Two Brooklyn lawmakers were already trying to effect that change earlier this year. New York State Senator Andrew Gounardes and Park Slope Assemblyman Robert Carroll, Brooklyn’s 44th district, in April introduced S8211. The bill, if enacted, would require insurance companies to pay up on claims related to the coronavirus pandemic under the business interruption provisions of insurance policies.
Many business establishments, such as restaurants and retailers, pay extra premiums for the special coverage, but have seen their claims denied because the insurance industry’s position is that COVID-19 isn’t a business interruption since it was the government that forced the shutdowns. Coverage tends to center on loss of income and payroll costs that emanated from an unexpected event.
Following Century 21’s announcement last Thursday that it was filing a Chapter 11 petition for bankruptcy court protection and shutting down all 13 store locations, Senator Gounardes tweeted: “It’s unconscionable that we are still allowing insurance companies to fleece businesses that carried & paid for business interruption insurance, only to have their claims rejected outright.” He ended the tweet by calling for the immediate passage of his and Carroll’s business interruption bill.
The McCarran-Ferguson Act of 1954 gives states broad authority to regulate insurers, although state insurance companies are still subject to some federal laws, such as those that bar them from coercion or intimidation. That means there can’t be any one uniform policy, and businesses operating in one state could end up with a result that’s different from that in another state on essentially similar claims.
One limitation of S8211 is that the proposed legislation would cover only businesses with 250 employees or less. That means that it wouldn’t be of any help, even if enacted, to larger enterprises, such as Century 21, which court documents indicate employed about 1,390. However, what the Century 21 case does show is how expensive premiums for business interruption clauses can get, and what happens when insurers decline to make good on promises that policy owners believe that they’ve paid for in good faith.
In the case of Century 21, the decision to shut down was made after the off-price chain’s insurance providers refused to pay out $175 million to cover losses from Covid-19, the retailer said.
In a court document filed by Norman R. Veit, Jr., who holds the dual position of chief financial officer and chief information officer at Century 21, he told the court that the retailer and their non-debtor affiliates had paid premiums to their insurance providers “in excess of $1.2 million annually.”
“While the effects of Covid-19 on the American economy, the retail industry and the debtors’ business have been devastating, the debtors were well positioned to weather this storm as a result of their careful insurance planning,” Veit said, noting that their various insurance policies collectively provide for “up to $350 million of insurance coverage, including for property damage, business interruption and other situations that would prevent the public from entering the debtors’ stores.”
Veit also said that repeated requests for payment on claims, even a request for partial payment on an interim basis for a small portion of their aggregate claim to allow debtors to sustain their business operations, went unheeded, which resulted in the July filing of a lawsuit against several of the insurance providers. The insurance action is being removed to the bankruptcy case for adjudication, with any recovered proceeds considered property of the off-pricer’s estates for the benefit of creditors.
The Century 21 executive also noted that without the insurance proceeds, the company estimated that they would need $75 million of additional financing, and that they were unable to borrow under their existing bank facility due to various defaults and the lack of inventory to support additional borrowings. Eventually, its bank lender took over the retailer’s collections and operating account, Veit said.
The company tried to find a strategic investor prior to filing its Chapter 11 petition, but was unable to secure any third-party investment. Due to a prior reorganization in 2017, Veit said the retail operations and intellectual property are housed in the entities that filed for Chapter 11, while real estate ownership and other assets were placed into a separate, non-debtor entity, Century 21 Inc. and its related non-debtor affiliates. In fiscal year 2019, Century 21 stores and its online platform generated about $747 million of revenue, Veit said.