Written collaboratively by Christopher McHattie, Courtney Allen, Michael Gattoni and Natalie Keller

Way back in March 2020 … when the “pandemic” and “shut downs” were getting into full swing, we wrote a couple of articles Business Interruption Insurance – What Does it Cover? (directed to the impact COVID-19 on those types of claims) and Coronavirus, Contracts and Force Majeure (directed to other concerns brought on by COVID-19). Now, almost a year later, let’s take a look at where those issues stand, what updates there are on the current status of those claims, whether business interruption claims are succeeding or not and the various legislative efforts undertaken directed to these concerns.

Business Interruption Insurance – What Does it Cover?

As we all know, the ongoing pandemic has devastatingly impacted the United States economy. Throughout the U.S. and around the globe, “shut down” and quarantine orders have completely upended how we do business. Companies have had to comply and have suffered tremendous losses as a result, including facing un-meetable contractual deadlines and other requirements and having to close locations and curtail activities, furlough employees and otherwise reduce personnel (or suffer the loss of employees and personnel), cancel events and issue refunds. 

As we anticipated, many businesses subsequently filed claims with their commercial liability insurers claiming that their losses were covered under the “business interruption” or the “civil authority” provisions of their policies. Those provisions are generally intended to provide coverage as follows:

• Business Interruption Coverage: covers loss of business income sustained due to suspension of business operations due to “direct physical loss” or “direct physical damage”; and
• Civil Authority Coverage: covers loss of business income sustained when access to the insured property is prohibited by order of a civil authority as a result of “direct physical loss” or “direct physical damage” to properties adjacent to the insured property which prevent the insured from accessing the property.

Last year we discussed a bill being introduced in New Jersey, A-3844, which would have required insurance companies to pay business interruption claims as a result of COVID-19 losses. That bill never made it to the floor to be voted on because of a variety of reasons, not least of which was pressure from big insurers who contended they were not paid premiums for the risk.

By and large, insurers have argued, successfully, that COVID-19 “shut down” orders and other COVID-19 “damages” were not the type of damages covered by existing policy language and have resultantly denied these claims. Meanwhile, policyholders continue to file business interruption lawsuits seeking judicial determination that their claims were improperly denied, at times also arguing bad faith.  At least 1,250 cases have been filed nationally, in both state and federal courts. Restaurants and bars make up over a third of these cases and slightly less than a third of the cases have been filed as “class actions” (i.e. on behalf of a group of similarly situated plaintiffs). Where decisions have been made, courts have ruled in favor of insurers the vast majority of the time based on prior case law which requires a finding that COVID-19 caused a “direct physical loss” or “direct physical damage.” As discussed in our article on the topic last year: “in order to be covered for ‘business interruption’ that interruption has to be caused by physical damage, typically fire, wind, theft or vandalism.”

The majority of cases have been “dismissed” by judges and never made it to trial. “The industry has persuaded judges to toss 64% of about 125 lawsuits” according to the University of Pennsylvania Carey Law School, which tracks the lawsuits. This result is largely because of virus exclusion clauses that began to be introduced into insurance contracts after the SARS outbreak in 2003. Another reason is that the language of the contracts clearly state that business interruption coverage is triggered by physical loss and damage, as we previously explained. “The prevailing view by courts has been that economic loss alone does not qualify as direct physical damage or loss of property that triggers business interruption coverage … The insurer cited courts in Alabama, California, Florida, Georgia, Illinois, Iowa, Michigan, Mississippi, New Jersey, New York, Oklahoma, Texas, West Virginia and Washington, D.C.”

However, policyholders are starting to succeed and there are several important cases where courts have found in favor of the policyholder. These decisions have the potential to frame plaintiffs’ strategies in future cases, and policyholders and insurers should pay close attention to these rulings.

