Author Archives: Heidi

Proposed Legislation For Business Interruption Insurance Coverage: Life Raft For Small Businesses, Anchor For Insurance Carriers

New proposed legislation regarding business interruption coverage may be an economic life raft for small businesses but a significant financial risk to insurance carriers.  The insurance industry has been hit with a substantial number of business interruption claims, a large part of which carriers have denied claiming a lack of physical property damage or citing a virus exclusion.  The proposed legislation combats the growing economic challenges for small businesses and denial of insurance coverage.  The insurance industry has pushed back hard against the legislation arguing that such laws would overwrite private contracts.  Proponents of these bills reason that the laws would provide for the creation of funds to reimburse insurers for losses paid by the industry and are another form of government stimulus funding, which utilizes the insurance industry to administer the distribution of those funds.

Although it is unknown whether the proposed legislation will be enacted, it is important to recognize that not all policies need this legislative assistance.  Some business interruption policies likely provide business interruption and other types of coverage for COVID-19 related losses under their terms, as written, and the enactment of legislation would not change such coverage.


Which Claims Are Covered under the Proposed Business Interruption Insurance Coverage Legislation?

Legislators in several states, including New Jersey, New York, Massachusetts, Michigan, Ohio, Pennsylvania, Louisiana, and South Carolina, as well as the House of Representatives, have introduced legislation to retroactively compel insurers to cover business interruption claims arising from damages sustained during a period of a declared state of emergency due to COVID-19, and a few bills going so  far as including any mutated forms of COVID-19.  The proposed bills provide coverage to claims asserted by small businesses, defined in the bills to be businesses with either 250, 150, or 100 and fewer employees.  Further, some of the proposed bills expressly address virus exclusions and require insurers to provide coverage despite any virus exclusion provided in a policy.

None of the proposed legislation have yet passed, and most have been referred to the state’s respective insurance or finance committee for review.


Has California Introduced Proposed Legislation?

There is no comparable bill pending in California.    However, California’s Insurance Commissioner Ricardo Lara sent a letter to Speaker Nancy Pelosi and California’s Congressional Delegation alerting them about the extent of the business interruption crisis and asking them to take immediate action to protect California’s businesses.  To provide state policymakers with more information, Commissioner Lara directed carriers to submit data by April 9, 2020 to the Department of Insurance regarding coverage of commercial business interruption claims related to COVID-19.  Commissioner Lara has not provided an update on the data produced by carriers.

Further, and in response to complaints regarding recent and swift denials of business interruption claims, Commissioner Lara issued a notice on April 14, 2020 requiring carriers and other insurance licensees to comply with their contractual, statutory, regulatory, and legal obligations and, importantly, to fairly investigate all business interruption claims related to COVID-19.  And, if a carrier denies a claim in its entirety or in part, then the carrier must provide the insured a written explanation of the legal and factual bases for the denial.


Potential Pitfalls of the Proposed Legislation.

The proposed legislation has unsurprisingly come under scrutiny.  While many of the proposed bills provide that carriers can apply for reimbursement from state funds made available specifically for this purpose, many critics believe that retroactively forcing coverage will bankrupt the insurance industry.  For example, on May 8, 2020, the U.S. Department of Treasury issued a letter to members of Congress stating that such proposals “fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the [insurance] industry.”

In addition to economic considerations, the legislation (if enacted) will have to withstand constitutionality challenges that will certainly be raised by the insurance industry.  Carriers can point to the “Contract Clause” (U.S. Const., Art. I, § 10, cl. 1) and Due Process Clauses (U.S. Const., Amends. 5, 14) of the Constitution in support of these challenges.  The United States Supreme Court has held that the “Contract Clause” prohibits “substantial impairment” of contractual rights, including for example insurance policies, unless the state has a “significant and legitimate public purpose behind the regulation” and the impairment is reasonable and appropriate as it relates to the public purpose.  Similarly, the Supreme Court has held that the Due Process Clauses prohibits such interference with contracts unless “the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means.”  Whether these legislative measures pass constitutional scrutiny will be very likely be the subject of lengthy litigation.

And while the purpose of the proposed legislation is to provide economic relief to small business, this relief may not arrive in time given the required legislative procedures to enact the proposed bills and lengthy litigation that will inevitably arise from constitutionality challenges.  Without the enactment of the proposed legislation, business interruption coverage will depend on the unique circumstances of a business’s loss and the specific terms of the policy.


Things to Consider. . .

Insurance policies have notice provisions requiring insureds to provide timely notice of a claim for coverage.  Thus, despite the pending legislation, small businesses can and should file a claim under existing business interruption coverage as soon as possible.  Insurance companies may use untimely notice as a basis to deny coverage.

The insured must show that there is a covered loss under the policy.  It is important to read the policy and understand what is required to entitle you to coverage   Business interruption claims likely require the insured to establish that it has incurred losses stemming from property damage.  Policies typically include one of following phrases in describing the type of property damage, the first being most favorable to the insured and the last being the most stringent showing: (1) “direct physical loss of or damage to” the covered property; (2) “direct physical loss or damage to” the covered property; and (3) “direct physical damage to” the covered property.

A common argument by insureds has been that the property damage is a result of the virus proliferating onto every surface and object in, on, and around the covered premises.  Another common argument is that the disjunctive use of the provision “direct physical loss of or damage to property” includes coverage for loss of use of the covered property, i.e., physical damage is not required and loss of use of the property is sufficient.

A stronger argument on which to base a claim is if the policy has a provision for damages resulting from governmental action or under a “civil authority” provision.  Some “civil authority” provisions provide coverage when a covered loss causes damage to property other than the covered property and the insured sustains a loss of income caused by action of civil authority that prohibits access to the covered premises.  Insureds are claiming that the state and local orders shutting down their business and neighboring businesses constitutes property damage because there is a “loss of use” of the business.

In a case pending before the United States District Court, Southern District of New York, Social Life Magazine, Inc. v. Sentinel Insurance Co. Ltd., Case No. 20-cv-3311, the insured sought a preliminary injunction asking the court to order the carrier to provide coverage during the pendency of the underlying action to determine coverage for its business interruption claims related to COVID-19.  The carrier opposed the injunction in part by arguing that the insured will not likely succeed in the underlying action because there was no “direct physical loss of or damage to” the premises, which is required under the terms of the policy to be entitled to coverage.

