Force Majeure and Insurance Provisions for Business Losses Sustained by COVID-19

As the United States and the rest of the world battle the COVID-19 pandemic, companies across multiple industries have struggled to quickly adapt: They are facing un-meetable contractual deadlines or other requirements and having to shutter some or all of their business activities, conduct furloughs or reductions in force, cancel events and issue refunds. These companies face potential lawsuits from customers, clients and investors, and have and will continue to undergo extensive financial losses as a result of quarantines and restrictions in trade. Given these unexpected changes, it is essential that each business evaluates protections it has for its failure to meet contractual requirements and financial losses by reviewing force majeure and related provisions of its contracts and evaluating its coverage under any applicable insurance policies.

A. Force Majeure

Force majeure provisions are typical in commercial contracts and real estate leases and are intended to protect parties from that which they cannot control, such as “acts of God”—including, where applicable, war, terrorism, strikes or quarantines. These contractual provisions kick in to protect a party from unforeseeable events that are outside of the party’s control, which makes performance of some kind (like fulfilling orders or operating a business) impossible, worthless or impracticable. Some agreements detail the types of activities that can constitute force majeure and/or may have exclusions specifically identifying what is not covered. For example, typically in commercial real estate leases force majeure clauses excuse delays in performance, such as for a landlord’s failure to complete alterations, but do not excuse nonpayment of rent by a tenant.

The famous “coronation cases” provide classic examples of what may be necessary to take advantage of in a force majeure provision. In one such case, Henry v. Krell, a British court excused a defendant from his commitment to pay money to the plaintiff to watch the coronation of King Edward VII from the plaintiff’s flat, which had a direct view of the expected coronation. When the coronation was abruptly cancelled due to the King’s health, the court held that the existence of the coronation was inferred in the agreement such that its cancellation made enforcement of the contract unfair and warranted an excuse to performance.

In modern times, generally, the party seeking to invoke force majeure must demonstrate that the underlying unexpected event has led to such party’s inability to perform the contract. There are certainly clear examples of this type of inability—such as televising a sporting event cancelled by the virus. However, the fact that performance of the contract would simply be more expensive or difficult given the existence of the COVID-19 pandemic is not likely to excuse performance absent explicit contractual provisions providing such relief. One thing, however, is quite clear: In these times of unpredictable results from COVID-19, it is essential that businesses evaluate their contracts for force majeure provisions and any available protections available under those provisions.

B. Commercial Property and Business Interruption Insurance Protections

Insurance policies often contain specific provisions that may protect an insured from unforeseeable occurrences.  In addition to evaluating the coverage available under their policies, insureds must also evaluate provisions mandating notice of claims to initiate any coverage that may be available for the losses detailed above, in order to avoid missing such deadlines or other requirements for coverage.  Although insurance provisions vary drastically and may provide different overall coverages, below we explore the different insurance provisions that may be applicable for potential losses and other coverages and issues pertaining to them.

1. Civil Authority

Some insurance provisions are designed to cover business income losses sustained where a governmental “civil authority” prohibits access to the insured’s business locations. Many insureds may seek to invoke this provision where a governmental body has shut down or inhibited their operation of business, as is the case for many businesses in New York following Governor Cuomo’s recent mandates restricting the operation of public establishments.

Analysis of restrictions on coverage for civil authority provisions are key as they often require “physical loss” or, less commonly, “imminent physical loss” or “physical damage.” Traditionally, the term “physical loss” is not defined in insurance policies. Courts have produced inconsistent interpretations of the term in seeking to ascertain the plain and ordinary meaning of it. Some cases suggest that “physical loss” must be tangible in nature, such as caused by fire or flood. See e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710-11 (E.D. Mich. 2010) aff’d sub nom. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569 (6th Cir. 2012). Other cases have held that gasses or bacteria in an insured’s property may qualify as “physical loss.”

For example, in Gregory Packing Inc. v. Travelers Prop. Case. Co. of Am., No. 2:2012cv04418 (D.N.J 2014), the court found that ammonia discharge in a building inflicted direct loss to the insured’s facility, resulting in unsafe air and rendering the facility unfit for occupancy while the ammonia remained therein. Similarly, in Motorists Mut. Ins. Co v. Hardinger, 131 Fed. Appx. 823 (3d Cir. 2005), the court held that a physical loss requirement could be met where a home was rendered uninhabitable as a result of E. coli bacteria contamination in the property’s well. Even where an insured can establish that COVID-19 itself constitutes a condition subject to the “physical loss” requirement, challenges may also lie in establishing that COVID-19 was in sufficient proximity to the insured’s business’s premises in order to further meet “physical loss” requirements.     

Additionally, given the unprecedented times, it cannot be fully anticipated how insurers and courts will react to claims seeking coverage for COVID-19. Absent direct precedent or clear exclusions from coverage, courts will have a lot of wiggle room to interpret provisions and coverage, including any ambiguous terms in the policies.    

2. Business or Trade/Supply Chain Interruption, Contingent Business Interruption and Ingress/Egress Provisions

In addition to civil authority coverage provisions, “business interruption” or “ingress/egress” provisions, which can specifically cover an insured’s losses due to business interruption where entrance or exit from the insured’s property is unavailable, may apply to businesses for losses as well. Contingent business interruption provisions may also be available to cover an insured where another business, such as one in the supply chain on which the insured’s business relies, is unable to perform. But like civil authority coverage, such provisions could be limited to those situations where the policyholder sustains a direct physical loss to business property.

