sfia thought leadership webinar may 5, 2020 webinar final.pdf · viral exclusions = increasingly...

SFIA THOUGHT LEADERSHIP WEBINAR

Webinar Host:Alli SchulmanManager, Communications & MarketingSFIA

May 5, 2020

Featured Speakers:Joshua KahnPrincipalMiles & Stockbridge

Survive and Advance: Important Contract and Insurance Coverage Issues for Businesses in the

COVID Era

Matthew WagmanPrincipalMiles & Stockbridge

Joseph BeaversPrincipalMiles & Stockbridge

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Survive & Advance: Important Contract and Insurance Coverage Issues for Businesses in the COVID Era

Joshua F. Kahn Joseph L. BeaversMatthew T. Wagman Alexander P. Creticos

May 5, 2020

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Who we are

• SFIA Legal Task Force members

• Matt and Josh advise and represent businesses in litigation (contract, product liability)

• Joe and Alex represent policyholders in insurance coverage claims and litigation. They also advise clients on the procurement and management of insurance assets.

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Goals for today

• Review force majeure and related legal concepts that excuse performance under a contract

• Discuss the current landscape concerning insurance claims for pandemic-related losses and the issues that will be determinative of coverage.

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Force Majeure: The Basics

○Excuses performance based on an event that preventsparties from fulfilling contractual obligations○Specific contract language controls and will be critical○Common elements:

ØList of events + “catch all”

ØNotice requirements

ØMitigation obligations

ØTermination or postponement of performance

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Force Majeure – Example 1

The parties' performance under this Agreement is subject toacts of God, war, government regulation, terrorism, disaster,strikes (except those involving [a party's] employees oragents), civil disorder, curtailment of transportationfacilities, or any other emergency beyond the parties'control, making it inadvisable, illegal, or impossible toperform their obligations under this Agreement. Either partymay cancel this Agreement for any one or more of suchreasons upon written notice to the other.

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Force Majeure – Example 2

Seller shall attempt to overcome but shall not be liable for any loss or damage from delay in delivery of any equipment or completion of any work as a result of causes of any kind beyond the reasonable control of Seller, such as, but not limited to, strike or other labor difficulties, war, riots, changes in laws and regulations, other acts of governmental authorities, fires, floods, unavoidable casualties, epidemics or health emergencies, delays in transportation of materials, or inability to obtain timely delivery of materials from suppliers where such transportation or delivery has been properly procured and appropriately expedited. In the event of any such delay, Seller will notify Buyer within a reasonable time after Seller becomes aware of such cause of delay and it is agreed that the time for delivery or completion shall be extended for a period of time at least equal to the time lost by reason of delay.

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Force Majeure & COVID-19

○Scope depends on its language

○Is the pandemic an “Act of God?”

• Common elements:

(1) unforeseeable, unpreventable event

(2) force of nature without human intervention

○The “catch all” clause may not catch all

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Force Majeure & COVID-19

○If recent events (i.e. pandemic, governmentrestrictions) qualify, these events themselvesmust prevent or delay performance

○Worsening economic conditions generally do notqualify.

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Case Study: Maui Meltdown

Background:

○ Contractual agreement to hold a conference at a hotel in Feb. 2002 (5 months after9/11)

○ FM clause allowed cancellation if a terrorist act made it “inadvisable” to performobligations

○ FM invoked; argument was that economic fallout from 9/11 made it “inadvisable” tohold conference

Holding: Performance not excused

○ “[A] force majeure clause does not excuse performance for economic inadvisability,even when the economic conditions are the product of a force majeure event.”

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OWBR LLC v. Clear Channel Commc'ns, Inc., 266 F. Supp. 2d 1214 (D. Haw. 2003).

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Case Study: Trump Beach

Background:○ Lease with the NY State Office of Parks for the construction of a restaurant on

Jones Beach in Long Island.

○ Building permit variance was denied by a different state agency, stalling project.

○ Trump invoked FM clause arguing rent should be excused because construction was delayed or prevented by “unforeseen restrictive governmental laws, regulations, acts or omissions.”

Holding: Performance excused○ Delay in construction, which in large part was caused by the NY State Office of

Parks, could not have been anticipated

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Trump on Ocean, LLC v. Ash, 899 N.Y.S.2d 63 (N.Y Sup. Ct. 2009)

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Sale of Goods: Commercial Impracticability (UCC § 2-615)

○Gap filler

○Seller’s delay not a breach of contract if performance is “impracticable”• Different outcome if partial performance is possible

• Notice requirements

• Courts generally allow both buyers and sellers to use this defense

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Sale of Goods: Commercial Impracticability (UCC § 2-615)○ “Impractical performance” – extreme and unreasonable

difficulty, expense, injury or loss

○Unforeseeability required

○Unanticipated difficulty and economic factors usually insufficient

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Sale of Goods: Commercial Impracticability (UCC § 2-615)

Is performance “commercially impracticable”?

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Common Law: Impossibility of Performance

○ “Impossibility” – contract cannot be performed due to “unforeseen, supervening act for which the promisor is not responsible”• Requires destruction of the subject matter of the contract, such

that performance is objectively “impossible”

• Financial distress or inability to make required payments do not qualify

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Common Law: Impossibility of Performance

○Complete defense to an action for damages arising from nonperformance

○Can provide an excuse for lack of performance outside of force majeure clause

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Common Law: Impossibility of PerformanceIs performance “impossible”?

