The Coronavirus Pandemic: Force Majeure Contract Clauses and Business Interruption Insurance Issues

By: Paul McDonald and William Wahrer

On March 11, 2020, the World Health Organization officially declared the Coronavirus a global pandemic. The ensuing responses from federal, state, and local governments as well as public health organizations are impacting the operations of many businesses.  These impacts include interruptions of supply chains, business slowdowns, and even shutdowns, which may lead to financial losses.

While the scope of the pandemic and the responses thereto are changing daily, and the full extent of its impact remains uncertain, businesses should be proactively considering how their contractual rights and obligations may be impacted. One prominent issue that businesses are facing is whether the Coronavirus constitutes a force majeure event and therefore, excuses contractual performance. In addition, the economic disruption of the Coronavirus may implicate companies’ business interruption coverage, which may provide potential relief to lessen financial losses related to the Coronavirus.

Force Majeure

What Is It?

“Force majeure” is a French term that is literally translated as “superior force.” In American law and business, the phrase refers to an unanticipated and uncontrollable event. Many commercial contracts contain a “force majeure clause,” which defines a set of events and/or circumstances beyond the contracting parties’ control that may excuse or delay parties’ contractual obligations for performance because performance would either be too difficult, impossible, or commercially impracticable.

The exact scope and the effect of a force majeure clause is dependent on the specific contract at issue. However, certain general principles are typically applicable. A force majeure clause will usually include a list of qualifying events, such as natural disasters, acts of God, acts or threats of terrorism, war, and labor difficulties. The clause typically requires the event to be unforeseeable and that the invoking party comply with certain notice obligations. Notably, courts are generally reluctant to excuse performance if the invoked force majeure event is not specifically stated in the clause because force majeure clauses are usually construed narrowly with the contract’s plain language. Moreover, the party relying on the force majeure clause typically has the burden to prove the cited event qualifies as an event specified in the contract, that the event was beyond its control, and was not due its own fault or negligence. These determinations are all very fact specific. Additionally, questions concerning contract interpretation are governed by state law, and thus, can vary depending on the jurisdiction.

Proactive Steps To Best Position Your Business

Businesses would be wise to take proactive steps to best position themselves to invoke or react to a force majeure defense. These include reviewing their contracts to evaluate the potential applicability of any force majeure rights/remedies and whether there are certain notice and response requirements. Businesses should keep detailed records that document the nature and scope of any  business interruptions and attendant costs, as well as evaluating alternate means of performance, including changing to alternate supply chains. Businesses should be monitoring all governmental and public health advisories and restrictions so that their information is current and complete. Businesses should also consider constructing contingency plans if they foresee force majeure being invoked against them, or inversely believe they will seek to invoke it.

Business Interruption Coverage

What is It?

Many businesses have “business interruption insurance,” which is meant to protect a business from losses sustained as a consequence of its inability to continue its normal operations and functions. Relatedly, “contingent business interruption insurance” provides insurance for economic losses stemming from disruptions to the company’s suppliers or customers. Covered losses under these types of coverages may include loss of earnings and additional expenses incurred during the interruption.

Business interruption insurance is usually purchased as part of a business’s commercial property insurance policy. Under many policies, coverage is only implicated when there is direct physical damage to or destruction of any insured property. Moreover, courts generally interpret coverage in accordance with the policy’s plain and ordinary language. As a result, insurers may dispute that any business interruptions resulting from the Coronavirus trigger coverage due to a lack of actual physical damage to insured property. What constitutes a “business interruption” also varies as some policies may require the total cessation of business in order to trigger coverage, whereas others may only require a slowdown or a reduction of business capacity. A policy may also specifically exclude certain occurrences such as civil disturbances and power service failures or may only cover certain business locations.  All these considerations are heavily dependent upon the jurisdiction and the policy language at issue.

Proactive Steps To Best Position Your Business

Businesses would be wise to obtain complete copies of all applicable insurance policies and to review and understand the nature and scope of any business interruption insurance that may be applicable, as well as any conditions or requirements for coverage to be triggered. Timely and detailed record keeping of the causes of interruption and the nature and amount of attendant costs will also typically improve the chances of a greater recovery from available insurance coverage.