Tag Archives: Jeff Gersh

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
https://preccelerator.com/category/covid-19-resources/

Stubbs Alderton & Markiles‘ authors:

Karine Akopchikyan

Jeffrey Gersh

Los Angeles County’s Eviction Moratorium/Rent Deferment Order

On April 14, the Los Angeles County Board of Supervisors amended its March 19 order that mandated an eviction moratorium on both residential and commercial tenants and gave defaulting tenants the ability to defer rental payments that become due through May 31, 2020 for months.

(March 19: https://covid19.lacounty.gov/wp-content/uploads/19032020HP_MFP_M577143825.pdf; April 14: http://file.lacounty.gov/SDSInter/bos/supdocs/145198.pdf#search=%22moratorium%20eviction%22.)

Specifically, the April 14 amendment expands coverage of the March 19 order to all cities in Los Angeles County that have not enacted their own eviction moratorium/rent deferment order and mobile home parks who rent space to mobile homeowners, in addition to the unincorporated areas of Los Angeles County that the March 19 order initially covered. Thus, cities within Los Angeles County who have enacted their own order, like the City of Los Angeles, do not fall under the Los Angeles County order.

Critically, while Los Angeles County’s order initially required defaulting commercial and residential tenants to demonstrate an inability to pay rent and/or related charges due to “financial impacts” related to COVID-19 in order to not be evicted for nonpayment of rent, the April 14 amendment provides that both commercial and residential tenants may “self-certify” their inability to pay as a result of “financial impacts,” and requires landlords to accept such self-certification. Tenants must still provide notice to their landlords of their inability to pay within 7 days of the due date.

“Financial impacts” include “substantial loss of household income due to business closure, loss of compensable hours of work or wages, layoffs, or extraordinary out-of-pocket medical expenses” that are “related to COVID-19” (i.e. if it is a result of any of the following: (1) diagnosed with COVID-19, or caring for a household or family member who is diagnosed with COVID-19; (2) layoff, loss of hours, or other income reduction resulting from business closure or other economic or employer impacts of COVID-19; (3) compliance with a recommendation from the County’s Health Officer to stay home, self-quarantine, or avoid congregating with others during the state of emergency; (4) extraordinary out-of-pocket medical expenses related to diagnosis and testing for and/or treatment of COVID-19; or (5) child care needs arising from school closures related to COVID-19).

Los Angeles County’s order as amended also prohibits both residential and commercial evictions based on the presence of unauthorized occupants, pets, or nuisance necessitated by or related to COVID-19. Further, the April 14 amendment extends a defaulting tenant’s time to pay back the deferred rental payments from 6 months after the expiration of the moratorium period (which is currently set for May 31, 2020 but may be extended) to 12 months.

It is worth reiterating that if a city within Los Angeles County has enacted its own order, then that order would apply over Los Angeles County’s. It is thus crucial for landlords and tenants alike to familiarize themselves with the order that is applicable to their location, as the vast majority of cities both inside and outside of Los Angeles County, as well as other counties themselves, do not allow for similar “self-certification,” and instead require a defaulting tenant to “demonstrate” or “show” an inability to pay rent due to COVID-19. When such demonstration or showing is required, tenants should be prepared to provide some form of supporting documentation, which might include bank statements, financial statements, accounts payable/receivable, or any other reasonable documentation. Given a lack of guidance on what constitutes sufficient supporting documentation, tenants should immediately begin the process of negotiating with their landlords to determine the supporting documentation that will be provided.

In sum, municipal eviction moratorium/rent deferment orders may differ from Los Angeles County’s order by: (a) excluding commercial tenants, or certain commercial tenants, from protection; (b) providing alternative timeframes for notifying landlords of an inability to pay or for making deferred rent payments once the applicable order or the COVID-19 emergency period expires; and (c) requiring a demonstration or showing of an inability to pay because of COVID-19.

