policy deductible or imposing any cost-sharing obligation on insureds, (2) allow enrolled insureds a one-time prescription drug refill before expiration of applicable waiting periods between refills so they can maintain an adequate supply of prescribed medications and (3) suspend any prior authorization normally necessary for covered diagnostic testing and treatment for COVID-19.

The Washington insurance commissioner's authority for this action is codified in Revised Code of Washington Section 48.02.060(5), which expressly empowers him to issue an order to address "medical coverage to ensure access to care" in response to gubernatorial state of emergency proclamation.

While not part of Emergency Order No. 20-01, grace periods for insurance premium payments can be established by these emergency powers. Emergency orders, like Emergency Order No. 20-01, may remain effective for 60 days but can be extended for another thirty days and becomes no longer effective when the underlying state of emergency terminates by another proclamation by the governor.

On March 18, the Alaska insurance director issued Bulletin B 20-08, prohibiting insurance companies from canceling their insurance policies based on nonpayment of premiums and asks insurers to waive all fees imposed on late payments of premiums until June 1. This bulletin relies on the following provision of Section 21.06.060 of the Alaska Insurance Code:

(d) If the director determines that a catastrophe has occurred in this state and in good faith believes that the governor or the President of the United States has issued or is about to issue a declaration of disaster, the director may take the action that the director considers necessary to assure that a contract of insurance already issued will be honored under the terms of the contract. Actions that the director may take include emergency orders permitting the immediate licensing of adjusters to facilitate handling of claims, permitting a licensee to open or close an office, permitting a licensee to move or remove a record as required by the existence of the catastrophe, or permitting the issuance by an insurer of checks or drafts drawn on an out-of-state bank in payment of a claim. Until a declaration of the disaster has been lifted, the director may take action to respond to a disaster without a hearing. An action taken under this subsection may not remain in effect more than six months from the date that the director determines that a catastrophe has occurred unless, after a hearing, the director determines that the action is still necessary to respond to the disaster.   

The Georgia and West Virginia insurance commissioners have issued similar bulletins (Georgia Directive 20-EX-05, Match 20) and (West Virginia Emergency Order 20-EO-02, March 18).

The Maryland Insurance Code authorizes the Maryland insurance commissioner to issue emergency regulations when the state's gGovernor has declared a state of emergency or the president has issued a major disaster or emergency declaration for the state or an area within the state under the federal Stafford Act.[1]

These regulations may address (1) submission of claims or proof of loss; (2) grace periods for payment of premiums and performance of other duties by insureds; (3) temporary postponement of cancellations, nonrenewals, premium increases or policy modifications; (4) procedures for obtaining nonelective health care services; (5) time restrictions for filling or refilling prescription drugs; (6) time frames applicable actions by the commissioner  and (7) any other activity necessary to protect the residents of the state.[2]

In response the COVID-19 outbreak, many other state insurance departments have issued (and if not yet, soon should be issuing) bulletins and circular letters to insurers. In many cases, these bulletins and circular letters supplement declarations of public health emergencies by the states' executive branches.

While many of these bulletins and circular letters, as they relate to the insurance industry, request cooperation and clarification of insurance policy terms, some portions of these bulletins and circular letters (such as bulletins issued in California, Florida, Georgia, Maine and North Dakota) follow in Washington's footsteps and affirmatively instruct the industry to engage (or refrain from engaging) in certain activities. Below is a sampling of these bulletins and circular letters so far:

State Insurance Department Bulletins

California Bulletin 2020-2 (March 5)

• All insurers providing commercial health insurance directed to reduce co-sharing to zero for all medically necessary screening and testing for COVID-19.

• Insurers must notify contracted providers and call center staff of waiver of cost-sharing and prominently display on insurer's website a statement that it is waiving cost-sharing for COVID-19 screening and testing.

Florida (Informational Memorandum OIR-20-03M, March 16)

• All entities regulated by the Florida Office of Insurance Regulation must notify the OIR on the same day that they (1) activate their business continuity and/or continuity of operations plans or (2) determine that business operations are compromised to the extent that it jeopardizes the ability to provide essential services to policyholders.

Illinois (Company Bulletin 2020-2, March 2)

• Reminders for no imposition of greater cost sharing on insureds for care received from specialists at in-network hospitals even if specialists rendering care are not participating providers and emergency services must be covered at in-network level regardless of which provider renders service;

• Encourages health insurers to consider all feasible and prudent options to reduce barriers of cost-sharing for testing and treatment of COVID-19;

• Encourages health insurers to cover enrollees for prescription drug refills to enable them to maintain a 30-day supply at home even if scheduled refill dates have not yet matured; and

• Reminder that if a travel insurance policy does not have an applicable coverage exclusion for COVID-19, then presumptively covers COVID-19 related claims.

