Business interruption insurance provisions

Property policies cover physical damage to property and business interruption losses. These policies often cover a policyholder's losses when its operations, or those of vendors, are disrupted. Careful analysis of policy language is necessary. For instance, business interruption coverage is often available, but it is usually linked to direct physical loss or property damage at the policyholder's location, or a supplier's location in the case of contingent business interruption.

Insurers will likely take the view that if a property has been closed for fear of the new coronavirus, but is otherwise habitable, these policy requirements are not satisfied. Depending on the circumstances, the governing law, and the applicable policy's language, they may very well be wrong. By way of example, some policies require "direct physical loss of or damage to" property. "Loss" and "damage" are not synonymous and may require separate analysis. Such wording could arguably trigger coverage where there is a loss of the premise's use (even if the property is not physically damaged).

If a property has been contaminated by an infected person, or because COVID-19 is in the airspace or on surfaces, this will likely constitute direct physical damage. Some policies, however, expressly define physical damage to include loss of use and function. Further, McCarter's Insurance Recovery Group convinced New Jersey's Appellate Court that physical damage includes loss of access, use and functionality, even when the policy fails to so define those terms (other state courts agree).

Property policies likewise provide coverage when there is an order of civil authority preventing business operations, without regard to any direct physical loss. Policyholders must understand the coverage provided by their insurance contracts, including any applicable sublimits and exclusions, if any, for property damage arising from social distancing, pathogens, viruses, and other disease-causing agents.

Other insurance products

Event cancellation policies, broadly speaking, cover policyholders' lost event-related revenue and expenses. These policies typically are triggered by events beyond the policyholders' control, and triggering events are listed in the policies. The policies may extend, depending on their provisions, to communicable diseases, epidemics and pandemics. They also may cover events that organizers are forced to cancel due to governmental bans, such as those imposed on public gatherings across the country. Most cancellation policies require policyholders to make reasonable attempts to minimize their losses, perhaps by rescheduling the event, if feasible.

Directors and officers liability insurance may be implicated in shareholder litigation alleging a company's failure to develop adequate contingency plans, to observe recommended or required protocols, or the disclosure of risks to financial performance. Employment practice liability insurance also may be implicated if employees allege they were mistreated when suspected of being infected. Some employment practices liability policies expressly cover alleged discrimination based on origin and medical status.

It is essential that policyholders review these contracts carefully to understand the express terms and to confirm the policies are consistent with their reasonable expectations at the time they were marketed and sold to them.

Force majeure

In addition to looking at insurance contracts, policyholders need to be mindful of their contracts with others. Businesses need to fully understand their contractual rights, remedies and obligations concerning their customers or business partners. Of particular importance in the current climate are force majeure provisions, which have become common in commercial contracts following the September 11, 2001, terrorist attacks, and Superstorm Sandy in 2012.

Force majeure — French for "superior force" —  refers to an unforeseeable event beyond the control of the parties that prevents a party from fulfilling its contractual obligations in a timely or complete manner. To the extent an agreement includes a force majeure clause, it will generally operate to relieve one or both parties of some or all of their contractual obligations if the unforeseeable event impairs performance of that contract.

Where a company is unable to perform, the parties to the contract should review their contracts to determine which party bears the risk of loss if performance becomes impossible or impracticable. For example:

• Does the contract contain provisions regarding breach, cancellation, termination or repudiation?
• Does the contract have a force majeure clause? That is a provision that excuses a party from obligations where performance is unworkable because of events the parties could not have anticipated or controlled.
• Does the provision expressly excuse performance for pandemics, epidemics or quarantine?
• Does it specify acts of God as force majeure events?
• What law governs the contract?
• If the contract has no force majeure provision, does the controlling law nonetheless have principles offering relief for the impossibility of performance or frustration of the purpose of the contract?

Broadly speaking, a force majeure clause excuses performance made impossible or impracticable by events neither anticipated nor controlled by contracting parties. Although these provisions may be narrowly construed by courts, depending on a contract's precise terms, the clause can apply to natural and man-made events (e.g., storms, strikes and riots). These provisions typically do not apply to purely economic hardship, however. Whether and how a particular clause will apply to pandemics, such as COVID-19, depends on the language of the provision and controlling law.

Courts have held epidemics to be force majeure events. Whether a force majeure clause covers an epidemic, such as COVID-19, will depend largely on a contract's language.

Parties may negotiate which specific events qualify as force majeure events. If epidemics are listed, this will likely relieve a party from performance. If the contract broadly excuses performance "for acts of God," the parties must consider whether the circumstances qualify. Black's Law Dictionary defines "act of God" to mean an "overwhelming, unpreventable event caused exclusively by forces of nature," and include "natural phenomena that are exceptional, inevitable, and irresistible, the effects of which could not be prevented or avoided by the exercise of due care or foresight."

As companies evaluate their contracts' provisions, they will want to consider:

• Any controlling law provisions;
• how force majeure events are defined;
• what performance is excused or delayed;
• whether events beyond force majeure events contributed to any delay or nonperformance;
• whether rights of termination apply and when;
• what mitigation efforts are required; and
• whether and how notice must be given under the circumstances.

Whether circumstances constitute a force majeure event that relieves a party's obligations under a particular contractual agreement will depend largely on the specific language of the involved agreement, the cause and circumstances surrounding the non-performance, and the applicable law.

Notice

Commercial contracts with force majeure provisions often require notice. Notice likewise triggers an insurance company's duty to investigate, and pay as appropriate, a claim or loss. Most insurance policies require the policyholder to give notice "as soon as practicable." A policyholder that fails to give appropriate notice may forfeit some or all of its coverage, for example, costs incurred prior to notice and without an insurer's consent.

In most jurisdictions, however, an insurer cannot prevail on a late notice defense unless it can demonstrate it suffered prejudice because of the late notice. A minority of jurisdictions enforce notice requirements as conditions precedent to coverage without requiring any showing of prejudice.

Parties should determine when notice is required and how it should be given under their contracts. Compliance with a notice provision is important because failure to provide timely notice can breach a contract and, in the case of an insurance contract, offer an insurer an excuse to seek to avoid or delay its coverage obligations.

Sherilyn Pastor is chair of the McCarter & English's Insurance Recovery, Litigation & Counseling Group. Contact her at [email protected]. Jennifer Black Strutt is an associate in the Insurance Recovery, Litigation & Counseling practice group at McCarter & English. Contact her at [email protected].

Related:

• Coronavirus coverage under a CGL policy
• COVID-19: NJ holds bill compelling insurers to pay business claims
• COVID-19 cases hit the courts