For instance, while the City of Los Angeles’ eviction moratorium/rent deferment order also covers both residential and commercial tenants, it: (a) does not extend protections to commercial tenants that are publicly traded companies, transnational companies, or companies with over 500 employees; (b) only grants defaulting commercial tenants a 3 month window after the emergency period to make up deferred payments (defaulting residential tenants have a 12 month window); and (c) was revised to not require defaulting tenants to “show” an inability to pay rent for reasons related to COVID-19; however, it also does not provide for self-certification – whether and to what degree tenants will need to substantiate an inability to pay because of COVID-19 under this order is thus unclear at this time. (LA City’s Order: http://clkrep.lacity.org/onlinedocs/2020/20-0147-S19_ORD_186585_03-31-2020.pdf.)

In light of the foregoing, all tenants (and to the extent applicable, landlords) should immediately:

Familiarize themselves with their applicable order, specifically the notice requirement and deferment periods;
If the applicable order so requires, be prepared to provide documentation demonstrating an inability to pay because of COVID-19; and
Understand that you will need to pay any deferred rent eventually, so start the conversation with your landlord as soon as possible to work out an agreement.

Preccelerator COVID-19 Resource Center
https://preccelerator.com/category/covid-19-resources/

SA&M authors:

Garett Hill

Jeff Gersh

For more information on these matters, please contact our COVID-19 Task Force at info@stubbsalderton.com or one of our attorneys at SA&M.

COVID-19 Legal Briefing – Families First Coronavirus Response Act (FFCRA)

Families First Coronavirus Response Act (FFCRA)

The FFCRA was signed into law on March 18, 2020, by President Trump to provide emergency relief and support in response to the COVID-19 (or “coronavirus”) pandemic. The three provisions of the FFCRA discussed below significantly change employees’ rights to paid sick leave and employers’ responsibilities for providing it. It is therefore crucial for employers that need to comply with the FFCRA (those with less than 500 employees) to understand the impact of this new legislation.

1. The Emergency Family and Medical Leave Expansion Act (EFMLEA):

The EFMLEA requires employers with fewer than 500 employees to provide to employees that qualify under the Act with up to 12 workweeks of leave. However, the first 10 days are unpaid (discussed further below) and the next 10 workweeks are paid leave. An employee is qualified if he/she has been employed with the employer for at least 30 days and is “unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable.” Notably, this does not apply to employees who cannot work because of: a recommendation or order by a public official or health care provider to quarantine due to exposure to or symptoms of coronavirus; or the need to care for a family member who is in quarantine based on a recommendation or order due to exposure to or symptoms of coronavirus.

As mentioned, the first 10 days of a qualifying employee’s leave are unpaid under the EFMLEA; however, if the employee is already entitled to paid time off, such as accrued vacation time, medical, or sick days, they could apply those days to the 10 days of unpaid leave and should be paid for the applicable time. For the remainder of the 12-workweek period, employers are required to provide qualifying employees with two-thirds pay for the number of hours the employee would otherwise be scheduled to work, with a cap of $200 per day and $10,000 in the aggregate.

Further, the EFMLEA gives the Department of Labor (DOL) explicit authority to create regulations that exempt businesses with fewer than 50 employees from the requirements of the EFMLEA “when the imposition of such requirements would jeopardize the viability of the business as a going concern.” The DOL has not acted on this yet and updates will be provided as changes occur.

Additionally, businesses with fewer than 25 employees will not be required to restore the job of an employee who takes leave under the EFMLEA if: (i) the employee’s position no longer exists due to economic conditions and (ii) the employer makes reasonable efforts to restore the employee to an equivalent role with equivalent pay and benefits or if a position is not available, the employer must make reasonable efforts for a 1 year period to contact the employee if an equivalent position becomes available.

Because the EFMLEA is technically an amendment to the Family and Medical Leave Act of 1993 (FMLA), the rights provided to employees under the FMLA, such as enforcement and a prohibition on retaliation, apply equally to the EFMLEA. Similarly, since the FMLA limits the 12 workweeks of leave to any 12-month period, an employee that has already exhausted 12 workweeks of leave under the FMLA in a 12-month period would be prohibited from additional paid leave under the EFMLEA.

