COVID-19 Contract and Insurance Issues

Dear Clients and Friends,

Our team of business, real estate, and litigation lawyers are available to answer your questions about some of the most pressing COVID-19 contract and insurance issues faced by our business clients. Our lawyers are using WebEx and Zoom to counsel clients, negotiate transactions, and try to resolve disputes including conducting online mediations and arbitrations. While courts and arbitration organizations have temporarily suspended in-person proceedings, they are open for business to accept new lawsuits and arbitration filings, and in some cases to conduct online hearings.

Do Your Insurance Policies Provide Coverage for COVID-19 Losses?

The answer is, maybe. The terms of your policies will determine the viability of your claims. You should review all your insurance policies and consult counsel or your insurance broker to determine the policies that may apply and their terms, especially notice requirements.

Companies with business interruption insurance may be covered from losses resulting from direct interruptions to the business’s operations, lost revenue, fixed expenses such as rent and utilities, or expenses incurred to operate from a temporary location. Contingent business interruption insurance may cover lost profits and costs that entirely result from disruptions in a company’s supply chain. While these policies typically relate to physical property damage, we are now seeing claims for coverage of losses due to business interruption resulting from COVID-19.

In one of the first cases seeking insurance coverage for losses resulting from the effects of the COVID-19 pandemic and government shutdowns, owners of a New Orleans restaurant seek a declaratory judgment against their insurer, Lloyd’s London, and the Governor of and the State of Louisiana.

In Cajun Conti, LLC, et al v. Certain Underwriters at Lloyd’s London, et al., filed in Louisiana state court, the plaintiffs allege that the insurance policy issued by Lloyd’s covers all risks (including loss of business income) unless clearly and specifically excluded in the policy. Because losses resulting from the Coronavirus or global pandemics are not excluded, they are covered. The plaintiffs further claim coverage for losses caused by civil authority shutdowns as a result of the global pandemic. The plaintiffs seek a declaratory judgment as to whether the civil authority provision of the policy has been triggered, whether the policy contains an exclusion for a viral pandemic and whether the policy provides coverage for losses resulting from future civil authority shutdowns of restaurants. We will be following this and other coverage cases to see how the courts apply insurance policies to the current situation.

Unlike other states, Connecticut has not yet enacted legislation addressing insurance issues relating to COVID-19. The Department of Insurance has issued some information that addresses common questions, “Novel Coronavirus and Business Interruption Insurance—FAQs.”

Force Majeure Clauses and Common Law May Excuse Contract Non-Performance

The COVID-19 pandemic has impacted the ability of businesses around the globe to maintain operations and fulfill existing contractual obligations.

Force majeure clauses excuse a party’s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations. Whether a force majeure provision applies is contract specific. Companies should review existing contracts for force majeure clauses that contain any provisions which cover COVID-19. If such a clause is missing, other contract provisions should be considered which may excuse nonperformance of a contract due to COVID-19.

Companies should be sure to comply with any notice required under the contract to preserve their rights. Each force majeure provision is different and must be reviewed to carefully determine the notice deadline. Typically, force majeure provisions have a tight timing requirement, requiring notice to the other contracting party within just days after the force majeure event causing the required condition. The notice should follow the requirements of the force majeure provision, which will usually, at the very least, require identification of the specific force majeure event and required condition. You may also want to provide a factual basis for the notice based on the extreme facts and circumstances, including government pronouncements, orders, actions, guidance, and directives as well as relevant news reporting.

A force majeure clause may excuse contract non-performance if the event is specifically identified in a contract’s force majeure provision. For a force majeure clause to excuse non-performance, the nonperforming party must show that performance was truly impossible. If a party could have foreseen and mitigated the potential nonperformance, or performance was merely impracticable or economically difficult rather than truly impossible, it is likely that force majeure will not excuse non-performance.

Governmental orders or restrictions that make performance impossible may also excuse non-performance.

Even if your contract does not contain a force majeure clause, the Uniform Commercial Code or common law doctrines of impossibility or, in some jurisdictions, impracticability may be invoked to excuse nonperformance. These doctrines may apply if you can establish that: (1) an unexpected intervening event occurred; (2) the parties’ agreement assumed such an event would not occur; and (3) the unexpected event made contractual performance impossible or impracticable. Impracticability excuses performance when the party can show that an event has made performance so difficult and expensive that, while still technically possible, it has become impractical. Like impossibility, the non-occurrence of the event must have been a basic assumption of the contract. Standing alone, increase in the cost of performance does not trigger impracticability. On the other hand, a business that cannot receive materials without excessive difficulty and extreme and unreasonable cost due to shutdowns of suppliers because of COVID-19 may seek to excuse nonperformance based on impracticability.

The doctrine of frustration of purpose may also offer relief if you can show that the event has destroyed the purpose of the contract.

Companies should review existing contracts. Is there a force majeure clause that contains any provisions which cover COVID-19? If not, other contract provisions should be considered which may excuse nonperformance of a contract due to COVID-19. Companies should also be sure to comply with any notice required under the contract or the Uniform Commercial Code, to preserve their rights.

Each insurance policy, each contract, and each factual situation is unique. We encourage you to contact us to review your documents and advise on your specific situation.

Corporate Practice Group
Litigation Practice Group
Real Estate Practice Group