3. Additional Limitations and Expansions on Coverage

Further considerations for insurance coverage include time limits in the policy for coverage. For example, some policies may set coverage limits for certain provisions to two weeks, or alternatively may not allow recovery for the first two weeks of losses. Moreover, some policies exclude coverage for contamination and pollution, including, in some cases specifically, “viruses.” Sometimes the exclusions are specific, such as for mold, anthrax or SARS, but other times they are broad. Conversely, some policies extend coverage specifically for losses due to epidemics, or communicable or infectious diseases, without any requirement for showing physical loss to the business. Lastly, while many policies are broad in terms of providing for covered losses absent specific exclusions, some are limited in scope to specific perils or covered causes such as flood, vandalism or fire.

4. Insured Options and Government Intervention

As discussed above, an insured should evaluate insurance coverage, including how the insurance provisions require calculation of losses for reimbursement. Counsel may be of assistance with evaluation of claims and requirements for notice. In addition to filing and noticing claims, insureds can bring court actions seeking declaratory judgments from a court that the insurance provisions will be in effect to cover their losses. In one such recent case, Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, a restaurant group filed a litigation on behalf of its restaurant, New Orleans’ Oceana Grill, asking that a court determine that its insurer covers lost revenue due to civil-authority actions covering coronavirus restrictions. In another recently filed action, Big Onion Tavern Group LLC et al. v. Society Insurance Inc., Case No. 1:20-cv-02005 (N.D. Ill.), a movie theater and restaurant owner has challenged an insurer’s refusal to provide coverage based on an insurer’s allegation that no physical loss was sustained by the insured.

Additionally, governments have been intervening on behalf of insureds, in order to flesh out or ensure protection for them. For example, on March 10, 2020, the New York Department of Financial Services issued new requirements for insurers in New York to create and provide “preparedness plans to address the operational risk, and [to confirm that they] are identifying, monitoring, and managing the financial risk, posed by COVID-19,” including requirements that the insurance companies assess the overall impact of COVID-19 on their reserves. New Jersey, Ohio and Massachusetts have proposed regulations that would require insurers to insure some property losses for in-state businesses by requiring policies to cover business interruption due to COVID-19 loss even if exclusions in the insurance agreements exist. However, it remains to be seen whether these regulations, and any similar ones enacted by other states, will run afoul of the United States Constitution or individual state constitutions, which might  prohibit the passage of laws impairing the obligations of contracts.

C. Other Insurance Coverage Considerations for Businesses

In addition to force majeure and business interruption-type insurance provisions, companies should evaluate the existence and application of the following other insurance policy provisions, as applicable to industries and circumstance.

1. Directors & Officers Insurance

When losses are sustained by company investors (as is sure to happen in our plummeting markets), investors may well bring claims alleging that they were misled about exposure to risk from pandemics such as COVID-19. For example, a securities class action lawsuit was recently filed against Norwegian Cruse Line Holdings, Ltd. alleging that the cruise line made false and misleading statements, or failed to disclose in its securities filings, its sales tactics that purported to provide customers with unproven or false statements about COVID-19 in order to attract customers to purchase cruises. For such adverse event-driven claims, it is important for any targeted company to review its Directors & Officers (“D&O”) coverage, if any.

2. Event Cancellation Insurance

Event cancellation insurance may cover businesses and organizations that  have to cancel or postpone events due to COVID-19 concerns or government-ordered restrictions, enabling them to retrieve lost profits and revenues, or amounts paid to reimburse vendors, ticket-holders or other third parties as a result of the cancellations. Coverage may also allow reimbursement of additional financial losses spent to hold an event at an alternative time, as well as potentially lost advertising and ticket sales, or losses occasioned by contractual obligations.

3. General Liability Insurance

Commercial general liability policy provisions afford coverage for liability to third parties for bodily injury and property damage, as well as privacy and other personal injury claims. Such coverage could prove useful to the extent that lawsuits arise by individuals, such as those trapped on cruise ships during the pandemic, who bring claims against the cruise lines or other businesses alleging negligent fault for failure to protect or warn customers about the potential contraction of COVID-19 and physical and emotional damages sustained as a result. As businesses remain open, or eventually reopen, claims alleging injury from failure to warn or failure to protect are expected to increase as well.

Many carriers of insurance have taken the position that they do not intend to cover losses resulting from the pandemic, and Reavis Page Jump LLP remains available to assist in analyzing contractual provisions for coverage, assessing rights and risk, and in bringing legal claims or other dispute resolutions concerning your insurance and contracts stemming from the COVID-19 pandemic.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. RPJ Partner
Mark H. Moore and Counsel Ethan Krasnoo counsel both companies and individuals on employment, commercial business, and insurance matters, and are available to consult on specific matters. They are admitted to practice in New York, the United States Courts of Appeal for the Second and Third Circuits, the United States District Courts for the Southern and Eastern Districts of New York, and the United States Tax Court. Attorney Advertising.