Senate Bill Report SB 5351

Summary

A Senate Bill Report on SB 5351, an act relating to business interruption insurance claims, prepared as of February 1, 2021 by staff of the Senate Committee on Business, Financial Services & Trade, with sponsors including Senators Frockt, Nobles and Cleveland. The background describes business interruption insurance, virus exclusion endorsements, and a March 2020 survey by the Office of the Insurance Commissioner that found more than 194,000 commercial policies with such coverage and premiums estimated at $437 million. It also summarizes two Washington superior court decisions on the meaning of loss of and damage to property. The bill would extend the minimum limit for a right of action against an insurer from one year to two years and construe coverage for direct physical loss of property as including loss of the ability to use it. The bill contains an emergency clause.

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                            SENATE BILL REPORT
                                  SB 5351

                                      As of February 1, 2021

Title: An act relating to business interruption insurance claims.

Brief Description: Concerning business interruption insurance claims.

Sponsors: Senators Frockt, Nobles, Cleveland, Das, Hasegawa, Keiser, Kuderer, Lovelett,
    Nguyen, Randall, Salomon and Wilson, C..

Brief History:
     Committee Activity: Business, Financial Services & Trade: 2/02/21.


                                     Brief Summary of Bill
           • Extends the minimum limit to a right of action against an insurer from
             one year to two years.
           • Establishes that every property insurance policy containing a grant of
             coverage for direct physical loss of or damage to property must be
             interpreted as deprivation and loss of the ability to use the property.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: Kellee Gunn (786-7429)

     Background: Business Interruption Insurance. When a business faces a slowdown or
     pause in business operations, the financial losses associated with the loss in net income may
     be managed with business interruption insurance. Business interruption insurance may also
     be known as a business income and extra expense (BIEE) policy.

     A typical BIEE form, provided by Insurance Services Offices, Inc., provides coverage for
     loss of income as well as additional expenses incurred to continue operations following a
     covered loss. This has been interpreted to mean that the business suspension must be




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

Senate Bill Report                              -1-                                             SB 5351
     caused by direct physical loss of or damage to property at its location. A BIEE policy form
     often comes with an endorsement establishing that the insurer will not pay for loss or
     damage caused by or resulting from any virus, bacterium or other microorganism that
     induces or is capable of inducing physical stress, illness, or disease.

     In March 2020, the Office of the Insurance Commissioner conducted an informal survey of
     commercial policies. The survey found more than 194,000 commercial policies had at least
     one type of business interruption or civil authority coverage in effect. The premiums for
     those surveyed policies were estimated at $437 million. Of those, most companies had the
     endorsement which prohibited coverage due to virus.

     Case Law. In Washington, the courts often decide whether an insurer has an obligation to
     its insured under the insurance contract. The insured then bears the burden of showing that
     coverage exists, and the insurer bears the burden of showing that an exception applies.

     Washington courts examine the terms of an insurance contract to determine whether, under
     the plain meaning of the contract, there is coverage. They tend to interpret insurance
     policies as a whole and read them in a manner which an average person purchasing
     insurance would understand them to mean. If terms are defined in a policy, they are
     interpreted in accordance with the definition in policy. Undefined terms, however, must be
     given their plain, ordinary, and popular meaning.

     A "direct physical loss" and "damage to" are often undefined terms in an insurance
     contract. A recent Spokane County Superior Court decision, Perry Street Brewing Co.,
     LLC v. Mut. of Enumclaw Ins. Co., and a recent King County Superior Court decision, Hill
     and Stout PLLC v. Mut. Of Enumclaw Ins. Co., both determined that "loss of" and "damage
     to" have distinct meanings from each other. The courts established that the insureds' lack of
     access to their property was a loss because the plain meaning of the word meant to deprive.
     In both instances, the insureds lost the ability to use their property for its intended purpose
     because its use was prohibited by gubernatorial proclamation due to the COVID-19
     outbreak. The insureds, in both cases, were seeking coverage on their business interruption
     insurance policies.

     Right of Action Under Insurance Contracts. Under current Washington State law, an
     insurance contract must provide an insured one year, at a minimum, to bring a right of
     action against an insurer.

     Summary of Bill: The minimum limit to a right of action against an insurer is extended
     from one year to two years, and every insurance policy containing a grant of coverage for
     direct physical loss of, or damage to, property shall be construed as deprivation and the loss
     of the ability to use the property.

     All causes of action are deemed to be prospective, except for those that occurred since
     February 29, 2020, when a state of emergency was issued because of the COVID-19


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     outbreak.

     Appropriation: None.

     Fiscal Note: Requested on January 27, 2021.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: The bill contains an emergency clause and takes effect immediately.




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