Does Force Majeure Force Business Interruption?
As businesses continue to navigate the various challenges posed by the COVID-19 pandemic, including supply chain shortages, many are asking not only whether they can seek relief from performance through force majeure clauses, but also whether these disruptions could trigger business interruption insurance. Unfortunately, the answers are not straightforward.
Force majeure contract provisions relieve contracting parties from liability for failing to perform contractual obligations due to circumstances beyond their control. A well-drafted force majeure clause should contain four essential elements: an identifiable triggering event; the effect of the triggering event on contract performance; the effect of the triggering event on contractual obligations; and a notice requirement. Traditionally, force majeure litigation focused on identifying the triggering event that caused non-performance and whether that event was specifically enumerated within the language of the contract. Courts strictly construed contract language applying a narrow interpretation to force majeure clauses, including strict interpretation of the “catch-all” language contained within the clause. If the triggering event was not specifically enumerated within the contract itself, relief from liability was not generally afforded.
The Context Of COVID-19
In the context of COVID-19, a majority of courts have undeniably identified COVID-19 as a force majeure triggering event. However, relief from contract liability is not automatic. Post-COVID, trending litigation no longer focuses on the facts and circumstances surrounding a triggering event, but rather the effects of triggering the force majeure clause itself. This has forced the judiciary to revisit the interpretation of force majeure provisions particularly within the context of analysing the “catch-all” language in the clause.
Although the traditionally narrow approach to force majeure invocation remains, some courts have provided contractual relief by interpreting boilerplate “catch-all” language to allow triggering events not specifically enumerated within the contract. Absent a contract requiring “strict impossibility” as the standard for non-performance, some states have afforded full or partial contractual performance relief by encompassing COVID-19 as an enumerated triggering event contemplated by the parties’ inclusion of “catch-all” language in a force majeure clause. If the invoking party can establish causation and is successful in proving that the requested relief was contemplated by the parties at the time of contracting, courts, in light of COVID-19, have afforded some relief from contractual performance.
Future Business Interruption
Obtaining contractual relief from liability is a success in the courtroom; however, it may also be a forecast for future business interruption. When faced with business interruption, a company will turn to its Commercial Business Interruption insurance carrier to help bridge the revenue gap until it can recover from the disrupting event. One hurdle to a successful claim is the requirement that business disruption is caused by a “direct physical loss.” The question, then, is whether COVID-19 can cause the “direct physical loss” required by business interruption policies, and the results are mixed.
Insurers have argued that COVID-19 related business losses are not covered by commercial policies because physical alteration or structural damage is required to trigger coverage – and that type of “physical loss” cannot be caused by the coronavirus. Many courts have agreed. As one court put it, the coronavirus “damages lungs. It doesn’t damage printing presses.” Although rulings vary by jurisdiction, to date four Federal Circuit Courts (Eighth, Eleventh, Sixth, and Ninth Circuits) have ruled in favour of insurers on COVID-19 business interruption claims.
While initial court cases overwhelmingly upheld coverage denials, a minority of courts across the country, including Minnesota, Missouri, Virginia, and North Carolina have agreed with policyholders that COVID-19 can cause the “physical loss” required by policies to trigger coverage. The difference in these rulings lies not in the approach, but in jurisdictional interpretations of the physical loss requirement. These jurisdictions have analogised the danger of COVID-19 to cases where coverage was upheld when asbestos, toxic air particles, or noxious gas rendered a property uninhabitable or dangerous because of non-structural sources.
As businesses continue to look forward, they should carefully consider how the coronavirus could impact contractual obligations in the future. This includes forethought to contract performance in the face of impossibility or impractically. Additionally, businesses should carefully consider the coverage offered by their insurance carrier to determine if the security they seek is in fact contemplated by their policy. At present, more than fourteen jurisdictions have provided guidance on the interpretation of force majeure clauses within the context of COVID-19, and virtually all jurisdictions have addressed claims arising out of business interruption insurance denials. Cases will undoubtedly continue to develop and case law will evolve, along with the virus.
About the authors:
Johanna Sheehe, Esq. is a litigator at Sheehe & Associates, P.A. Her practice comprises commercial litigation, insurance defence, and equine law in state and federal courts throughout the State of Florida. Ms Sheehe can be reached via email at jsheehe@sheeheandassociates.com.
Thasaian Jordan, Esq. serves as the Managing Attorney at the Jordan Legal Group. She advises businesses and individuals on a wide range of corporate, insurance and estate-planning matters. MS Jordan can be reached via email at tqj@jordanlegalgroup.com.
