Insurance, contracts may not protect against virus disruptions

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As the new coronavirus alters nearly every aspect of daily life in the United States, unprecedented disruptions to American businesses are forcing companies to face legal and insurance questions they have never previously dealt with — and professionals in the legal and insurance industries say that answers may be a long way off. 

“The situation is just fraught with uncertainty,” said Dan Mills, Colorado commercial sales leader for the insurance broker HUB International, with an office in Loveland. “The information you get changes so rapidly that it’s taken us a while to determine what we really should be telling our clients.”

The COVID-19 virus has upset the marketplace across many industries at international, national, regional, state, and local levels. Sports leagues have suspended their seasons. Supply chains have been interrupted. Restaurants and bars have been ordered by governments to close. Planned events have been cancelled. Contracts may not be fulfilled. Businesses dependent on walk-in customers have seen that lifeblood dry up. 

The economic reality of the coronavirus, which was declared a pandemic by the World Health Organization on March 11, is beginning to include questions of how, if at all, insurance may compensate companies for their losses, and whether COVID-19 will trigger force majeure clauses of contracts. 

Force majeure is a contract clause that frees parties from their obligations in extraordinary, unexpected circumstances, such as “acts of God” — fires, hurricanes, earthquakes, volcano eruptions — war, terrorism, blockades, and labor stoppages. 

However, force majeure clauses rarely address pandemics or public health crises such as COVID-19, said Giovanni M. Ruscitti, founder and managing partner at the law firm Berg Hill Greenleaf Ruscitti LLP in Boulder. Force majeure clauses that do address pandemics are the exception, Ruscitti said. This means that, for many contracts that go unfulfilled because of the coronavirus, parties may have to assert or defend force majeure in ways they’ve never had to before.

“It’s going to be very interesting to see how this plays out,” Ruscitti said. “We’re starting to see people being prepared to make these arguments.”

Cameron Grant, managing shareholder at the law firm Lyons Gaddis in Longmont, said businesses with force majeure clauses that don’t address pandemics  may argue that the coronavirus is an event outside the reasonable control of contracting parties, and therefore constitutes an act of God.  

However, even if a court accepts COVID-19 as a force majeure event, companies still have to establish a causal link between the virus and their inability to fulfill their contractual obligations, Grant said. Businesses may also have to prove that they took steps to mitigate the effects of the coronavirus before they’re given relief.

“It’s not as if the contract evaporates,” Grant said. “You have a defense to a breach of contract allegation by the other party that has some limitations.”

In the construction industry, where Ruscitti said force majeure clauses are in every contract, preparing these arguments means understanding how COVID-19 affects a company’s subcontractors, vendors, and suppliers. It also means documenting in detail the impacts that the coronavirus had on a company’s schedule and costs. 

“If giving a force majeure notice,” Ruscitti said, “simply saying ‘It is going to affect us’ is not sufficient.”

Some types of contracts, such as event contracts and loan agreements, rarely have force majeure provisions, Ruscitti said. Therefore, without specific language in the contract granting relief, events cancelled because of COVID-19 will likely be a loss for the companies putting them on. 

And businesses may not be able to recover such lost revenue from their insurers. Mills, the Colorado commercial sales leader for HUB International, said it’s unlikely that either business interruption or property and casualty insurance would cover losses from the coronavirus. 

“If this were covered, that would be the end of the insurance industry,” Mills said. “It would bankrupt the industry. This is so disruptive.”

Business interruption insurance usually requires physical damage to a company’s property before it kicks in. So does contingent business interruption insurance, which covers companies whose primary supplier, partner, or customer is lost. 

Indeed, Mills said he believes the biggest insurance payouts related to COVID-19 will be workers’ compensation. If multiple employees at the same business test positive for the coronavirus, Mills said, that may be considered a work-related compensable event. In that case, businesses would see their workers’ comp premiums go up. 

However, with the unprecedented nature of the COVID-19 pandemic, many questions are still unanswered. One of the biggest unknowns for insurers, Mills said, is liability. 

“Liability is the one area where companies are terrified,” Mills said. “If an organization is found responsible for infecting people, where does it end?”

Michael Shirazi, benefits adviser for Shirazi Benefits, with locations in Greeley and Fort Collins, said businesses are also wondering how their health insurance providers will handle short-and-long-term disability claims that arise out of the coronavirus. 

Some corporate health insurance providers have waived costs for employees to be tested for COVID-19, Shirazi said, and the cost of testing is low enough that it shouldn’t affect premiums. However, if several employees from a company have to be hospitalized because of the coronavirus, those costs could start to add up. 

Businesses are also awaiting answers about potential changes to the Family and Medical Leave Act and the approval of a stimulus package, Shirazi said. 

“There’s enough anxiety and rumors,” Shirazi said. “We’re mostly telling our clients to wait until official regulations are in place.”

Another unknown that businesses may have to contend with is whether their landlords or lenders invoke personal guarantees on their leases or loans, Mills said. 

“I have clients who own restaurants that have no more revenue coming in, but they still have rent and insurance,” Mills said. “If your business is already stretched, this is going to be painful.”

Right now, Ruscitti said he’s telling clients to be ready to assert or defend force majeure and to document in detail how the COVID-19 pandemic is affecting them. He’s also advising them not to panic and to remember that their companies are not the only ones dealing with the coronavirus. 

“Try to have a common-sense discussion about the true impacts of the coronavirus on everyone’s business,” Ruscitti said. “There is an economic reality that some parties are going to have to absorb.”

Mills said he’s telling his clients to err on the side of caution, allow employees to work from home when possible, and compensate workers who don’t come in because of the pandemic. Beyond that, it’s a waiting game. As the situation evolves, the implications for companies, their contracts, and their lost revenue will become clearer. 

“The next steps are to do the right thing and let the chips fall where they may,” Mills said.