The court denied the insured’s request for an injunction.  The court focused on the requirement of “direct physical loss of or damage to” the insured property and held that the language of the policy provided business interruption coverage only where the insured’s property suffered “direct” physical damage.  This court’s holding, while telling, is not determinative of the outcome of other claims.  Each policy must be reviewed and analyzed to determine whether or not the insured has coverage under its policy.

Once the insured establishes that it has coverage, it is up to the carrier to show that the loss is not covered as a result of, for example, an exclusion in the policy.  And, indeed, claims arising from the COVID-19 pandemic have been met with significant pushback from carriers relying on “virus and contamination exclusions” that are included in many policies.  These virus exclusions became predominant in 2006, after the Severe Acute Respiratory Syndrome (SARS) epidemic.  Here is an example of a virus exclusion:

“We will not pay for loss or damage caused by or resulting from any virus, bacterium, or micro-organism that induces or is capable of inducing physical distress, illness, or disease.”

While the exclusion appears to be all-encompassing, insureds who have policies with the virus exclusion are not out of luck.  Many businesses are attempting to overcome the virus exclusion by arguing that the predominant cause of the loss is the civil action—the state and local orders requiring non-essential businesses to shut down or allowing non-essential businesses to operate on a limited basis.  Specifically, COVID-19 was first confirmed in the United States on January 20, 2020 and in California on January 26, 2020.  Between these dates and through the day before the state and local orders were in effect, businesses were not impacted by the virus and did not experience any losses.  However, as of the date of the state and local orders, and as a result of the restrictions, businesses were forced to shut down (or operate on a limited basis) causing the businesses to sustain losses.  Thus, businesses are claiming that the government orders are in fact the cause of their loss and, therefore, the virus exclusion should not apply. Carriers will oppose the above argument by contending that the root cause of the loss is a result of the COVID-19 virus and, therefore, the claim is excluded.  Stay tuned.

Another safety net for insureds is the inclusion of an applicable endorsement in the policy.  Endorsements are typically attached at the end of the policy, which, as a result, has been interpreted by courts to mean that any coverage extended in the endorsement is not excluded by exclusions that are included in the preceding policy pages.  For example, if a restaurant (1) has a policy with a virus exclusion, (2) the policy includes a “food contamination” endorsement at the end of the policy, and (3) the restaurant experiences food contamination relating to COVID-19, then the insured can seek coverage under the “food contamination” endorsement despite the virus exclusion.

The final determination of these issues will be subject to lengthy litigation and, again, will depend on the facts of the case and the specific policy language.

For more information visit our COVID-19 Preccelerator Resource Center

Stubbs Alderton & Markiles‘ authors:

Karine Akopchikyan

Jeffrey Gersh

Black Lives Matter – SA&M’s Commitment to Community and Change

Words inadequately express the profound outrage we at Stubbs Alderton & Markiles feel regarding the killing of George Floyd by a Minneapolis police officer.  In the context of the now tragically familiar list of Black men and women, and other people of color, who have recently lost their lives at the hands of certain members of groups sworn to protect and serve, his death requires us all to consider our role as catalysts for change.

In response to the anger, frustration, fear and desire for meaningful transformation provoked by these tragedies, a diverse coalition of Americans have exercised their first amendment rights peaceably to assemble, and to petition the government for a redress of grievances.  We add our collective voice to the chorus lawfully and non-violently demanding accountability, justice and institutional change.

We empathize with the grief and suffering of the Black community and offer our condolences to the families of the victims of racial violence.  While we cannot, nor do we pretend to, fully grasp the magnitude of the challenges people of color face on a daily basis in our society, we cannot ignore the root cause of these challenges – institutional racism and personal discrimination.

Accordingly, with complete resolve, we:

  • commit to take action by donating funds, dedicating time and utilizing other resources at our disposal to support individuals and organizations working to remedy the legacy of racism in our country;
  • encourage the members of the SAM family and our broader community to proactively advocate, through active listening and dialogue, and through express action, for the rights of communities of color to promote observable institutional change; and
  • most importantly, unequivocally affirm that Black lives do matter.

We acknowledge that change will neither be swift nor easy, but we pledge to do our part and to hold ourselves accountable to our commitments.

PPP Flexibility Act Guidance

On May 28, 2020, the U.S. House of Representatives approved the Paycheck Protection Flexibility Act to give more time and flexibility to employers who receive or have received forgivable loans under the Small Business Administration’s Paycheck Protection Program (“PPP”).  On June 3, 2020, the Act passed the Senate by unanimous consent.  The Act was signed and put into effect by President Trump on June 5, 2020.

Period eligible for loan forgiveness extended

Critically, the PPP Flexibility Act extends the time PPP recipients have to spend their funds and still be entitled to receive forgiveness of the loan from eight weeks to the earlier of 24 weeks or December 31, 2020.  However, borrowers that have received their loans prior to the PPP Flexibility Act’s enactment may still elect to use their funds over the original 8-week period and the related obligation to maintain payroll levels only through June 30, 2020.  Borrowers using the new covered period will be obligated to maintain payroll levels for an extra 16 weeks.

Exemption for reduced forgiveness amounts

Relatedly, the Act creates a new forgiveness exemption based on employee availability during the period from February 15, 2020 through December 31, 2020.  Under this provision, loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if a borrower documents in good faith both the inability to rehire individuals who were employees on February 15, 2020 and the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.  This exemption also extends to borrowers whom in good faith are able to document the inability to return to the same level of business activity at which the borrower operated on or before February 15, 2020, due to compliance with regulatory standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 and promulgated between March 1, 2020 and December 31, 2020 (the Act specifically identifies guidance issued by Department of Health and Human Services, the Centers for Disease Control and Prevention, and the Occupational Safety and Health Administration).

75/25 rule now 60/40

Another significant provision from the Act lowers the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness from 75% to 60%.  This means that 40% of the loan may now be spent on covered non-payroll costs (i.e., rent, mortgage interest and utilities), as opposed to the prior 25% requirement.