The EFMLEA is set to go into effect on April 2 and will remain in effect until December 31, 2020.

2. The Emergency Paid Sick Leave Act of 2020 (EPSLA):

While the EFMLEA does not really deal with an employee who is ill, the EPSLA was enacted to deal with this in some part, although there is some overlap. The EPSLA requires employers with fewer than 500 employees to provide up to two workweeks of paid sick leave to all employees for almost any issue related to the coronavirus. Under the EPSLA, full-time employees will receive up to 80 hours of paid sick leave while part-time employees will be entitled to paid sick leave pro-rated by the average number of hours worked over a two-week period. This will apply to all employees regardless of how long the employee has been employed.

Unlike the EFMLEA, paid sick leave under the EPSLA will apply to any of the following situations:

To self-isolate because the employee is diagnosed with coronavirus;
To obtain a medical diagnosis or care if such employee is experiencing the symptoms of coronavirus;
To comply with a recommendation or order by a public official or health care provider to quarantine due to exposure to or symptoms of coronavirus;
To care or assist a family member who is self-isolating because of a coronavirus diagnosis or who is experiencing symptoms of coronavirus and needs to obtain medical diagnoses or care; or
To care for a child if the child’s school or place of care is closed or the child-care provider is unavailable.
To self-isolate due to any other substantially similar condition specified by the Secretary of Health and Human Services.
If an employee takes paid sick leave under reasons 1-3 as listed above, the leave will be paid at the employee’s regular rate or the minimum wage (whichever is higher) and is capped at $511 per day and $5,110 in the aggregate. If the employee takes leave due to reasons 4-6 as listed above, that leave will be paid at two-thirds of the employee’s regular pay or minimum wage rate and capped at $200 per day and $2,000 in the aggregate.

Employers must make paid sick leave under the EPSLA available in addition to what is already provided by an employer’s existing paid leave policies. Further, employers are prohibited from changing their existing leave policies to avoid this requirement (and are also prohibited from conditioning EPSLA paid sick leave on an employee’s finding a replacement). Employees will also be able to first use paid sick leave under the EPSLA before using other accrued paid sick leave, and an employer cannot require the employee to use other paid sick leave first. Unused paid sick leave under the EPSLA will not carry over from one year to the next and will not need to be paid out at the end of an individual’s employment. Moreover, the EPSLA can be applied in conjunction with the EFMLEA by employees who qualify under both Acts to cover the first 10 days of unpaid leave under the EFMLEA.

Employers will be required to post a notice related to the EPSLA in the workplace. A model notice will be provided by the DOL by March 25. Employers who fail to comply with the EPSLA will be subject to penalties under the Fair Labor Standards Act. Like the EFMLEA, the EPSLA will go into effect on April 2 and will remain in effect until December 31, 2020.

3. Tax Credits for Paid Sick and Paid Family and Medical Leave:

The FFCRA does extend some relief to employers that are required to provide paid leave to employees under the EFMLEA or the EPSLA. These employers will receive payroll tax credits subject to certain limitations. Credits for wages paid under the EPSLA will be capped at $511 per day for days in which full pay is required, and $200 per day for days in which two-thirds pay is required and are available for up to 10 days per employee per calendar quarter. EFMLEA credits are capped at $200 per day (and at $10,000 with respect to all calendar quarters). These credits are refundable to the extent they exceed the employer’s payroll tax and are not available to employers that are also receiving credits under Internal Revenue Code Section 45S for paid family and medical leave. The FFCRA also extends tax credits to the self-employed, which carry additional considerations.

SA&M is actively monitoring the labor issues and resources that become available to businesses during this time. For more information or if you have questions about labor or employment issues for your business, please contact Jeff Gersh at jgersh@stubbsalderton.com.

The attorneys of Stubbs Alderton & Markiles, LLP are continuously monitoring the current COVID-19 situation and publishing relevant updates that pertain to your business. Contact one of our legal professionals at info@stubbsalderton.com, if you have any questions.

For more information please visit our COVID-19 Resources page.