Coronavirus: Force Majeure Contract Clauses, and Business Interruption Insurance

By April 4, 2020Uncategorized

Tuesday, March 13, 2020

Frank C. Gibson, Partner

The United States is under a national emergency declaration due to the continued spread of COVID-19 (Coronavirus). Markets have been affected. Travel restrictions are increasing, as are supply chain disruptions. Closures of unknown duration are daily announced by businesses, government offices and facilities, schools and other educational institutions.

We cannot predict how long the coronavirus will disrupt life. Now is the time to consider the legal landscape when planning for or dealing with the coronavirus outbreak. Human health comes first of course, yet economic considerations should not be ignored. Whether or not they are aware of it, businesses and other contracting parties often allocate the risk of unanticipated business disruption in their contracts in force majeure clauses (translation from the French: “superior force”), and through business-interruption insurance coverage. Whether you are considering insurance recovery or assessing the risks of nonperformance of contractual duties in the context of the Coronavirus pandemic, the following points should be borne in mind.

Let’s start with force majeure clauses. These are provisions that can excuse a party’s performance of its contractual obligations under circumstances beyond the party’s control. Depending on its scope, the clause can provide protection if a party’s performance would be commercially impracticable, illegal, or impossible. The clauses often refer to “acts of God, war, riot, strike, labor disturbance, fire, explosion, flood, acts of terrorism or shortage or failure of suppliers” as events triggering relief from the obligations of contract performance.

Courts vary in their interpretation of force majeure clauses. Whether and how the clauses are enforced depends on their wording, the triggering event, and the nature of the performance to be excused. For instance, a clause that includes “disease” as triggering event in a banquet-facility rental agreement would likely to be interpreted to excuse the renter’s payment obligation in today’s factual context. On the other hand, a contractor relying on “act of God” wording in a force majeure building contract clause is unlikely to obtain relief from his completion deadline if some of his workers don’t show up due to their Coronavirus concerns. If you have concerns with the risks of performing a contract, or wonder how to deal with your counterparty’s non-performance under a force majeure clause, you should consult legal counsel before acting or reacting.

When it comes to insurance, your policy must be reviewed for business interruption coverage. This coverage usually obtains if there is a “direct physical loss” (e.g., fire, flood or earthquake). Those sorts of peril might be difficult to show if your business is down due to your workers’ or customers’ Coronavirus concerns, or even due to cases of COVID-19 among your workers. In the latter case, a good argument for “direct physical loss” and therefore coverage might made if one or more infected workers’ presence in the workplace before they were tested and quarantined lead to business closure due to contamination. Coverage might also obtain if an essential supplier shuts down due to COVID-19, thus shutting you down. In that case, the supplier’s goods or services could be properly characterized “property operated by others whom you depend on to . . . deliver materials or services to you . . . accept your products or services . . . manufacture products for delivery to your customers . . . attract customers to your business” – thus meeting the policy definition of as “Dependent Property.”

Coverage might also come into play if your business cannot operate due to the actions of a civil or military authority. For instance, if your business is supplying school cafeterias, and if the governor has ordered all schools closed, there is potential for insurance recovery – at least for the period of time set forth in the policy.

Because your insurance broker or the insurer itself might well greet your coverage inquiry with skepticism, it is a good idea to check with your attorney. If your attorney is not comfortable giving an opinion in this esoteric area of the law, then she or he can refer you to specialized coverage counsel.

If you have questions about how to protect yourself as a business owner from the financial consequences of the Coronavirus pandemic, please give one of our business attorneys a call at 541-686-9160.

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