Tag Archives: Karine Akopchikyan

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

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

Authors:
Jeffrey Gersh
Karine Akopchikyan
Garett Hill