Deferral period extended

The Act also extends the existing 6-month loan payment deferral period until the date on which the amount of forgiveness determined is remitted to the lender.  Further, if a borrower fails to apply for forgiveness within 10 months of the last day of the covered period, payments of principal, interest, and fees will begin no earlier than 10 months after the last day of such covered period.

New minimum maturity date

The Act also extends the existing 6-month loan payment deferral period until the date on which the amount of forgiveness determined is remitted to the lender.  Further, if a borrower fails to apply for forgiveness within 10 months of the last day of the covered period, payments of principal, interest, and fees will begin no earlier than 10 months after the last day of such covered period.

Further, the Act also creates a new five-year minimum maturity date (applicable only to post-enactment loans) and provides that nothing shall be construed to limit lenders and pre-enactment borrowers from mutually agreeing to modify the maturity terms to conform with this change.

Adjustment to delay of employer payroll taxes

Lastly, the Act now permits borrowers whose loans were forgiven in whole or in part to delay the payment of employer payroll taxes until December 31, 2021 (with respect to up to 50% of the amounts due) and December 31, 2022 (with respect to the remaining amounts due up to 50%).  Borrowers who received forgiveness were previously prohibited from taking advantage of this benefit.

Stubbs Alderton Authors:

Garett Hill

Jeffrey Gersh

Caroline Cherkassky

For more information on worker’s rights and business liability, visit our COVID-19 Preccelerator Resource Center

Preccelerator Webinar: Equity & Alternative Compensation w/ Louis Wharton

For a company founder, it is easy to understand the benefits of providing stock or stock options to employees. It’s a way of compensating employees that doesn’t drain cash from the business. Employees will feel invested in the future success of the company. Join us to get insights and wisdom about maximizing opportunities and minimizing mistakes in creating equity.

If you did not have a chance to attend this workshop on equity and alternative compensation for startups with Louis Wharton, the entire webinar can be found here.

To view our other webinar events, please visit our events page. 



Louis A. Wharton is a Partner of the firm. Louis’ practice focuses on advising venture capital funds and angel networks, along with middle-market, emerging growth, early-stage and public companies in corporate finance, mergers and acquisitions, securities compliance and general corporate matters.

He counsels clients in the technology, e-commerce, and digital media, among others.

Paycheck Protection Program: Guidance On Forgiveness

May 29, 2020 marks 8 weeks since Paycheck Protection Program (PPP) loans were first made available and thus the beginning of borrowers’ eligibility to apply for loan forgiveness.  On May 22, 2020, the SBA released two rules to help clarify various aspects of loan forgiveness and inform on the SBA’s review process, discussed below.

Loan Forgiveness Process:  Lenders determine loan forgiveness on a borrower-by-borrower basis.  To receive loan forgiveness, borrowers must complete and submit the Loan Forgiveness Application (or a lender’s equivalent) to their lenders.  Lenders have 60 days from the date the Loan Forgiveness Application is submitted to issue its decision to the SBA, which in turn has 90 days to remit the appropriate forgiveness amount to the lender.  (For a more detailed discussion on what costs qualify as forgivable, see our prior post here.)

Alternative Payroll Covered Period:  Borrowers are not required to base forgiveness amounts on the 8-week period that begins with the date of disbursement.  Instead, borrowers may opt to use an 8-week period beginning on the first day of the first payroll cycle after loan funds are disbursed (the “alternative payroll covered period”).  For example, if a borrower receives its PPP disbursement on June 1, but the borrower’s first pay cycle after disbursement begins on June 7, the borrower may elect to calculate its loan forgiveness amount by using the period from June 7 to August 1 (8 weeks after June 7).

Costs Incurred but not Paid During Covered (or Alternative Covered) Payroll Period:  Payroll costs incurred during the borrower’s last pay period of the covered period (or alternative payroll covered period) are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness.  Additionally, non-payroll costs that are otherwise eligible for forgiveness and are incurred within the covered period or alternative covered period and paid on or before the next regular billing date are also eligible for forgiveness.  For example, a rent or utility payment paid after the designated 8-week covered period can still qualify for loan forgiveness to the extent the payments were for rent or utilities incurred during said period.  However, advance payments for interest on mortgage obligations do not qualify for forgiveness.

Payroll Caps:  Payroll costs are forgivable to the extent that they cover employees’ salary, wages, or commissions during the covered or alternative covered period and do not exceed a prorated annual salary of $100,000.  This also applies to bonuses, hazard pay, and the salary, wages, or commissions paid to furloughed employees.  Further, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses.

Reductions to Loan Forgiveness Amounts:  The CARES Act provides that a borrower’s loan forgiveness amount will be reduced if a borrower reduces its full-time equivalent (FTE) employees (meaning 40 hours or more of work each week) or reduces any employees’ (who made less than $100,000 in 2019) salary or wages by more than 25%.  The CARES Act also allows borrowers to avoid such reductions if employees are rehired and restored salary and wage levels by June 30, 2020.  The May 22nd interim rules clarify that borrowers may still be entitled to avoid such forgiveness reductions so long as they offer to rehire FTE employees or restore employees’ hours, even if they do not accept.  Such offers must be made in good faith and be for the same salary, wages, and number of hours that the employee earned prior to separation or reduction in hours.  Records of these offers and rejections must also be maintained, and the borrower must inform the applicable state unemployment insurance offer within 30 days of the employee’s rejection.  Moreover, to ensure that borrowers are not doubly penalized, salary/wage reductions apply only to the portion of the decline in employee salary and wages that are not attributable to an FTE employee reduction.  Further, if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction, then no corresponding loan forgiveness reduction will be imposed.

SBA’s Review Process:  As discussed in our prior post addressing borrowers’ potential liability under the False Claims Act, all PPP loans in excess of $2 million, and any other loans “as appropriate,” will be reviewed by the SBA.  Either way, if the SBA reviews a borrower’s loan, it will look at borrower eligibility, loan amounts and use of proceeds, and loan forgiveness.  Borrowers are required to maintain PPP documentation for six years after the date the loan is forgiven or repaid in full and must permit the SBA access to such files upon request.  If the SBA believes that a borrower may not have been eligible for the loan, the loan amount, or the loan forgiveness amount, the SBA will require the lender to contact the borrower in writing to request additional information and may also request information directly from the borrower.  If the SBA determines that a PPP loan recipient should have been ineligible, no forgiveness will be permitted.  The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.  Another interim rule will be issued that addresses how recipients ruled ineligible can appeal such a determination.

