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Your Business is Shut from Coronavirus, Now What? Checking Insurance Policies and Contracts

March 18, 2020 | News
Your Business is Shut from Coronavirus, Now What?  Checking Insurance Policies and Contracts

Business owners watch the news while shouldering many responsibilities. Sports cancelled. Schools closed. Gyms and bars shut. Restaurants scaled down to take-out and delivery. Then, along with the run on goods, burglaries started.

Now business owners have either shut or reduced hours and staff. As you ask yourself, “What next?” here are a few legal tips.

Check Your Insurance Policy for Business Interruption Coverage

A first step in crisis management is always check the insurance policy.  Business interruption insurance is a frequently purchased protection.  However, successfully collecting is a tricky process. 

The first barrier is making sure an exclusion doesn’t apply.  After the SARS outbreak of 2003, insurance companies began issuing exclusions for pandemics.  A good policy should cover weather, floods, fire, earthquakes, disasters that are natural or manmade, civil unrest, war, terrorism, pandemics, and government actions.  Government actions (or acts of civil authority) can include orders to evacuate or shut, and often proceed hurricanes or pandemics, such as the Covid-19 virus. 

Matching the policy language to the facts is a job for experienced litigation counsel.  If you do have coverage, insurance companies often engage in legal maneuvers to cheat you out of it.  Likewise, Plaintiff attorneys have thought of various ways to go after coverage, including suing brokers who failed to obtain the correct insurance that their clients requested.  Overall, an attorney can help you document facts that match both language in your insurance policy and court rulings interpreting such policies.

A common insurance tactic is disputing what is a “triggering event.”  For Covid-19, there are already declarations of emergencies by states and by the US President.  Local authorities may have issued orders or recommendations.  However, insurance policies often tie triggering events to physical property damages.  There are two federal cases that excused insurance companies from paying business interruption insurance, on evacuation orders for hurricanes.  The theory was that the order to evacuate was for fear of property damage, not that any damage had occurred yet.  Whether this applies to you depends on the language of your contract. 

Even if you have a clause requiring physical damage, how a virus may fit into the policy is less tested than fires and floods.  A virus could be seen like a chemical spill, where a whole area must be shut.  Also, some insurance policies have provisions on interruptions to suppliers or customers, which could lend to recovery.  Physical damage may also result from other issues such as burglaries or vandalism. 

Moreover, whether a business slows or shuts completely can determine whether insurance is available, depending on the policy.  Some courts hold that “interruption of a business” means “cessation or suspension of business”.  Accordingly, if a business remains open while business slows down, that could preclude a claim.  Likewise, one court held that business suspension must be necessary – not from a lack of customer demand – but from an inability to meet customer demand. 

If you do have a claim, documenting the losses becomes an important issue.  There is at least one appellate case holding that speculative losses are not recoverable.  Other cases have disputed about when losses start and stop, and what damages measure should be used.  Thus, it become important to document the business prior to the pandemic, as well as afterwards. 

In summary, if you have a business interruption issue, you should talk to a lawyer about the exact details of what is happening and how to document those issues for your insurance claim.   

Check Contracts for Force-Majeure and Remedy Provisions

You should also check your contracts with vendors.  There are two main areas.  The point is to manage risk of your vendors not performing, or to address your own liabilities when you cannot perform under a contract. 

First, check for Force Majeure clauses.  This is the classic “Act of God” excuse for unusual and unexpected events that make fulfilling a contract impossible.  These clauses are narrowly construed, but the scale and unforeseeability of the Coronavirus pandemic is the kind of thing that could fit.  Any specific clause should be checked for its validity under Texas law, and if it has specific enough language to know what to do.  Be aware that courts can limit force majeure clauses to its specific language. 

Second, check for remedy language in your contracts.  Often, there are liquidation provisions and notice clauses that set grounds for how to terminate a contract.  Because there are usually time provisions in termination clauses, if you need to do it, sooner is better than later.  If you can’t pay right away, at least take the steps to limit damages.  If you have damages, you should also mitigate them.  If a tenant stops paying and moves out, try to find another.  This at least documents your damages. 

There are equitable doctrines in case law to excuse contract compliance when it becomes impossible to do so.  We have brought claims for rescission of contract, in unusual circumstances.  Keep in mind that unprofitable is not the same as impossible.  The point is that if you need to negotiate a claim, there are ways of doing it, and your attorney can help. 

When businesses shut or have interruptions, property leases are often a problem.  These are typically long term, and some have personal liability.  Sometimes, we’ve found obligations go both ways, and the owner didn’t live up to its side of the bargain when bad events happened.  Regardless, if your business is shutting, it can be a good time to negotiate.  It’s hard to get money out of closed business.  An owner may prefer to keep someone in the lease and give a break, while waiting for the virus to pass us by.  If you find yourself in desperate circumstances, and need help negotiating, feel free to call us. 

Practical Steps

As attorneys, we approach business cases as problem solvers.  It’s easier to work things out when everyone knows the legal positions and defenses.  We’ve settled many cases by providing a legal analysis, and then working towards a practical solution.  It’s hard to get paid when a business shuts.  It can make better sense to reach a comprise.

If your business needs legal help due to the Coronavirus, call us for a free consultation.

Joseph M. Schreiber

Founding Partner

Erik A. Knockaert

Founding Partner