In light of recent events, and the World Health Organization’s declaration that COVID-19 (also known as the coronavirus) is a global pandemic, Taft’s Real Estate Group is alerting clients to some areas of interest and possible concerns. We are in unprecedented times with travel restrictions and bans enacted around the globe. Earlier this week, New York Governor Andrew Cuomo placed a certain portion of the city of New Rochelle on lockdown for a minimum of two weeks due to COVID-19. This and other events left us thinking: If a business has no clients and customers, or if employees are not permitted to go to work, how does that tenant pay rent? How does that landlord stay solvent? What about scheduled events that have (or may have) no attendants? While there are many unknown possibilities and outcomes from this historical public health emergency, we at Taft wanted to highlight risks and present strategies so businesses can pivot and mitigate risk presented by COVID-19. Because disruption in business activities appears inevitable, COVID-19 will send shockwaves through businesses, making it difficult to perform contractual obligations, perform services and deliver goods.
So let us explore a few topics in order to provide guidance during these uncertain times.
Business Interruption and Property Insurance
Did you know you can, and hopefully already have, insured your business against interruptions in service? Many landlords require, or tenants proactively obtain, business interruption insurance. Now is the time to review (or obtain) your policy to see if COVID-19 is a qualifying event and if other clauses offer protection. We received insight from Thomas A. Flynn, Chairman of ONI Risk Partners, an insurance company offering business interruption policies, whereby typical policies covering business losses, include: (i) direct physical damage to insured property, (ii) decontamination of insured property, (iii) loss of income, (iv) contingent business interruption, (v) stableness of workforce, (vi) civil authority issued and (vii) employers’ enforcement of specific corporate and human resources policies. Some of these coverage areas will potentially offer coverage during these troubling times. However, these typical policies will likely not cover COVID-19. We understand many insurance policies exclude diseases and viruses as insured perils under a contamination exclusion.
Limited coverage for COVID-19 is offered by a handful of companies in the form of communicable infectious disease exposure. Coverage will typically require an actual presence of the disease on the insured sight, not mere speculation. Some coverage may pay for the cost of cleaning and disposing of contaminated property. Other coverage may indemnify for the time it takes to clean up. Communicable disease coverage typically has a very small sub limit of usually less than $5,000,000, so the scale of the impact of your business may make the coverage inadequate. Also, presence of COVID-19 at a supplier or customer location that is not your insured property may not trigger coverage.
Other coverage may exist for COVID-19 related events, especially as global supply chains continue to be significantly impacted even after the virus is contained. Property policies frequently address these supply chain exposures in clauses such as contingent business interruption, civil authority, ingress and egress and logistics extra expense.
In response to the COVID-19 outbreak, the Insurance Services Office (ISO) recently drafted two communicable disease coverage endorsements to provide limited coverage once approved. However, insurers may choose not to provide this coverage. The two business income endorsements that the ISO created are:
- Business Interruption – Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus – Edition February, 2020.
- Business Interruption – Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (including Orders Restricting Some Modes of Public Transportation) – Edition February, 2020.
These forms are merely advisory but available for any member carrier as guidance for language in their policies. These endorsements may provide the following coverage: (i) it begins immediately upon suspension of the insured’s operations (there is no waiting period), (ii) is extended for the time period specified in the schedule and (iii) is provided on an annual aggregate basis limited to the amount stated in the schedule. Furthermore, both endorsements may (i) provide limited coverage when/if there is a suspension of operations due to closure or quarantine at the insured location ordered by a civil authority attempting to avoid or limit the spread of COVID-19 infection, (ii) extend dependent property coverage (contingent business income) for named locations if the dependent property is ordered closed by a civil entity and (iii) apply to income loss suffered by insureds operating from a vehicle or mobile equipment, if the policy is endorsed to recognize such vehicle-based operations.