Modifications Expected:   On May 28, 2020, the U.S. House of Representatives approved legislation (the “Paycheck Protection Flexibility Act,” H.R. 7010), that would extend the time PPP recipients have to spend their funds and receive forgiveness from eight weeks to 24 weeks.  The bill would also lower the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness from 75% to 60%.  The House bill passed under special rules established to expedite legislation while the House is not in full session, requiring a two-thirds vote for passage instead of a simple majority.  The House bill will now need to pass the Senate before making its way to President Trump’s desk to be signed into effect.  A separate bill advancing through the Senate would double the covered period of forgivable PPP spending to 16 weeks but would not change the 75% payroll cost requirement.  We will continue to track these bills and provide updates accordingly.

Stubbs Alderton Authors:
Caroline Cherkassky
Garett Hill

For more information on worker’s rights and business liability, visit our COVID-19 Preccelerator Resource Center :

Preccelerator Webinar: Customer Discovery w/ Eric P. Rose

This talk will cover the preliminary market research work of Customer Discovery, that is to discover who would most value your proposed new product. It will also cover the tough decisions to then tailor your product in a way that the market values the most and yields the best return on its development investment.

If you did not have a chance to attend this workshop on customer discovery with Eric P. Rose, the entire webinar can be found here.

To view our other webinar events, please visit our events page. 


Eric P. Rose, NPDP, MBA

Founder & President, Pinnacle Product Innovation, Inc.

Eric’s company helps entrepreneurs move new products from an opportunity into market reality. Services offered include Market Research, Product Development, Manufacturing Sourcing, R&D Project Management, IP Commercialization. Eric has worked in the Consumer, Medical, and Industrial product markets with companies including Baxter Healthcare and Mattel. Eric’s background includes,

BS Product Design (ASU), MBA Marketing / Entrepreneurship (Pepperdine)

35+ years’ professional experience in new product development and commercialization experience with companies ranging from startups through Fortune 500 firms.

Certified New Product Development Professional (NPDP) from Product Development and Management Association (

Part-time professor since 2009 including Pepperdine (MBA, Product Innovation), Loyola Marymount (BA, Entrepreneurship, Product & Business Design), MBA@Rice (MBA Marketing), and Guest Lecturer, USC Technology Commercialization course. Currently an Entrepreneur in Residence CSUN.

Preccelerator Managing Director Len Lanzi Featured on Startup 2.0

Len Lanzi Startup 2.0SA&M Preccelerator Managing Director Len Lanzi was featured on Startup xyz’s video series, Startup 2.0. In the interview, conducted by Lucas Pols, Len covered topics ranging from the SA&M Preccelerator’s investment thesis, mistakes that Len sees commonly in startups, setting realistic expectations, raising a friends & family round, and startup budgeting.

To watch the full interview with Len, visit here.

About Startup 2.0
Startup 2.0 is a video series that will feature a new venture capital firm or seasoned entrepreneur covering subjects from raising capital to growth, and everything in between! Join Spark xyz and follow their social channels to stay up-to-date on our newest installments.

About Len
Leonard M. Lanzi has over 30 years of organization management and fund development experience. He has been serving as the Executive Director of the Los Angeles Venture Association since 2007. In his capacity at LAVA, Len works with the LAVA board of directors to direct the strategic plan and organize educational and informational programs within the venture-funded startup ecosystem in the greater Los Angeles region.

Len brings a well-rounded knowledge from such diverse human service organizations as the Community Kitchen of Santa Barbara, Court Appointed Special Advocates, Junior Achievement of Southern California, and the Boy Scouts of America.

What Every Business Should Know About Workers’ Rights and Business Liability During COVID-19

On May 8, 2020, California’s stay-at-home order was modified to reflect the state’s entering Stage 2 of its COVID-19 pandemic response, where businesses in the retail, manufacturing, and logistics industries can reopen, subject to certain restrictions (e.g., delivery and curbside pickup only).  Last week, Governor Gavin Newsom also hinted that entering Stage 3 “may not even be a month away.”  Below are some questions and answers about workers’ rights and business liability that may arise as businesses reopen.

Can workers obtain Workers’ Compensation benefits for injuries arising out of COVID-19 illness?

In California, workers’ compensation benefits are the exclusive remedy for injuries that a worker sustains from a condition of their employment.  Some states’ workers’ compensation statutes exclude coverage for “non-occupational diseases” or “ordinary diseases of life,” such as a cold or flu, which may arguably encompass COVID-19.  However, California’s Labor & Workforce Development Agency (“LWDA”) has clarified that workers are eligible for workers’ compensation benefits for injuries resulting from COVID-19.

However, generally speaking it  is the worker’s burden to show that they were exposed to and contracted COVID-19 during their regular course of work.  This showing will ultimately depend on the unique circumstances of each claim, including, for example, whether there were any known cases of COVID-19 infections at their workplace, whether the premises were contaminated with the virus, and whether the employer implemented safety and social distancing provisions.

On May 6, 2020, Governor Newsom changed the forgoing general presumption and issued an executive order that  creates a rebuttable presumption for a period of 60 days (May 6 – July 5) that may entitle workers who work outside their homes to workers’ compensation benefits if they contract the coronavirus.  Under the recent executive order, it will be presumed that the worker contracted COVID-19 during their regular course of work if (1) the employee tested positive with COVID-19 within 14 days after working at their place of employment; (2) the last day must have been on or after March 19, 2020; (3) the worker’s place of employment is not their home; and (4) the worker’s diagnosis of COVID-19 must be by a licensed physician and the diagnosis must be confirmed with further testing within 30 days of the diagnosis.

