What the Fine Print in Your Contracts and Insurance Policies Means for Coronavirus Losses

With the COVID-19 outbreak spreading around the world, quarantines, business closures, supply shortages, and travel restrictions are becoming more commonplace…

With the coronavirus (COVID-19) outbreak spreading around the world, quarantines, business closures, supply shortages, and travel restrictions are becoming more commonplace. They are also starting to affect U.S. businesses, including those in New York and New Jersey.

To help minimize the impact on their operations, businesses should be actively working to secure alternate supply streams in the event of supply chain disruptions; develop remote-work plans for employees in the event of quarantines and business closures; and establish alternatives to in-person meetings in the event of widespread travel restrictions. It is also wise to examine the fine print in your contracts for a clause known as “force majeure” and determine whether your insurance policies cover “business interruption.”

Force Majeure Clauses

As the coronavirus spreads, many New York and New Jersey businesses are taking a closer look at the force majeure clauses in their contracts. While these clauses are often overlooked as “boilerplate” provisions, they can be extremely important when disaster strikes.

A force majeure clause, meaning “superior force” in French, relieves the parties from performing their duties under the contract in certain circumstances.  The circumstances include those deemed beyond their control that makes performance inadvisable, commercially impracticable, illegal, or impossible. Examples include natural disasters like hurricanes, floods, earthquakes, and other “acts of God.” They also apply to man-made disasters, such as war, terrorism, civil disorder, supply shortages, and labor strikes.

In the past, disease outbreaks have triggered force majeure clauses, although not in all cases. According to Chinese media, more than 1,600 companies in China have applied for and obtained force majeure “certificates” from the Chinese government to support claims under force majeure clauses.

When determining if a force majeure provision applies, one of the first steps is to determine whether the event qualifies under the contract. Many contracts are ambiguous as to whether an event qualifies, and the party seeking to rely on the clause may have the burden of establishing the occurrence of a force majeure event.

The next step is to determine whether the risk of nonperformance was foreseeable and able to be mitigated, as well as whether performance is truly impossible. Under the terms of most force majeure provisions, parties are obligated to mitigate any foreseeable risk of nonperformance. Accordingly, they can’t invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated. While it will depend on the terms of the contract, the party seeking to invoke force majeure is typically required to establish that performance is truly impossible as opposed to merely impracticable (untimely, expensive, etc.).

The terms of the contract are likely to specify specific and detailed notice requirements that may be required. The contract should also provide a timeline for providing such notification. Parties should also carefully review the contract to determine if there are any requirements regarding evidence or information that must be submitted along with a notice of reliance on the force majeure clause.

Business Interruption Insurance

For small businesses in New York and New Jersey, missing even one day of business can be disastrous. Therefore, businesses should verify what is covered – and what is excluded – under their insurance policies if COVID-19 forces a temporary business closure.

The most applicable coverage is business interruption insurance, which specifically provides coverage when the insured suffers a loss of income from a disruption of business operations. Losses that may be reimbursed include lost revenue, expenses like rent, and temporary relocation costs.

Generally, in order to incur a business interruption loss, an insured must suffer a loss of income from a disruption of business operations. This disruption may be from a physical loss or damage to the insured’s own property, as a result of a covered cause of loss. Contamination may not always be considered physical damage. However, some policies may also cover business interruption simply as a consequence of government action, such as an order from health officials, or as a preventative measure to alleviate concerns about the spread of coronavirus.

In the wake of prior outbreaks, such as Severe Acute Respiratory Syndrome (SARS), some insurers expressly excluded disease outbreaks in their business interruption policies. Accordingly, it is important to read your policy carefully and consult an experienced attorney with any insurance liability and recovery questions related to the COVID-19 outbreak.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.