COVID-19 and Business Interruption Insurance: The Constitutionality of Legislatively Mandated Coverage

On March 6, 2020, the South Carolina Department of Health and Environmental Control (DHEC) announced it was investigating two potential cases of the novel coronavirus (COVID-19). Both individuals tested “presumptive positive,” giving South Carolina its first cases of COVID-19. Less than two weeks later, South Carolina experienced its first COVID-19 related death. Since then, South Carolina has had nearly 400,000 probable or confirmed COVID-19 cases and over 5,000 COVID-19 related deaths. In March of 2020, South Carolina Governor Henry McMaster responded to the pandemic’s increasing threat by signing numerous executive orders that closed public schools and restaurants and implemented various “stay-at-home” measures. Less than a month later, Governor McMaster tightened restrictions further, closing “nonessential” businesses and restricting travel only to work commutes and trips for “essential services.” Since May of 2020, Governor McMaster has steadily abrogated many of these restrictions and regulations, but the drastic effects of the stay-at-home orders and COVID-19 pandemic continue to harm South Carolina’s economy.

The pandemic’s economic losses have yet to be precisely calculated; however, there are some indications of the types of losses that South Carolina will face. For example, a release from April 2021 reported that the state revenue for March 2020 was down $273 million, or 47.1%, compared to March 2019. Another way to conceptualize these losses is by looking at South Carolina’s gross domestic product (GDP). In 2020, South Carolina’s current-dollar GDP (essentially GDP not accounting for inflation) fell from $247 billion in quarter one to $224 billion in quarter two, roughly a 9% decrease. According to the U.S. Bureau of Economic Analysis, this annualizes to a 32.6% reduction in GDP.

The financial toll on specific industries is also informative. For example, despite continued operations, golf courses in the Myrtle Beach area collectively lost nearly $21 million in the spring of 2020. This figure does not account for the peripheral losses that golf clubs experienced, like lost sales of merchandise and food. Restaurants have also been hit particularly hard because they were one of the first businesses Governor McMaster restricted. Even as restaurants reopen, many operate at limited capacity and are incurring additional costs for proper sanitization and disposable equipment. Some restauranteurs have estimated a 25%–50% reduction in normal business levels while spending tens of thousands of dollars above standard operating costs to comply with new safety standards. Clearly, South Carolina’s economic losses are substantial. Many business owners have looked to federal programs, like the Paycheck Protection Program, to recoup those losses, and others have looked to the federal government to supply stimulus funds, particularly through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

There is, however, another potential avenue to recoup losses: business interruption (BI) insurance policies. BI insurance policies are intended to help businesses cover losses, especially from closures outside of their control. If, for example, a business office burned down, business owners would need a fire policy to cover fire damage and property losses, but if the business had a BI policy, it could claim lost income in the interim. Such policies allow businesses to continue operations through catastrophic events and, potentially, keep employees on payroll in the meantime.

South Carolina’s response to the financial havoc wreaked by COVID-19 should focus on sustaining the local economy and fairly spreading financial liability across relevant parties based on ability and previously negotiated liability. Leaving this problem to the judiciary is simply not a viable option. S.1188 not only fails to accomplish the goals set out above, but it also fails to pass constitutional muster; the provisions imposed by the Bill are not reasonable impairments on the obligations of contracts, and as a result, they run afoul of the Contracts Clause. Even if the Bill were constitutionally valid, it would bankrupt insurance companies; impose substantial financial liability on the state; and, at the very least, result in large premium hikes from insurance companies, thus inhibiting access to insurance across the state. For these reasons, the South Carolina General Assembly should instead enact a law that broadens the definition of “physical loss or damage” under a BI policy, declares certain exclusions presumptively valid, incentivizes the spread of financial liability, and maintains certain competitive advantages based on planning and investment.