But legal challenges could threaten the bill’s implementation if it becomes law

A sign reads “We are closed due to the pandemic” in front of a shuttered restaurant

New York lawmakers have introduced legislation that would require insurers to reimburse businesses suffering from closures or loss of revenue related to the novel coronavirus outbreak. The bill would apply retroactively to restaurants and other establishments that had an insurance policy in place by March 7.

It’s a development that could provide massive relief to the hospitality industry and that has the potential to shift how the federal government plans any further stimulus aid. Lawmakers in Ohio, New Jersey, and Massachusetts have introduced similar legislation, though legal challenges are virtually a certainty.

Business Insurance first reported on the New York bill.

Business interruption policies — which cover lost income from fire, theft, wind, and other events — generally carry specific exclusions for virus and bacteria, a product of big payouts following the SARS outbreak in 2003. State Assembly bill A.10226 would change that.

The measure, introduced last week by Assemblymember Robert Carroll, would force insurers to extend COVID-19 coverage “during a period of a declared state emergency.” The policy would only apply to restaurants and other businesses with 100 or fewer full time eligible employees, which means larger groups like Momofuku or Danny Meyer’s Union Square Hospitality Group likely wouldn’t benefit.

Insurers who disburse COVID-19 claims would be eligible for “relief and reimbursement” by the state, per the bill.

If passed and implemented — a gigantic if — payouts to bars, restaurants, and other small businesses could dampen or displace the need for federal COVID-related aid, at least in states where the laws take effect. Like a rent forgiveness bill introduced by New York lawmakers, the new measure aims to shift the financial burden of the pandemic from a larger number of cash-strapped individuals and small businesses to a more limited collection of better capitalized corporations — like banks and insurance companies.

Prospects of the bill’s passage, as well as its legality, remain uncertain. It will “undoubtedly face legal and constitutional challenges by the insurance industry,” according to an online post by law firm Herrick’s Feinstein LLP. The post specifically cited the contracts clause of the U.S. Constitution, which limits the ability of states to interfere with private contracts.

The bill, which lists 11 co-sponsors, has been referred to the state insurance committee.