In Optical Services USA/JCI v. Franklin Mutual Insurance Co., No. BER-L-3681-20, the Superior Court of New Jersey, Law Division, Bergen County, the court ruled that physical loss or physical damage was not required under New Jersey law. The court found the insurer did not provide it with any controlling legal authority to support its interpretation. The court, conversely, found the plaintiff’s argument was supported by Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co., 406 N.J. Super. 524 (App. Div. 2009). The Wakefern found in favor of grocery chain resulting from a loss of power caused by the electrical grid and transmission lines not being physically capable of providing electricity. The Optical Services court held that “[s]ince the term ‘physical’ can mean more than material alteration or damage, it is incumbent on the insurer to clearly and specifically rule out coverage in the circumstances where it was not to be provided.” Id. at 28 (citing Wakefern, 406 N.J. Super. at 542). This decision, which is of minimal precedential value, was in the context of a Motion to Dismiss and was in large measure because of the standard on such a motion which is very much in favor of the policyholder in this instance.

Similarly, in North State Deli LLC et al. v. The Cincinnati Insurance Co. et al., North Carolina Superior Court for the County of Durham, CASE NO. 20-CVS-02569, and on a more complete record (and thus a more important decision from a precedential value perspective) the Court granted summary judgment in favor of the policyholder restaurants, concluding that physical damage to the building was not required under the policy at issue. 

Similarly, a Florida doctor was able to keep his case alive and prevail on a Motion to Dismiss by arguing that the language used in his policy was too ambiguous and the judge refused to dismiss his case. Urogynecology Specialist of Florida LLC v. Sentinel  Insurance Company Ltd., Case No.: 6:20-cv-1174-Orl-22EJK (M.D. Fla. Sept. 25, 2020)

A case in Missouri, Studio 417 Inc. et al. v. The Cincinnati Insurance Co., was won by the Plaintiff policyholders, with the judge determining that losing access to the property was enough to constitute a covered “Business Interruption.” The outcome of that case is being appealed by the insurer.

The foregoing cases are few and far between and as one article characterized it: “the tidal wave of favorable rulings for insurers in COVID-19 business interruption insurance coverage lawsuits that started in 2020 is continuing in 2021.”

Coronavirus, Contracts and Force majeure

In addition to business interruption and insurance, another prominent legal principle during a time of disruption is the force majeure clause. Last year, in Coronavirus, Contracts and Force Majeure, we discussed how businesses needed to understand the force majeure clauses in their contracts and consider if those clauses could be used as a either a sword or a shield (depending upon where they stood on a particular issue), and whether or not the contracts could be fulfilled.

An often-ignored provision in contracts (until now), the force majeure clause has gained incredible significance in the midst of the COVID-19 pandemic. As predicted, litigation arising from the effects of COVID-19 related to force majeure and the inability to complete contractual obligations have been favored provisions to either excuse, delay or renegotiate performance under an agreement.

Courts in Pennsylvania and New York have ruled that COVID-19 and the restrictions caused by the pandemic can be deemed “natural disasters,” one of the very typical “triggering” events listed in most force majeure clauses and found those clauses are a valid basis cancel contracts. In December, The United States District Court for Southern District of NY held that COVID-19 was a valid reason to invoke force majeure clause in JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020cv04370, (S.D. N.Y. 2020). In JN Contemporary, an art dealer sued an auctioneer for costs as required by the existing contract in the event the painting failed to sell. The auctioneer in turn argued that auction to sell the painting was canceled because of COVID-19, a “natural disaster,” and that his performance was excused by the force majeure clause of the contract. The agreed and held: “The COVID-19 pandemic and the attendant government-imposed restrictions on business operations permitted Phillips to invoke the Termination Provision. The pandemic and the regulations that accompanied it fall squarely under the realm of Paragraph 12(a)’s force majeure clause. That clause is triggered when the auction ‘is postponed for circumstances beyond our or your reasonable control.” This decision sets a precedent and is a win for those who have been unable to perform contractual duties due to the pandemic.