It will be up to the employer to establish that the worker did not contract COVID-19 at work by producing evidence that the injured worker did not satisfy one of the above four criteria or that the injured worker contracted the virus by another cause.  The employer must produce such evidence within 30 days of the filing of the claim by the worker.  After 30 days, an employer can produce evidence to rebut the presumption with evidence discovered after the 30-day period.

Overcoming the presumption will likely be difficult given the many variables in tracing how and where a worker has been exposed to the virus and obtaining evidence to disprove the worker’s claim.  Further, employers and insurers will likely challenge the executive order  due to the difficulty of proving that the employee contracted the coronavirus elsewhere.  How is the employer supposed to establish this?  Can the employer demand to know everyone the employee came into contact with outside of work and if those people were contagious?  Can the employer go even further and inquire where the employee has been? And on and on down the line  In short, there are a myriad of open issues and no guidance as of yet.

Are independent contractors eligible for workers compensation and unemployment compensation?

In California, workers compensation and unemployment compensation are typically only available to employees.  However, workers who believe they were misclassified under recently enacted AB-5, and applicable case law, may be eligible for both of these benefits.  To learn more about misclassification under AB-5, check out “The Fight For Clarity On Calif. Worker Classification Law.”

Additionally, independent contractors who have voluntarily contributed to unemployment insurance Elective Coverage and made the required contributions or had a past employer contribute to the unemployment insurance fund on their behalf in the past 18 months, may also qualify for unemployment compensation.  Further, the Pandemic Unemployment Assistance (“PUA”) program of the CARES Act gives states the unprecedented option of extending unemployment compensation to independent contractors and other workers who are ordinarily ineligible.  On April 28, 2020, California’s Employment Development Department (“EDD”) followed suit and expanded the availability of unemployment compensation via the federal PUA program to business owners, self-employed individuals, independent contractors, and gig economy workers.

What happens to workers who are receiving unemployment compensation and do not feel comfortable returning to work as businesses begin to reopen?

Workers who opt not to return to their positions when their employers reopen amid the COVID-19 pandemic will likely not remain eligible for unemployment compensation.  Generally, individuals receiving regular unemployment compensation must act upon any referral to, and accept any offer of, suitable employment.  A request that a furloughed employee return to his or her job very likely constitutes an offer of suitable employment.

Specifically, the U.S. Department of Labor outlines the conditions an individual has to meet to refuse to return to work in order to remain eligible for PUA, as provided by the CARES Act. The list includes (i) a COVID-19 diagnosis, restrictions due to childcare availability, (ii) caring for an ill family member, or (iii) health “complications that render the individual objectively unable to perform his or her essential job functions, with or without a reasonable accommodation” as a result of having recovered from COVID-19. However, voluntarily deciding to not return to work out of a general concern about exposure to COVID-19 is likely tantamount to the employee having quit and will likely eliminate PUA eligibility.

The EDD similarly requires applicants to be “able, available, and actively seeking work” to collect unemployment benefits.  Accordingly, a worker’s decision to not return to work out of general health concerns related to COVID-19 would likely not satisfy this requirement. If, however, a worker declines to return given their underlying health conditions and thus an increased chance of significant illness if exposed to COVID-19, then the worker may be entitled to maintain unemployment compensation subject to the EDD’s discretion.

What if an employer offers a different position to a furloughed employee?

What if an employer offers a temporarily furloughed employee who is receiving unemployment compensation an otherwise similar role that provides, for example, hourly wages instead of the employee’s previous salaried compensation?  Will this be considered “suitable work,” and would the adjusted compensation create “good cause” to refuse this position”?  More generally, if the employer changes the terms of the employment – at what point does it constitute good cause to voluntarily quit and be eligible for unemployment compensation?

Whether an employee has good cause to not return to work or quit and be eligible for unemployment compensation is determined on a case-by-case basis and the burden of proving eligibility is on the claimant.  The EDD provides the following framework in determining whether good cause exists for the claimant to have voluntarily quit and remain eligible for unemployment compensation:

“Once the claimant’s reasons for leaving are determined, the interviewer must apply a three-part test to determine the presence of ‘good cause’: (1) Is the reason for leaving ‘real, substantial, and compelling’? (2) Would that reason cause a ‘reasonable person,’ genuinely desirous of working, to leave work under the same circumstances? (3) Did the claimant fail to attempt to preserve the employment relationship, thereby negating any ‘good cause’ he/she might have had in leaving?… ‘Compelling,’ in this sense merely means that the claimant’s reasons for quitting exerted so much pressure that it would have been unreasonable to expect him or her to remain with the employment. The ‘pressures’ exerted upon the claimant may be physical (as with health), moral, legal, domestic, economic, etc.”

A relatively insignificant reduction in salary due to a worker’s being reassigned to a different hourly role has been found to not constitute good cause to terminate voluntarily.  In one case, for example, a California court found that a reduction in the employee’s wages by roughly 7% did not, by itself, constitute good cause for voluntarily leaving employment.  However, the California Supreme Court has held that a 25% wage cut constituted a “substantial reduction in earnings” and that reduction was regarded as good cause for leaving employment.

Also uncertain is what happens in the situation where a salaried employee is offered an hourly position with no guarantee of actual work.  This would likely serve to support a claimant’s argument that good cause exists to reject the offer of employment and remain eligible for unemployment compensation. Moreover, in some situations, an employee may be deemed to be partially unemployed and thereby entitled to partial unemployment compensation.  Thus, hourly employees with reduced workloads may still receive partial unemployment compensation to supplement lost hours.  Each of these situations must be evaluated on a case by case basis.

What other rights do workers have if they believe their employer has not adequately addressed COVID-19 related safety concerns?

If a worker believes their employer has not adequately addressed COVID-19-related concerns, other limited remedies are available.  Per California’s Department of Industrial Relations, employees deemed non-essential who believe they were terminated or otherwise retaliated against for refusing to go to work while the stay-at-home order is in effect may file a retaliation claim with the Labor Commissioner’s Office.  Similarly, essential workers who feel their employer has not taken steps to ensure a safe work environment may also file a claim with the Labor Commissioner. These claims can lead to damages and penalties against the employer if it is found to have treated an employee adversely or fired an employee for refusing to work in (or complaining of) an unsafe work situation.