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Common Law: Frustration of Purpose

o Frustration of purpose “is the common law relative to the UCC defense of impracticability.” D.S. Simmons, Inc. v. Steel Group, LLC, No. 5:06-CV-363-BR, 2008 WL 488845, at *2 (E.D.N.C. Feb. 19, 2008).

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Common Law: Frustration of PurposeFrustration of purpose – performance would be “virtually worthless,” or the objectives of the contract have become “meaningless” or “essentially destroyed”

○ Performance is possible, but would be virtually worthless to the other party

○ Courts analyze the overall, joint intention of the parties in entering the contract, not just one party’s subjective and/or post hoc intent

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Common Law: Frustration of PurposeHas purpose of contract been frustrated?

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International Considerations: The U.N. Convention on Contracts for the International Sale of Goods

Article 79 of CISG: excuses obligations when performance is rendered impossible

○ Applies when parties are citizens/residents of treaty countries, unless waived

○ Notice requirement

○ Mere “difficulty” or “additional expense” unlikely to qualify

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Practical Advice

○Potential remedies or relief will governed first by the contract, the UCC (if applicable) and common law.

○ If you have a problem talk to your business partner, try and be creative with a business solution

○ If that does not work, enforce your bargained for rights through the litigation.

○Revise (and pay close attention to) force majeure clauses going forward.

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Insurance Coverage Issues

Presentation Topics

○ COVID-19 business interruption insurance issues

○ COVID-19 event cancellation insurance issues

○ Other COVID-19 insurance issues

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Business Interruption

Types of BI Coverage

○ Business interruption

○ Contingent business interruption

○ Civil authority

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Business Interruption

The Key Coverage Issues for Pandemic-Related Losses

○ Property damage / direct physical loss or damage requirement

○ Exclusions

○ Possible legislation

○ Loss calculation

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Business Interruption

Property Damage / Direct Physical Loss or Damage?

○ Analogous examples

• Harmful gases / vapors

• Asbestos, lead, Chinese drywall, etc.

○ Factual issues

• Potential contamination vs. actual contamination

• Recontamination risk

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Business Interruption

Exclusions?

○ Viral exclusions = increasingly common after 2003 SARS epidemic (and standardized in 2006 ISO endorsement)

• Very existence supports argument that viral harm = property damage

• Causation issues (e.g., did virus cause the loss or did gov’t action?)

○ Pollution exclusion

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Business Interruption

Possible Legislation

○ Proposed / discussed in at least 7 states to date

• LA, MA, NJ, NY, OH, PA, SC

○ Potential impact

• Policy clarification (e.g., viral harm = property damage)

• Policy reformation (e.g., viral exclusions are null and void)

• Viral insurance fund

○ Retroactive application?

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Business Interruption

Loss Calculation

○ Temporal limitations in policy

○ Restoration period

• When is property “restored”?

o Once premises are decontaminated? A certain number of days / weeks after last positive test of employees/invitees? When civil orders are lifted?

• “Extended period of indemnity”?

○ Market impact of pandemic ignored or considered?

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Event Cancellation

Key Coverage Issues

○ Potentially covered circumstances / requirements

○ Exclusions

○ Loss calculation

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Event Cancellation

Potentially Covered Circumstances (examples)

○ Cancellation, postponement, relocation, reduced attendance

Potential Requirements (examples)

○ Physical or legal inability to hold event

○ Unavoidable circumstances beyond insured’s control

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Event Cancellation

Exclusions?

○ Similar to BI (viral, pollution, etc.)

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Event Cancellation

Loss Calculation

○ Treatment of refunds / coupons / credits

• Voluntary vs. contractually required

• Temporal issues?

○ Mitigation requirements

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Other Insurance Issues

Negligence claims for bodily injury, false imprisonment, etc.

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Contact Us

Joe Beavers410 385-3582

jbeavers@milesstockbridge.com

Alex Creticos410 385-3584

acreticos@milesstockbridge.com

Matt Wagman410 385-3859

mwagman@milesstockbridge.com

Josh Kahn410 385-3411

jkahn@milesstockbridge.com

mslaw.com

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Firm Overview

Miles & Stockbridge is a leading law firm with offices in the mid-Atlantic region, including offices in Baltimore and Washington, D.C. Its lawyers help global, national, local and emerging business clients preserve and create value by helping them solve their most challenging problems.

Miles & Stockbridge P.C.

www.mslaw.com

Twitter: @mstockbridgelaw

The opinions expressed and any legal positions asserted in this presentation are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C. or its other lawyers. No part of this presentation may be reproduced or transmitted in any way without the written permission of the author. Images are subject to copyright. All rights reserved.

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Have any questions?

Additional questions or contact information can be

submitted to aschulman@sfia.org

Host:Alli Schulmanaschulman@sfia.orgSFIACoordinator, Communications & Marketing Thank you to all of our participants!

Expert Panelists:Joshua Kahnjkahn@milesstockbridge.comMiles & StockbridgePrincipal

Register for the latest SFIA webinars at www.sfia.org/calendar

Matthew Wagmanmwagman@milesstockbridge.com Miles & StockbridgePrincipal

Joseph Beaversjbeavers@milesstockbridge.comMiles & StockbridgePrincipal