Maine (Bulletin 442, March 12)

• Urges carriers continually to assess their readiness and be prepared to make any necessary adjustments to their operations, prioritize consumers' needs and make every effort to expedite claims approvals and payments and other essential customer service functions;

• Instructs insurers to must make all reasonable accommodations for late payments and other problems that are beyond the consumer's control; and

• Notes that travel insurance has particular importance, and travel insurers reminds that travel insurance policies must provide full coverage for all covered risks arising out of COVID-19 exposure and infection, subject only to such lawful exclusions as are clearly stated in the policy.

New York (Insurance Circular Letter No. 4, March 6)

• The circular letter expands ability for insurance companies to offer cancel-for-any-reason, or CFAR, benefits in the state.

• Back in 2010, under OGC Opinion No. 10-02-06, the New York State Department of Financial Services found that CFAR coverage "is not incidental [to an insurance product]. Rather, it stands in place of trip cancellation/interruption insurance because it covers cancellation for any reason at all" and accordingly could not be written by insurance companies.

• The circular letter now considers CFAR products as incidental to providing insurance and allows insurance companies to offer such products in light of the COVID-19 pandemic, but the insurance company must "make CFAR benefits generally available to consumers, without requiring the purchase of a standard insurance policy from the insurer" and, if CFAR coverage is offered in conjunction with a standard travel insurance policy, "CFAR benefits must be reflected in a standalone contract that is separate from the insurance policy."

New York (Circular Letter No. 5, March 12)

• Requests that authorized property and casualty insurers submit to the New York Department of Financial Services information regarding business interruption coverage written in the state by March 18.

New York (DFS Sec. 308 Letter, March 12)

• Requests that authorized property and casualty insurers writing commercial property insurance provide information to both the New York Department of Financial Services and their policyholders information regarding volume of business interruption coverage, civil authority coverage, contingent business interruption coverage, and supply chain coverage, as well as an explanation of the coverage that each issued policy offers in regard to COVID-19; and

• "Commercial property insurance" includes business owner policies, commercial multiple peril policies, specialized multiple peril policies and substantially similar kinds of insurance.

North Dakota (Bulletin 2020-1, March 11)

• Health and travel insurers asked to identify and remove barriers to testing and treatment of COVID-19;

• Health carriers asked to waive cost-charging, including co-pays, deductibles and coinsurance for Centers for Disease Control and Prevention-recommended testing of COVID-19; 

• If in-network providers cannot meet particular needs of an insured, carriers must make exceptions to provide-out of-network benefits at the in-network cost-sharing levels;

• All preauthorization requirements must be waived in connection with COVID-19 testing and treatment and immunizations must be provided at no cost; and

• Unless a travel policy specifically excludes COVID-19, any sickness, accident or death coverage contained therein must provide coverage to COVID-19 contingencies.

Conclusion 

State legislatures may also act to address insurance coverage issues in the context of COVID-19. New Jersey has already proposed legislation that would mandate coverage for virus related losses under business interruption insurance policies, notwithstanding a long-standing approved virus exclusion in a commonly used insurance policy forms filed by various rating organizations with state insurance departments.

New Jersey Bill A-3844 would require business interruption coverage for COVID-19 triggered losses, even for insurance policies that contain the previously approved virus exclusion, but only for insurance policies in-force as of March 9, issued to small businesses with less than 100 full-time employees. However, this proposed bill, as currently drafted, may suffer from a constitutional impairment of contracts infirmity and appears to have become stalled.   

As it becomes increasingly apparent that the COVID-19 outbreak will fundamentally impact the health concerns of U.S. resident individuals and the business practices of companies and their insurance carriers, we expect to see substantial and, at times, painful compromises.

Individuals are encouraged (and increasingly required) to limit their COVID-19 exposures to others; companies will be forced to make difficult business choices in light of mandated restrictions and operational closings, and insurance carriers will increasingly see their insurance policies called upon to augmented the alleviation of the national burden.

We expect insurance regulators to continue remaining extremely active by promulgating guidance and providing oversight as we, as a nation, ride the COVID-19 pandemic wave through its soon expected peak and, eventually, to calmer waters ahead.

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Brian Casey is a partner at Locke Lord LLP and co-chair of the firm's regulatory and transactions insurance practice group.

Zachary Lerner is a partner at Locke Lord.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Annotated Code of Maryland, Insurance Section 2-115.

[2]  Id.

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