Under the federal Occupational Safety and Health Act, enforced through the Occupation Safety and Health Administration (“OSHA”), employees can refuse to work if they reasonably believe they are in imminent danger, which means they must have a reasonable belief that there is a threat of death or serious physical harm likely to occur immediately or within a short period.  In the context of COVID-19, this will likely require a specific fear of infection that is based on fact—not just a generalized fear of contracting COVID-19 infection in the workplace, and that the employer cannot address the employee’s specific fear in a manner designed to ensure a safe working environment.

California’s counterpart to OSHA(“Cal/OSHA”), requires every employer to develop and implement a written safety and health program tailored to the specific workplace.  Among other things, recent Cal/OSHA guidance mandates that all California employers must determine if COVID-19 infection is a hazard in their workplace and if it is implements prevention measures and training.  Workers can file confidential complaints with OSHA or Cal/OSHA if they believe their employer is non-compliant, which could lead to on-site investigations, various civil penalties, and/or special orders requiring employers to make changes to their workplace.

Will businesses be shielded from COVID-19-related liability?

U.S. Senate Majority Leader Mitch McConnell has stated that any additional federal aid bill for state and local governments should make the money contingent on states providing liability protection to businesses and hospitals providing services amid the COVID-19 pandemic.  Indeed, on May 12, Senator McConnell stated that he is overseeing the drafting of legislation that would “create a legal safe harbor for businesses, nonprofits, governments and workers and schools who are following public health guidelines to the best of their ability.”  However, he was clear that the bill would not provide absolute immunity, and that “there will be accountability for actual gross negligence and intentional misconduct.”

The U.S. Chamber of Commerce has also made several suggestions on this topic, including safe harbors from: privacy laws for employers who inquire about health status, age and disability bias laws if companies follow guidelines regarding at-risk employees, and simple negligence claims for COVID-19 exposure if businesses follow government health guidance. Manufacturers have also suggested (i) raising the legal standard for plaintiffs’ claims that a business failed to protect them from COVID-19, (ii) giving additional protections to businesses making new products to address the COVID-19 crisis, and (iii) shielding businesses from privacy suits if they reveal a worker’s COVID-19 diagnosis for safety reasons.  Currently, the extent to which any liability protections will be extended remains unclear.

What can businesses do to best protect against claims related to injuries from contracting COVID-19?

Businesses must consider the extent and manner in which they will reopen.  As a best practice, and in compliance with Cal/OSHA requirements, businesses should establish safety protocols, update employee and company handbooks to reflect the safety protocols (and provide handbooks to workers), and enforce compliance with the protocols. Employers can turn to the California Department of Public Health (“CDPH”) for guidance on how to reopen their businesses and provide a safe working environment for their workers.  While businesses can use effective alternative or innovative methods to provide a safe work environment, such as implementing guidance from the Centers for Disease Control and Prevention, the CDPH guidelines are helpful as they are industry-specific and cover employee training, cleaning and disinfecting protocols, physical distancing guidelines, and a big-picture plan for creating and implementing the safety protocols.

Important and recommended practices include establishing policies and practices for maintaining a healthy work environment and social distancing.  Employers can maintain a healthy work environment by, for example, providing and mandating the use of personal protective equipment, such as masks and gloves, regularly sanitizing high-frequency touched surfaces, providing napkins and hand sanitizers to employees, limiting access to common areas such as break rooms and kitchens, increasing ventilation and outdoor air circulation, and requiring employees to report travel outside the state.

Social distancing means avoiding large gatherings and maintaining 6 feet distance from others when possible.  Social distancing protocols can include providing flexible worksites (e.g., telework) and work hours (e.g., staggered shifts), increasing physical space among employees and between employees and customers at the worksite, implementing flexible meeting and travel options (e.g., postpone non-essential meetings or events, use video conferencing, etc.), and providing alternative delivery methods, including curbside pick-up for products and utilizing phone, video, or web for services.

For more information on worker’s rights and business liability, visit our COVID-19 Preccelerator Resource Center

Jeffrey Gersh
Karine Akopchikyan
Garett Hill

Heidi Hubbeling Featured on Women Founders Network “An Insider’s Guide to Perfecting Your Investor Pitch”

While it seems that your fundraising journey may have been turned upside down because of COVID-19’s effects on the economy, rest assured there are still funders who are weathering the storm and actively looking for new deals. Although markets may change with the current economic circumstances, the process of fundraising and the criteria for creating a perfect pitch remains the same. Investors will be looking even more diligently into your specific market, competition, team domain expertise and the metrics of your company. At the Stubbs Alderton & Markiles, LLP Preccelerator®, a Los Angeles based accelerator program for early-stage companies, we have a strong emphasis on fundraising technique and strategy. Audrey Delaney of StarMetrics, one of our recent cohort company founders, provides a window into what has made her fundraising journey successful. I’ll follow up with insights on how to apply her advice to your own investor pitch.

Heidi: How important is the role of “storytelling” in your pitch?


  • Audrey: “Storytelling is the most important part of the pitch. Interestingly, I’ve found that it’s even more important to investors who aren’t too familiar with your product or industry – for them, it’s even more important that the story be clear and pretty simple. What is a problem or change that’s happening in the industry/sector now, what is your “a-ha” insight that gives you a window into the future of that problem? For me, the more I could get my pitch down to a few short sentences, the bigger the potential people can see in it.”

Investors hear or see hundreds, if not thousands of pitches per year, and a strong founder story about the pathos of your idea can set you apart from the noise, showcasing the “Why You,” the “Why Now” and “Why This” of your company without loads of data – but with a memorable narrative. The data is very important but comes later in a pitch. Ultimately, they are investing in “you.”

Heidi: When you started attending investor meetings to pitch your company, what was the one consistent piece of information you were asked most about?


  • Audrey: “For my product specifically, the most consistent question came around TAM (Total Addressable Market). Many VCs and investors feel that entertainment is a difficult market, and too small of a TAM. I have had to make a clear story/ path for how my product can reach $100mil, and how the TAM is large enough to support that.”

