Coronavirus Losses Could Trigger 'Act of God' Clauses in Contracts, Insurance Claims
Companies Should Review Policies, Agreements to Address Pandemic-Related Business Interruptions
U.S. insurers, real estate companies and legal authorities are in uncharted waters as they begin to assess how to meet their obligations and cover losses from the coronavirus pandemic.
It could take months for companies to find out whether commercial business and property insurance will cover billions of dollars in potential losses as the rapidly increasing number of U.S. coronavirus cases forces more businesses to close, according to business and insurance attorneys.
Standard commercial insurance may not cover business losses ranging from delays in product and materials shipments to closures of offices, hotels, stores, restaurants, bars and other businesses, experts said. But attorneys expect an increase in lawsuits over force majeure provisions, also known as "acts of God" clauses, according to Steven Appelbaum, a contract litigation attorney with Washington, D.C.-based Saul Ewing Arnstein & Lehr.
Attorneys who are fielding questions from construction and real estate clients said disagreements are likely to arise quickly over whether the pandemic and the government's response to it should trigger force majeure claims and allow businesses to cancel or amend contracts due to closures, stalled real estate deals or delays in receiving construction materials and other goods and services, Appelbaum said.
"In my practice, I don't recall seeing a force majeure event for an infectious disease," Appelbaum said. "You're seeing states issue emergency declarations and order closures of facilities, which could be considered a force majeure event, depending on the contract language. But it's all over the map and it's very specific to the particular contract and industry."I've seen accounts of where parties to real estate transactions are hitting brakes on transactions to see how the pandemic plays out," he added.
The spread of the coronavirus has disrupted global travel and business on a scale never seen in modern times. Whole countries have been locked down, and supply chains have been indefinitely disrupted. It has sent the stock market plummeting, and some economists and analysts believe it has already helped to set off a global recession.
How companies and individuals recover from the closings and impacts could determine whether they survive and reopen at all. Hotels, malls, community housing and nursing homes have been particularly hard hit by the virus. But other industries, including logistics and offices, are likely to be hurt by the ripple effects of the virus, such as requirements that people limit community gatherings and face-to-face meetings.
The University of California, Los Angeles, Ziman Center for Real Estate predicts office, industrial and apartment sectors could take a major hit from the 2 million job losses expected as result of the economic free fall.
"In sum, it will not be a pretty picture over the next several months," reads a UCLA Ziman Center Economic letter issued this week.
Some companies are invoking force majeure provisions in canceling or rescheduling events that can cost tens of thousands of dollars in room bookings, travel costs and other expenses.
Washington, D.C.-based tenant representation firm Cresa was recently forced to cancel its annual meeting scheduled for May in Las Vegas because of the outbreak, Chief Executive Jim Underhill told CoStar News.
"Fortunately, we have a force majeure protection in our agreement so we’re probably okay," Underhill said. "But we had an events booking group and other vendors helping us. It’s not just the hotels that are affected by this crisis. The trickle-down impact is very significant."
No Coverage for Most Shuttered Businesses
Companies may have also trouble getting reimbursement for loss under standard commercial property insurance. Most commercial insurers excluded viral outbreaks from standard business interruption policies after the global outbreak of severe acute respiratory syndrome, better known as SARS, in 2002 and 2003.
Insured companies may face numerous hurdles recouping losses under a typical property policy because coronavirus-related losses typically don't involve physical property damage, said Shannon O'Malley, a partner in the Dallas office of Zelle LLP, a Minneapolis-based international law firm specializing in insurance-related disputes. For example, revenue losses may be linked to lost productivity, inability to travel and reductions in purchases goods and services.
"None of these causes of economic loss are related to physical damage to insured property," O'Malley said.
Insured companies should carefully review their policies because some commercial insurance programs have expanded coverage to include optional riders and endorsements at the time of purchase covering nonphysical types of loss specifically relating to epidemics, including event and bookings cancellations, O'Malley said.
For example, the loss of use of property that has become unusable because of virus contamination may under some circumstances be considered a physical loss covered by property policy and accompanying business interruption coverage.
"If a facility is shut down or property is quarantined because of concerns that the property itself will serve as the mechanism for the spread of the coronavirus, the insured will have a much stronger argument that there is physical loss or damage," said Micah Skidmore, a commercial insurance lawyer with Dallas-based Haynes and Boone law firm.
The World Health Organization reported 179,843 confirmed cases of the coronanvirus and 7,176 deaths in 159 countries as of Tuesday morning, including 3,536 confirmed cases and 58 deaths in the United States.