COVID-19 LEGAL ALERT: Business Insurance Coverage and the Force Majeure Clause of Contracts
Below is some general information regarding two commonly asked business questions about COVID-19.
Does my business insurance cover COVID-19 losses?
Most companies carry a variety of different insurance policies that may help mitigate financial losses related to COVID-19. Whether the disruption or delay caused by the COVID-19 outbreak gives rise to an insured risk depends on the insurance policy terms. Clients should review their policies to determine if they have coverage for losses related to COVID-19. If so, the policy typically will require the insured to give prompt notice to the insurer and take steps to mitigate its loss or damage, so it is important to identify these policies early. Some potentially applicable policies for COVID-19-related losses include:
- Business interruption insurance – This provides coverage for losses a company sustains due to a business stoppage or slowdown caused by direct physical loss or damage to insured property. It typically will not apply for COVID-19-related losses unless the property itself is contaminated.
- Supply chain insurance – This provides coverage against losses resulting from disruptions in a company’s supply chain and may apply to losses related to COVID-19, because it does not generally require physical loss. However, there are often limits or exclusions to these policies.
- Commercial general liability insurance – This coverage for third-party claims alleging bodily injury, property damage, or personal injury can apply, for example, if a company faces a claim that its negligence led to COVID-19 exposure and infection of customers.
In addition, clients that have suffered a loss resulting from disruption due to COVID-19 should review affected contracts to see if the contract requires the counterparty to list the entity as an additional insured on a policy that might respond to a coronavirus claim. Similarly, companies should check if there is any indemnification provision in the relevant contract that would cover COVID-19-related losses. For example, many contracts contain a provision that one party will indemnify the other for losses related to the indemnitor’s breach. If the indemnitor has failed to perform due to COVID-19 (and none of the excuses for performance apply), the indemnitee may have a valid indemnification claim.
Is COVID-19 covered in the force majeure clause of contracts I have signed?
A force majeure clause is a provision in an agreement that excuses a party's performance under the agreement to the extent its failure to perform is due to certain extreme circumstances outside that party's control, for example, due to the occurrence of a natural disaster or an act of terrorism or war. However, fitting into a specified force majeure event is only part of the equation. Other critical steps may include causation (the impacted party may need to show a causal link between COVID-19 and its failure to perform) and notice. Clients should review whether the force majeure clause in various contracts have any notice requirements and ensure the timeliness, complete content, and proper delivery method of any force majeure notice.
Many contracts will include one or more of the following as specified force majeure events, which may apply to COVID-19:
- A pandemic or epidemic. The World Health Organization declared COVID-19 a pandemic on March 11, 2020.
- A public health emergency or communicable disease outbreak. COVID-19 is a communicable disease and was declared a public health emergency by US authorities in January 2020.
- A quarantine. Even if a quarantine is in place, a contract party may argue that it is not a force majeure event if it affects individuals but not the impacted party as a whole.
- Government or administrative action or changes in laws or regulations. The impacted party may argue that force majeure applies if authorities order a relevant state-imposed lockdown or facility closures to try to contain the spread of COVID-19.
- Failure of upstream suppliers. If the clause provides for upstream supplier defaults or delays, the impacted party may have an excuse for delayed performance while it finds another supplier.
If the force majeure clause does not specifically list covered events, the parties must consider if COVID-19 would fall under general force majeure wording, such as "Acts of God." This depends on the rest of the force majeure clause, the contract, and the circumstances causing the non-performance. Parties should not assume these catch-all clauses apply to COVID-19.
If you need assistance interpreting insurance policies, analyzing contracts, or navigating new legislation related to COVID-19, contact your King & Jurgens attorney or Len Brignac at lbrignac@kingjurgens.com.
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