While a large market by itself will not sell your product, if you are looking to be a venture-funded company, you will need to be addressing a market of hundreds of millions or $1B minimum. If your market is smaller, that’s totally okay – you can be a very lucrative small business, rather than a venture fundable business. I hear a lot that “we are taking a small sliver of a huge pie” or “we are going to get 2% of an enormous market,” but that’s not helpful to investors when fundraising — especially if not all of that market is relevant to your product or service.

It’s best to take a bottom-up approach in calculating your market. Show investors by your analysis that you have a great understanding of the market dynamics, the customer’s buying behavior, and what’s going to motivate a purchaser to adopt your product. Estimate potential sales in order to determine a total sales figure. Where will your products be sold? What are the sales of comparable products? How much of those current sales can your company steal from competitors?

Other information to have perfected in your pitch includes:


  1. Competitive Analysis – Never say “I have no competitors.” If there are no competitors – there is no market for your business. Define your competitors’ strengths and weaknesses compared to your company’s and where there are opportunities for your idea to flourish.

  2. Revenue Model – How will you make money? Investors need to see a clear path to a return on their investment. Find recurring revenue. Don’t rely solely on data-driven revenue or ads. Make sure whatever the path to revenue – you showcase it clearly in your pitch.

  3. Use of Proceeds and Needs – Make sure that you ask for enough funding to give you 18 months of runway (12 for performance, 6 for cushion while you fundraise again). Have your cost analysis completed to show to investors if they ask. Investors want to know what their funds will be used for (i.e. marketing, tech development, team growth), but also why you need THEM specifically. How can they be a resource to you on an advisory level or what partnerships and introductions can they make for you?

Heidi: How did your presentation style change from your very first pitch until today? Did you have to overcome any performance fears or challenges?


  • Audrey: “For me, I don’t have any real fears about speaking in public. But I have to work on making sure I come across as excited and enthusiastic, way more so than is my natural default mode – I’m pretty low key and analytical by nature. So for me, I have to put myself back into the mindset of when I first thought of the idea, and how exciting and game-changing that is – and then convey that.”

The bottom line is that you need to be confident and convey passion about your idea. If you are not comfortable as a public speaker – practice in front of people until you are. One of the benefits of joining an accelerator like the Preccelerator, programs like Women Founders Network’s Fast Pitch, or participating in one-off pitch events – is that you gain all of the necessary training to become comfortable and confident with your pitch. Many VCs would be happy to also give you valuable feedback on both your pitch deck and pitch presentation that you can utilize when you go to fundraise. If you have warm intros to willing investors in your network – don’t be afraid to ask!”

Heidi: Finally, what is one piece of advice that you would give a founder just starting out on their fundraising journey?


  • Audrey: “I knew that I was an expert in my product and industry, but not in the landscape of fundraising, VCs and so on. I think the best thing I did is to always be seeking and listening to those people with the experience you don’t have. For me, I needed to get expert insight on fundraising and how to grow – and so that was listening to mentors like SAM Preccelerator, angel investors, VCs, and other founders who had been through the process. There’s so much to figure out as a first-time founder, but there are a lot of people out there who know the path. And especially – if a few people are giving you the same piece of advice, it’s probably worth taking!”

Never stop learning. Surround yourself with individuals who have the experience and expertise that can take you and your company to the next level. Be coachable and heed guidance – but don’t bend like a reed in the wind with every different piece of advice. Be confident in your domain expertise and ability to build your idea!

To read the full article “An Insider’s Guide to Perfecting Your Investor Pitch” on WFN visit here. 
Heidi Hubbeling Leach
About the Author

HEIDI HUBBELING LEACH is the Chief Marketing Officer at Stubbs Alderton & Markiles, LLP. Throughout her 12-year career with SA&M, Heidi has been a consummate team player with the firm’s continued growth. Heidi’s experience in professional services marketing, relationship building, business development strategy and entrepreneurship has aided her in leading the Preccelerator Program, an accelerator program for early-stage startup companies housed out of the Santa Monica offices of Stubbs Alderton & Markiles.

While this program began as a marketing initiative for the firm, it has grown into a venture-backed accelerator over the past 7 years and has demonstrated the dedication that the firm has for startups in the LA ecosystem. As COO of the Preccelerator, Heidi sourced and provided due diligence for hundreds of applicants, developed the Program curriculum, a formal mentorship program with over 100 active mentors, and built a Partner Program with various strategic corporate partners. Utilizing her network and fundraising expertise, Heidi continues to provide investment strategy and introductions to capital for both Preccelerator cohort companies and SA&M clients.

Covid-19 False Claims Act – Guidance For SBA PPP Loan Applicants

False Claims Act To assist small businesses in the wake of the COVID-19 pandemic, Congress established the Paycheck Protection Program (“PPP”) under the CARES Act, with $700 billion in Small Business Administration  (“SBA”) loans to small businesses intended to pay for payroll, rent, and other expenses. To be eligible, a business is required to complete a short, 4-page PPP Borrower Application Form (“Application”).  For many businesses in a rush for funds and eager to submit the Application before program funding was depleted, completing the Application could have been accomplished relatively quickly, with basic information about the business, signing the Application, and certifying, among other statements, that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” After the launch of the PPP, the SBA has released a series of FAQs, which have provided additional clarity and, at times, additional confusion, regarding, among other issues, the question of “necessity”. As a result, each small business that received PPP funds must ask: What does “necessary” mean, and what if the PPP funds were not “necessary”?

Addressing the Issue of “Necessity”

Those small businesses looking for a precise definition of “necessary”/”not necessary” may be looking for the foreseeable future because the federal government has not defined the meaning of “necessary”, though the SBA has provided some guidance in FAQs 31 and 37 (and has indicated in FAQ 43 that it intends to issue additional guidance on this question before May 14, 2020). We explore the question of necessity in greater detail in “SBA Guidelines Regarding Necessity.

