A brief explanation of Force Majeure clauses and applicability of business interruption insurance policies amid the world wide COVID-19 economic collapse.
-- Nick Vogel
With the novel coronavirus (“COVID-19”) literally shutting down the world economy, businesses impacted by precarious supply chains and labor shortages should consider whether or not their contracts contain force majeure clauses.
At the same time, businesses should also take a look at their insurance policies to determine whether they have business interruption insurance, and whether the specific events in recent weeks (i.e. government shelter-in-place orders and mandatory business shutdowns) qualify as causes of interruption that will allow coverage. Indeed, many restaurants are now filing lawsuits seeking a legal determination as to their rights under business interruption insurance policies. Restaurants such as the Billy Goat Tavern in Chicago, the Oceana Grill in New Orleans, and Chef Thomas Keller in Napa Valley have all filed lawsuit seeking to recover for loss of business related to government-ordered restaurant closures.
Invented as a way to mitigate damages resulting from an unexpected proverbial “act of God,” force majeure clauses allow parties to suspend their contractual obligations to one another until one or both parties can stabilize themselves. Force majeure translates from French to mean, literally, “superior strength” or “superior force.” In the legal world, force majeure clauses provide parties with a contractual defense similar to impossibility. Wisconsin Electric Power Co. v. Union Pacific R.R. Co., 557 F.3d 504, 507 (7th Cir. 2009) (the name “force majeure” suggests a purpose similar to that of the impossibility doctrine). The phrase “historically embodied the notion that parties could be relieved of performing their contractual duties when performance was prevented by causes beyond their control, such as an act of God.” Sun Operating Partnership v. Holt, 984 S.W.2d 277, 282 (Tex. App. 1998). Unlike the common law doctrines of impossibility, impracticability, and frustration of purpose, however, force majeure clauses typically only suspend a parties’ contractual duties, as opposed to outright terminating the contract. See e.g. Kodiak 1981 Drilling Partnership v. Delhi Gas Pipeline Corp., 736 S.W.2d 715, 718 (Tex. App. 1987) (occurrence of a "force majeure" condition suspends a party's obligation to perform one's obligations under a contract) (emphasis added).
Importantly, a party may only rely on the force majeure defense if its contract contains a force majeure clause. See Howard Johnson International, Inc. v. M.D.1, Ltd. liability Co., No. 11 C 2593, 2012 U.S. Dist. LEXIS 151223, at *11 (N.D. Ill. Oct. 19, 2012). Or, a contract must contain language that references the intent to excuse performance in the event of a force majeure event. Wisconsin Electric Power Co., 557 F.3d at 507 (force majeure clause must always be interpreted in accordance with its language and context, like any other provision in a written contract, rather than with reference to its name).
With world governments collectively responding to COVID-19 with unprecedented calls to shut businesses well into the immediate future, now is the time for businesses to take a close look at any contracts they may have to determine whether those contracts contain a force majeure clause.
Act of God or Act of Government?
While a contract or insurance policy may not have a clause titled “Acts of God” or even “Force Majeure,” there will likely be language that the courts would interpret as a clear force majeure term that effectively suspends contractual duties. Generally speaking, courts will consider a force majeure event to be one “caused by overpowering, superior, or irresistible force, such as an act of God, which is beyond the reasonable control of the parties and cannot be avoided by the exercise of due care.” Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 400 (Ky. 1992). As a specific example, in 2003, the International Chamber of Commerce (“ICC”) published a model force majeure clause designed to “[combine] the predictability of listed force majeure events with a general force majeure formula which is intended to catch circumstances which fall outside the listed events.” https://iccwbo.org/publication/icc-force-majeure-clause-2003icc-hardship-clause-2003/ (last visited March 24, 2020). The ICC’s list of force majeure events includes the following (abridged):
You read that correctly - the ICC’s model force majeure clause specifically includes piracy in its list of potential force majeure events. Indeed, contracting parties may define whatever type of event they wish to include in a contract’s force majeure clause. Kentucky Utilities Co., 836 S.W.2d at 400 (Ky. 1992) (analyzing force majeure clause holding that parties are free to set forth the terms they desire in a contract).
Given the possibility that a policy might cover COVID-19 related matters (epidemic, pandemic, government law or regulation, businesses should be looking to their contracts for clauses that suspend liability for any of the reasons listed above. Typically, the applicable type of insurance policy would be one that covers business interruption.
Business Interruption Insurance
Unfortunately for many small businesses, a significant amount of business interruption insurance policies contain language that excludes certain causes from triggering coverage. Thus, while a force majeure clause might intend to excuse performance when certain events above occur (eg rent or other payment), a business interruption policy might use exclude coverage for specific force majeure events. On the bright side, courts prefer to interpret insurance policies containing ambiguous language in favor of coverage. See Great West Casualty Co. v. Robbins, 833 F.3d 711, 715-16 (7th Cir. 2016). If a policy lacks specificity as to the cause of damage at issue, it is possible a court will find that there is coverage. See e.g. Royal Indemnity Co. v. McClatchey, 101 Ga. App. 507, 508 (1960) (holding that although a vehicle insurance policy contained exclusion clauses and limitations on liability, none applied to the cause of damage alleged; “Thus, the word "accident," as contained in the insurance policy, covered damage done by an act of God, including the lightning strike.”).
However, ambiguous language leads to litigation. Thus, insurance companies are not likely to pass on an opportunity to deny coverage. Indeed, there can be no doubt that the current global economic shutdown will keep many courts busy with claims related to policy enforcement for years to come.
As noted above, now is the time for businesses to look at their existing insurance policies (a business will not likely be able to obtain a new policy covering what has just occurred). The first question should be whether the policy contains language that requires the insurer to cover business interruptions. The second question would be to determine whether language exists that specifically excludes coverage related to business interruptions caused by compliance with government authority, laws, regulations, or such. For, insurance companies will likely deny coverage sought by businesses shut down specifically due to government action. Some insurance companies may also exclude coverage for claims arising from business interruptions related specifically to viruses, bacteria, or mold.
Whether denial of claims by insurance companies related to the fallout of the COVID-19 pandemic will be enforced remains for the courts to determine. Should a claim survive to trial, a jury may very well be sympathetic. However, if the matter turns solely on a matter of law, a judge will decide. But, as a bit of good news for businesses, courts will strictly construe insurance policies against the insurer. See Abstract & Title Guaranty Co. v. Chicago Insurance Co., 489 F.3d 808, 812 (7th Cir. 2007).
With this in mind and in anticipation of the foreseeable fallout coming from massive and unprecedented business interruptions around the country, legislators in some states have responded quickly by introducing legislation to protect businesses from insurance companies. For instance, on March 23, Ohio State Representatives John Rogers and Jeff Crossman introduced a bill that would prohibit the denial of insurance claims made by small businesses “for “pandemic” or “viral epidemic” reasons and allow small businesses to obtain insurance to cover their losses due to the public health emergency closures. In Massachusetts, State Senator James B. Eldridge introduced a bill stating that, "no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.” New Jersey has a similar bill in the works.
With states rushing to propose laws that might help small businesses recover from insurance policies for business interruptions caused specifically by COVID-19 and strong government responses to the pandemic, it may make sense for businesses to determine what their state will be enacting before rushing to file suit. Mudd Law will keep abreast of these developments.