While many have succeeded, in Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., 20-cv-21724, a federal court in Florida cast doubt on a tenant’s ability to claim that a COVID-related force majeure event prevented it from paying rent, observing that “Kirkland . . . has failed to point to factual allegations in the complaint that show the government regulations themselves actually prevented Kirkland from making rent payments.” In other words, Kirkland still had the money it needed to pay the rent, and COVID-19 had not in fact prevented payment.

Similarly, in Future St. Ltd. v. Big Belly Solar, LLC, 20-cv-11020, the United States District Court for the District Of Massachusetts rejected an argument by a distributor of solar recycling bins that it could not perform its contractual obligations due to COVID-19.  The Court reasoned: “Even assuming arguendo that the pandemic and effects of same are a force majeure under the Agreement, Future Street has not shown that its failure to perform its obligations under the Agreement were caused by same as required [by] the Agreement. This is particularly true where certain of its obligation to pay Big Belly preceded the pandemic and it still paid some of the software and replacement part bills during the winter 2020 … its non-performance is [not] excused under the force majeure clause of the Agreement.”

These cases highlight the need to establish causation between the force majeure event and the performance at issue.[1]  

What if there is no Force Majeure Clause?

What if your agreement does not have a force majeure clause? All is not lost.

Impossibility

Under New York law, for example, the doctrine of impossibility excuses a party’s contract performance when an unforeseen and unanticipated event makes performance objectively impossible.[2]  Moreover, “the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”[3] One noted commentator on New York contract law states: “The doctrine of impossibility may provide a defense where unforeseen government action prevents the performance of a contract.”[4] Considering the restrictions on construction and the CDC requirements for exposure to COVID-19 or what to do if a positive result for COVID-19 occurred, you will likely be able to at least argue that it was impossible to perform, to argue that your personnel were unable to continue to work in any way that would even approximate what both the contracting parties anticipated at the time the contract was signed. While COVID-19 was clearly unanticipated, this will be a very fact intensive analysis and argument to make. You will need to be able to demonstrate that COVID-19 was not, and could not have been, anticipated. You will need to be able to demonstrate that governmental responses that impacted your business were similarly unforeseen and could not be anticipated. If you can apply “impossibility” to the obligation in issue, it will also likely apply to other provisions of the Agreements by and amongst the parties, performance and inherent obligations, for example notice provisions and deadlines.

Frustration of Purpose

Under the related doctrine of frustration of purpose, performance may remain possible, but a “supervening event fundamentally has changed the nature of the parties’ overall bargain.”[5]  It applies “when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.”[6]

To excuse nonperformance, the frustration must be “substantial” and it must go to the core of the parties’ agreement: “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”[7]

Like impossibility, the “non-occurrence of the frustrating event must have been a basic assumption on which the contract was made, “and the frustrating event must have been unforeseeable.[8] Unlike impossibility or force majeure, where the performance must be rendered objectively impossible, the doctrine of frustration can apply where no actual impediment to performance exists.

Takeaways

As the COVID-19 pandemic enters its second year, pandemic-related lawsuits will continue, and we believe accelerate as the parties monetary reserves start to dwindle. Whether you’re considering a claim, worried about being on the receiving end of a claim or just thoughtfully preparing for how to work during and after the pandemic, we recommend considering the following non-exhaustive checklist that can help you better prepare for the effects of COVID-19 and the force majeure clauses:

• Check your contracts for force majeure clauses – The actual words used are what ultimately matter.
• Consider the wording of each force majeure clause – what are the triggers? “acts of God” (if so, COVID-19 may not be covered); “epidemic,” “pandemic,” “disease outbreak,” or even “public health crisis,” (if so, COVID-19 probably is covered); “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation” (if so, COVID-19 may or may not be covered – we happened to believe “government order or regulation” more often than not will cover COVID-19, at least the shut-downs)
• Determine if the events it covers – look closely at how force majeure events are defined and decide whether COVID-19 fits the definition. For example, epidemics and pandemics are generally classified as such, and there may be debate as to applicability. Here, however, COVID-19 has been classed as a global pandemic. Some governments have actually officially certified COVID-19 as a force majeure event in their jurisdiction.
• Figure out how COVID-19 links to non-performance – A force majeure clause usually requires performance of contractual obligations to be “prevented”, “impeded”, “hindered” or “delayed”.  To rely on a force majeure clause, the event must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, “but for” COVID-19, a party must have been willing and able to perform. This isn’t necessarily performance only, but could be canceling a contract within a period of time, which deadline was missed “but for COVID-19.
• Understand the pros and cons of declaring a force majeure event – Depending on how long performance is affected, the contract may allow the right to suspend, seek an extension of time or for either party to terminate. Are you prepared for one or more of these consequences?
• Understand and comply with the contractual notice requirements -When did COVID-19 start to affect your contract? If unsure, consider declaring a force majeure at the earliest opportunity, followed by further periodic notices or updates regarding the continuing disruption so your claim is not time-barred.
• Document all evidence that supports your claim of disruption – Properly document all communications about the disruption and its effects, including order or service cancellations.
• Respond quickly to force majeure notices – Failure to respond to a force majeure may be deemed to admit that force majeure event occurred.
• Be ready when the force majeure event ends – If the force majeure event is deemed temporary, understand that your and the other party’s obligations will resume. It is likely best to agree with the other party to the contract when “performance” will resume. As the effects of COVID-19 are felt at different times and will continue to be felt, force majeure notices could be issued even after it is downgraded from a pandemic.
• Learn from COVID-19 and prepare for future disruptions – Assess your current contracts and consider how COVID-19 have impacted your business. Do force majeure clauses in your existing and future contracts clearly and expressly allocate force majeure risk? Depending on your relationships with the parties you contract with, consider amendments to your existing agreements to prepare for future outbreaks.

It is critical that companies proactively assess the specific terms and conditions of their governing insurance policies and contracts to determine whether interruptions from the COVID-19 pandemic would be covered and whether force majeure clauses are valid.

The McHattie Law Firm continues to follow COVID-19 developments as they impact the workplace and will provide frequent updates on those developments. For assistance addressing issues in your workplace, feel free to contact us. 

This blog is for informational purposes only.  It does not constitute legal advice and may not be relied upon as such.  If you face a legal issue, you should consult a qualified attorney for independent legal advice with regard to your particular set of facts.  This blog may constitute attorney advertising.  This blog is not intended to communicate with anyone in a state or other jurisdiction where such a blog may fail to comply with all laws and ethical rules of that state of jurisdiction. 

---

[1] https://www.natlawreview.com/article/revisiting-force-majeure-and-other-contractual-considerations-amid-covid-19

[2] Comprehensive Bldg. Contractors, Inc. v. Pollard Excavating, Inc., 674 N.Y.S. 2d 869, 871 (3rd Dep’t 1998) Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987); see also § 77:95. Frustration of purpose, 30 Williston on Contracts § 77:95 (4th ed.)

[3] Id.

[4] Banks, New York Contract Law § 20:8 citing RW Holdings, LLC v. Mayer (2016).

[5] Tilcon New York, Inc. v. Morris County Co-Op Pricing Council, 2014 WL 839122, *17 (N.J. App. Div. March 5, 2014) (quoting JB Pool Management, LLC v. Four Seasons at Smithville Homeowners’ Association, 431 N.J. Super. 233 (App. Div. 2013)

[6] PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011) (quoting Restatement (Second) of Contracts § 265, Cmt. a).

[7] Crown IT Servs., Inc. v. Koval–Olsen, 11 A.D.3d 263, 265, 782 N.Y.S.2d 708 [2004] (citing Restatement (Second) of Contracts § 265 (1981)); PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011.

[8] Warner v. Kaplan, 71 A.D.3d 1, 6, 892 N.Y.S.2d 311, 315 (2009) (“the doctrine of frustration of purpose … is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence”).