What if the PPP Funds Were Not “Necessary”? Potential Liability under The False Claims Act

Unfortunately for many small businesses and individual directors and officers, the answer to the second question (i.e., what if the PPP funds were not “necessary”?) is much clearer, and not for the better.  Each business that received PPP funding (as well as those directors, officers, and/or employees who were involved in preparing and submitting the Application) could face liability under The False Claims Act (31 U.S.C. §§ 3729 – 3733), which is longstanding federal legislation that imposes liability upon any “person” (which includes any corporation, partnership, limited liability company, or any other entity, as well as any director, officer, employer, or independent contractor) who/that “knowingly” submits a materially false or fraudulent claim for payment to the federal government.  A “person” acts “knowingly” under The False Claims Act when that person “has actual knowledge of the information”, “acts in deliberate ignorance of the truth or falsity of the information”, or “acts in reckless disregard of the truth or falsity of the information”.

Director/Officer Liability under The False Claims Act

This means that every director/officer who “knowingly” participated in preparing and submitting an Application that contained materially false or fraudulent information could face liability under The False Claims Act.

As a practical matter, to avoid liability under The False Claims Act, the director/officer would need to establish, at a bare minimum, that he/she acted reasonably and in good faith in assisting with the Application, and that he/she was not reasonably aware of any materially false or fraudulent information in the Application. Stated alternatively, liability could extend to those directors/officers who did not make (or chose not to make) a reasonable and prudent inquiry into the possibility that the Application contained materially false or fraudulent information.

Directors/officers could also face liability for relying on analysis/information from an expert or specialist (including an accountant) regarding the necessity of the PPP funds if the expert’s analysis/information turned out to be materially false or fraudulent. In such situations,  directors/officers could face liability if they failed to either provide the expert with (or access to) the relevant documents and/or reasonably rely on the expert’s analysis.

Further, individual directors/officers (as well as businesses) should also note that The False Claims Act applies to “implied certifications”, which are statements that are rendered misleading or deceptive because they omit material information (commonly referred to as “half-truths”). This would include a business’s failure to disclose that it violated a regulation, statute, or law that would affect its eligibility to operate in good standing and/or receive PPP funds.

While the issue of individual director/officer liability is fact-specific and requires analysis of the specific circumstances, each person who was involved in the Application process must scrutinize the extent and nature of his/her involvement, and understand that “pointing the finger” is not a valid defense under The False Claims Act. In analyzing their prospective liability, those participating individual directors/officers should consider whether they sought to independently confirm the accuracy of the information in the Application; whether they had an opportunity to independently verify the materially false or fraudulent information; whether they appropriately supervised the Application process; and whether, with due diligence, they could have spotted the materially false or fraudulent information in the Application.

Lawsuits to Enforce The False Claims Act

To enforce The False Claims Act, the U.S. Department of Justice (“DOJ”) can file a lawsuit against any “person” in violation. Commonly in False Claims Act enforcement, lawsuits are filed by a “relator” – that is, any person, including an ordinary citizen or a whistleblower, who is the “first to file” a lawsuit and who has original evidence that the alleged violating business or individual director/officer violated The False Claims Act. Relator status is subject to specific filing and service procedures, as set forth in 31 U.S.C. § 3730. Further, after the relator files the lawsuit, the DOJ has the discretion to stand in the shoes of the relator to prosecute the lawsuit as the original plaintiff. Alternatively, if the DOJ chooses not to intervene, it can dismiss the lawsuit over the relator’s objection, or seek to stay discovery if the lawsuit would interfere with the federal government’s investigation or prosecution of a related criminal or civil matter.

Damages under The False Claims Act

If a court determines that a defendant business, director, officer, or other person violated The False Claims Act, then, pursuant to 31 U.S.C. §§ 3729 – 3730, each such defendant faces liability for 2 to 3 times the amount of damages that the federal government sustained (which would likely consist primarily of the amount of the loan, especially if forgiven), in addition to a civil penalty in an amount between $11,181 and $22,363 (as set forth in 28 C.F.R.  § 85.5), the costs of litigation, and the relator’s reasonable attorneys’ fees and costs as the prevailing party (if applicable). This is in addition to potential criminal liability.

Take Immediate Action to Avoid or Reduce Potential Liability under The False Claims Act

For those businesses and individual directors/officers concerned with potential liability under The False Claims Act, it is critical that they act immediately. Businesses that repay the loan in full by May 14, 2020, “will be deemed by SBA to have made the required certification in good faith.” This means that, as long as the PPP funds are fully returned by May 14, the business and officers/directors will not face liability under The False Claims Act (or other civil or criminal liability arising from the act of submitting an Application that contained materially false or fraudulent information). Even if the PPP funds are not returned by May 14, the business and individual directors/officers should still take immediate efforts to return those funds that were not “necessary”— as the timing of repayment could constitute a mitigating factor that could potentially reduce damages and penalties if a False Claims Act lawsuit is filed.

Other Important Considerations for Businesses and Directors/Officers

Even for those businesses and directors/officers that have experience litigating corporate governance or related business disputes, an action under The False Claims Act is not your average lawsuit. For example, under the business judgment rule – which is a common defense in litigation by shareholders involving corporate governance and business disputes in Delaware and California corporations – directors and officers who act in their representative capacity are presumed to have acted in good faith and reasonably in most circumstances. Under The False Claims Act, however, the federal government – and not the shareholder or member – suffers the harm. As a result, the business judgment rule is unlikely to provide comfort to directors/officers in claims involving The False Claims Act.

Moreover, in analyzing potential liability or litigation under The False Claims Act, businesses and directors/officers should also look into potential insurance coverage under any applicable D&O, errors, and omissions, or related insurance policy/coverage. For these reasons, in addition to other issues that are unique to The False Claims Act, any business or individual concerned with potential liability or litigation should immediately consult with an attorney.

Looking to the Future

The federal government has made clear that it is committed to ensuring that only those eligible businesses received PPP funds. More specifically, in FAQ 39, the SBA explained: “To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” Further, as announced on April 20, 2020, the Senate Committee on Small Business and Entrepreneurship intends to “conduct aggressive oversight of the Paycheck Protection Program (PPP), including whether companies made false certifications to the federal government to receive PPP loans.” While the definition of “necessary” might not be certain, one thing is certain — there will be many False Claims Act proceedings linked to the PPP program, in the years to come.

COVID-19 Preccelerator Resource Center

For further information and follow-up on this article, contact our business litigation chair Michael Sherman, or SA&M attorneys Caroline CherkasskyDan Rozansky or Neil Elan.