The second endorsement listed above currently contains an additional feature not found in (i) endorsement, adding coverage if the insured suffers a suspension of operations due to mandated closure or restricted usage of public bus, rail or ferry lines or related stations or terminals serving the area where the insured’s business is located.
Each of these endorsements currently have exclusions, such as the (i) the loss or expense related to absence of infected workers or those suspected of being infected, (ii) any fines or penalties, (iii) loss or expense due to fear of contagion, when the insured’s premises are not under quarantine, (iv) costs to clean, disinfect, dispose or replace any property and (v) intentional actions taken to spread or introduce the virus.
A global pandemic like COVID-19 has never before been encountered by the insurance industry. The scale of the economic impact will continue to test businesses, and their insurance coverage and as the effects of COVID-19 work their way around the world. It is recommended that, even if policies do not contain specific coverage for disease, you should: (i) track any contamination that impacts your property, or those of your suppliers or customers, (ii) record any impact on operations, revenues and/or extra expenses incurred due to the virus and (iii) work with your brokers and claim consultants to do an extensive review of your coverages and evaluate the specific facts that impact affected businesses.
Another insurance possibility that may be helpful during this time, but is a little less known, is parametric insurance. This type of insurance is based on data triggers, such as circumstances that harm the economy of a company or region. Determination of the data trigger being met comes from a third party agreed upon by the stakeholders. This type of policy will cover losses to a certain degree or data point. If the loss goes above or below the agreed to data point, the insurance is not triggered and does not pay. However, if the loss meets the data point, the policy must pay out.
Force Majeure Clauses in Business Contracts
What is force majeure?
Does or will COVID-19 qualify as a force majeure event?
Does my lease have the appropriate language?
Your business contract may have a force majeure clause. Force majeure generally means that an event is neither controlled nor anticipated. When any of these force majeure events occur, it can trigger this provision of your contract and excuse someone from their obligations. Triggering events sometimes includes acts of war, interruptions caused by natural disasters or acts of God, strikes, government shut downs or interference, civil bodies enacting a state of emergency, labor shortages, quarantines, and a breakdown in logistics beyond either party’s control, to name a few.
As this pandemic spreads through the United States, your clause may be triggered by government shutdowns or interference as states of emergency and travel bans are imposed. Cities are implementing quarantine requirements which may also trigger the clause. Whether COVID-19 specifically triggers your force majeure clause depends on the language of your specific contract provision including global pandemics or communicable infectious diseases and outside forces such as a government or civil body imposed shut down, declared state of emergency or quarantine. You also must consider who is entitled to invoke the provision, as the contract may be specifically limited to one party.
A few additional considerations may be found in common law under legal doctrines such as the doctrine of impossibility, frustration or impracticality. These doctrines vary from state to state on the tests used to prove a claim and are also fact sensitive. It may present a cause of action you can bring in court if you need to protect your business due to circumstances outside of your control. However, be mindful that your state may also impose a duty to mitigate damages by taking certain reasonable steps. Additional provisions to consider in your contracts include dispute resolution provisions, mandatory mitigation provisions and any possible arbitration provisions.
Whether it’s business interruption insurance, seeking protection under a force majeure clause within your contract, or litigating over an inability to perform under a common law claim, make sure you document the effects of COVID-19 on your business carefully in the event you need to take advantage of one of these possible options to excuse performance under a contract. Contracts clauses and insurance are an important ways to protect your business. As you review guidelines issued by the CDC and WHO, and create strategies to protect the health of your family, make sure you are doing the same to protect the health of your business. Your family, and the families of your employees, will thank you. Taft’s team is ready to serve and assist during this time. Taft’s COVID-19 Resource Toolkit provides legal updates, information from healthcare authorities and other helpful resources.
- Thomas A Flynn CPCU AAI, Chairman, ONI Risk Partners
- Chris Boggs - www.independentagent.com/vu/vu/Insurance/Commercial-Lines/Property/Endorsements/BoggsCoronavirusBIEndorsement.aspx
- Black Law Dictionary
- World Health Organization website