Can a state legislature force an insurer to cover a loss / risk where it is either not covered by the plain terms of the policy’s coverage provisions, or excluded by the policy’s exclusions and/or endorsements without violating the prohibition found in the United States Constitution against impairment of the obligations of contracts?
Article I, § 10 of the United States Constitution states in relevant part: “No State shall…pass any…Law impairing the Obligation of Contracts…”
Several states, including Louisiana, New York, Massachusetts, Michigan, New Jersey, Pennsylvania, South Carolina and Ohio have proposed legislation to require insurance policies to be “construed” to include the covered perils being alleged as owing in these lawsuits arising from actions by authorities closing non-essential businesses as a result of the COVID-19 pandemic. These include policies that provide cover for, among other risks, business interruption and business losses, expenses, physical damage to or loss of property, forced closures by civil authorities of non-essential businesses, and which exclude coverage for “organic pathogens” as in the total mold endorsement, or various iterations of the pollution exclusion.
For the Federalist and constitutional scholar the question immediately comes to mind whether a state legislature may, through the passage of positive law, alter the terms, conditions, and limitations of what is essentially a “contract” between two private parties, and in these cases, specifically, the coverage provisions in commercial and business insurance policies, as well as the conditions, limits and exclusions therein, or to essentially force an interpretation that results in an outcome that would otherwise be impossible upon an application of the plain language of the policies? The answer is a resounding “No.” Such laws are specious, at best, in light of the federal constitution’s Contract Clause, Art I, § 10.
While it is somewhat misleading to characterize laws affecting the enforceability of contracts as “incorporated terms” of the contract itself, see, e.g., 3 A. Corbin, Contracts § 551, pp. 199-200 (1960), such laws are subject to Contract Clause analysis because without “incorporated terms”, contracts are reduced to simple, unenforceable promises.” The obligation of a contract consists in its binding force on the party who makes it. This depends on the laws in existence when it is made; these are necessarily referred to in all contracts, and forming a part of them as the measure of the obligation to perform them by the one party, and the right acquired by the other.
If any subsequent law affects to diminish the duty, or to impair the right, it necessarily bears on the obligation of the contract. See, e.g., McCracken v Hayward, 43 US 608, 2 How 608, 612; 11 L Ed 397 (1844). See also Von Hoffman v City of Quincy, 71 US 535, 4 Wall 535, 550; 18 L Ed 403 (1867).
Likewise, for example, a change in the remedies available under a contract, may convert an agreement enforceable at law into a mere promise, thereby impairing the contract’s obligatory force. See, e.g., the famous discussion of this as presented in multiple Constitutional Law courses in Sturges v. Crowninshield, 17 US 122, 4 Wheat 122, 197-198, 4 L Ed 529 (1819). See also Edwards v Kearzey, 96 US 595, 601, 24 L Ed 793 (1878).
This may seem hyper-technical, but the common law of contracts binds the parties as if they have made the law (and barring those contracts reprehensible to public policy), to wit, the totality of applicable law by and between themselves, as such exists in the instrument that it is totally (and solely) binding upon them as it relates to the subject matter of the contract. Thus, any alteration by an outside source (other than by the parties themselves by amendment agreed upon in the manner in which amendments and/or endorsements can be made or added to the contract itself, respectively) creates a situation where the language of the contract itself has been reduced to nothing more than terms that must now be read in conjunction with whatever other alternative “terms” have been injected into the transaction by the outside third party, i.e., the legislative body that has created an obligation where none existed before, diminished the significance of a restriction that would otherwise prevent coverage owed, or nullified an exclusion that would prohibit coverage altogether. These latter “terms” of the contract would no longer be enforceable, because there are these other “terms” incorporated that compromise the certainty and exactitude of the original terms, and thus, there may no longer be an “obligation” to perform in the one case, and in the other, there is also no reason for the party who would benefit from performance to worry about a condition dependent on the existence of certain facts, or the existence of facts that might implicate a limitation of coverage or the application of an exclusion therefor.
