The global economy and businesses’ ability to operate have been disrupted due to the coronavirus outbreak (COVID-19). Companies should expect to see a surge in disputes over whether force majeure clauses and business interruption insurance applies to COVID-19. Force majeure clauses are contract provisions that excuse a party’s nonperformance when “acts of God” (typically natural disasters such as hurricanes, lightning strikes, tornadoes, floods, earthquakes, and fires) or other extraordinary events prevent a party from fulfilling its contractual obligations. If a force majeure clause includes epidemics or pandemics as a triggering event, the party could argue that COVID-19 qualifies as it has been officially declared a pandemic by the World Health Organization. COVID-19 could also be covered under other triggering events such as an act of governmental authority since the federal government and state governments at nearly every level have instituted lockdowns to prevent the spread of COVID-19. Because force majeure clauses are typically interpreted narrowly, whether claims relying on these provisions will be successful will be heavily dependent on the contractual language and the facts specific to the business at hand.
Business interruption insurance is intended to cover losses resulting from unforeseen interruptions to a business’s operations and generally cover lost revenue, fixed expenses such as rent and utilities and certain floating expenses such as operating from a temporary location. Similarly, supply chain insurance is intended to cover lost profits and costs resulting from disruptions in the company’s supply chain and is typically quite broad covering “Public health emergencies; e.g., pandemics requiring quarantine.”
Pollution liability coverage may be applicable too during the COVID-19 emergency. Businesses may incur cleanup or waste removal costs if forced by government authorities to temporarily close. If the virus is present on a policyholder’s premises, there could be coverage for decontamination costs, cleanup and interruption by a communicable disease.
Many policies also provide coverage for business income losses sustained when a civil authority prohibits or impairs access to the policyholder’s premises. In the event that a federal, state, or local governmental authority limits access to areas where a communicable disease has been identified, civil authority coverage may apply.
On March 16, the first coronavirus coverage suit for business interruption was filed in a Louisiana state court by a restaurant seeking a declaration of coverage for coronavirus-caused losses under an “all risk” business interruption policy. The restaurant is seeking a judicial determination that the Louisiana governor’s public gathering restriction, and New Orleans mayor’s restriction on restaurant operations, trigger the “civil authority” provision of the insured’s policy. The restaurant also seeks a declaration that if COVID-19 is found within the restaurant itself, because COVID-19 may “formites” for up to 28 days, the restaurant has suffered “physical loss” triggering the business income coverage provision. The restaurant is further arguing that because the policy covers all risks of loss, and there is no exclusion for losses due to a virus or global pandemic, the insurer must cover the business’s losses.
However, standard property policies require physical damage to be triggered and typically contain contamination exclusions. As a result, insurers will likely dispute whether COVID-19 constitutes the physical loss requirement. Courts across the country have yet to uniformly determine whether contamination to property constitutes the physical loss requirement. Businesses should proactively review their policies and take all required steps to effectively make a policy claim, which may include efforts to mitigate damages and timely provide notice. Like force majeure clauses, whether a business’s insurance policy covers business or supply chain interruptions due to COVID-19 requires a close analysis of the specific terms and conditions of the governing policies. Just as COVID-19 continues to spread, the fluidity of the legal landscape in this area continues to change. If you have questions about your insurance policy, contact us.
Businesses affected by the coronavirus (COVID-19) pandemic need specialized advice on a wide array of unprecedented and rapidly-evolving legal issues. Dunn Sheehan’s experienced litigation and business attorneys are well-positioned to help our clients proactively navigate these challenges, including business and supply chain interruption claims; contracts, leases, force majeure and impossibility of payment and performance; and your obligations and benefits under emerging legislation such as the CARES Act and EFMLA. Dunn Sheehan offers legal representation on an hourly, contingent and/or hybrid based on a case-by-case basis. Please contact us to learn more about preserving and protecting your business during the COVID-19 crisis. For more information on business interruption claims please contact us.