For this reason, changes in the laws that make a contract legally enforceable where it may not otherwise be so, trigger scrutiny under the Contract Clause because they impair the obligations of both parties to pre-existing contractual agreements – they effectively alter the law of the contract that was the agreement of the parties and universally applicable as it relates to the transaction between them. This is true even if the “legislation” does not alter any of the contract’s bargained for terms. See, e.g., City of Quincy, supra (repeal of tax designed to repay bond issue); Bronson v Kinzie, 42 US 311, 1 How 311, 316; 11 L Ed 143 (1843) (law limiting foreclosure rights); McCracken, supra at 611-614 (same).
The suggestion that a state could alter the terms and conditions of written agreements between the parties would expand the definition of contract so far that the constitutional provision would lose its anchoring purpose, i.e., “enabling individuals to order their personal and business affairs according to their particular needs and interests” with certainty as to how their actions and conduct are to be guided. Allied Structural Steel Co v Spannaus, 438 US 234, 244-245; 57 L Ed 2d 727; 98 S Ct 2716 (1978). Instead, the Contract Clause would have the perverse and opposite effect of its very intended purpose, and it would thereafter protect against all changes in legislation, regardless of the effect of those changes on bargained-for agreements! The ultimate irony of this taken to an extreme would render the Contract Clause itself entirely dependent on state law. As Justice Story pointed out:
It has been contended, by some learned minds, that the municipal law of a place where a contract is made forms a part of it, and travels with it, wherever the parties to it may be found. If this were admitted to be true, the consequence would be, that all the existing laws of a State, being incorporated into the contract, would constitute a part of its stipulations . . . . If, therefore, the legislature should provide, by a law, that all contracts thereafter made should be subject to the entire control of the legislature, as to their obligation, validity, and execution, whatever might be their terms, they would be completely within the legislative power, and might be impaired or extinguished by future laws; thus having a complete ex post facto operation.
2 J. Story, Commentaries on the Constitution of the United States § 1383, pp. 252-253 (5th ed. 1891).
The question concerning legislation proposed to make insurance companies do something that the contract of insurance does not require by forcing an interpretation of the instrument that creates an obligation where none existed or provides a remedy where none was available will be subject to this constitutional question in the coming months and years!
Attorney Carson J. Tucker and Lex Fori PLLC have argued and won significant constitutional cases in state and federal courts, and written on issues of constitutional law, including cases brought on principles of federal preemption and under the First, Fourth, Fifth, Eighth and Fourteenth Amendments to the United States Constitution. Mr. Tucker has also defended governmental entities and written amicus curiae briefs on issues of constitutional law including Civil Rights litigation on 42 USC 1983 liability in a variety of contexts.
Mr. Tucker has presented webinars to the International Municipal Lawyers Association (IMLA) on several pending issues among the Circuit Courts and his petition in the United States Supreme Court concerning 42 USC 1983 claims. Outline of 42 USC 1983 Webinar on 42 USC 1983 Claims
Mr. Tucker has developed a particular expertise in writing amicus curiae briefs on issues of constitutional law and prosecuting and defending appeals in the United States Supreme Court and lower state and federal courts. He has had several significant successes in, among other courts, the Sixth Circuit Court of Appeals, the Michigan Supreme Court and the Michigan Court of Appeals. In addition to his work on appeals, Mr. Tucker has written briefs amicus curiae in the United States Supreme Court and federal and state courts throughout the country for various governmental and non-governmental entities. In addition to being licensed to practice in Michigan, Mr. Tucker is admitted to practice in the Eastern and Western District Federal Courts in Michigan, the United States Court of Appeals for the Sixth Circuit, and the United States Supreme Court.
Mr. Tucker has also done extensive insurance coverage and defense work on matters including those involving catastrophic loss events under both standard forms and custom policy forms, and for insurers, excess insurers and reinsurers, and regularly advises companies and insurers on issues of insurance coverage and recovery under US law.