In addition to the crushing human toll, the COVID-19 pandemic has created enormous uncertainty in the business community.
Business owners are confronting tough choices everyday – how to pay rent and make payroll when cash flow has disappeared – and nobody knows when businesses will fully re-open, and how long it will take to return to normal.
One thing is certain: there is a wave of litigation on the horizon created by the COVID-19 pandemic. Below are four types of likely COVID-19 lawsuits and what businesses and their advisors need to know about them.
Litigation over “Force Majeure” Clauses in Commercial Contracts
An obscure legal phrase has taken on renewed importance as businesses are forced to confront having to perform under contracts that were drafted before COVID-19 emerged. Force Majeure (French for “superior force”) is a common contractual provision that allows parties to escape their obligations due to an extraordinary event beyond their control. Most commonly, Force Majeure provisions refer to war, riots, crime, plague, or an Act of God (e.g. hurricane, flood, or earthquake).
Interestingly, these provisions often include “plague” as one of the conditions that would excuse performance, but it is unclear if a court would interpret COVID-19 as a “plague” sufficient to excuse performance. Importantly, Force Majeure only allows a party to escape its contractual obligations if performing is literally impossible, not merely if it is inconvenient or more expensive than anticipated. Business owners should read their contracts carefully, and consult with counsel about whether performance is required or can be modified.
Industries/types of businesses likely affected: Landlord/tenants, borrowers, restaurants and other hospitality industries, and small businesses closed by the pandemic with monthly cash obligations (e.g., rent).
Practical take-away: Because access to courts is severely limited during the pandemic, and could be for some time, and also because litigating Force Majeure issues could take years, in the short term, informal agreements between businesses (e.g. payment plans, deferrals, accommodations, etc.) should strongly be considered.
Employee Wage Claims
Layoffs due to a downturn in consumer demand, and the huge rise in employees working from home, have created the perfect storm for wage claims. Maryland law requires that employers pay overtime for all non-exempt employees. Now, however, with teleworking as the new normal, it is much harder to track what employees are doing and how long they are working.
Overtime claims are of particular concern in this regard. Because employees may be entitled to treble damages and attorneys’ fees if their employer fails to pay overtime properly, it is critical that employers review their existing policies and procedures, and ensure that they are able to accurately track employee time. Moreover, if a non-exempt employee’s hours are cut in whole or in part, it is essential that they not work more than authorized and that all time is documented.
Industries/types of businesses likely affected: Employers of all sizes, but in particular, small businesses with employees working from home that do not have robust employment policies and time-keeping procedures.
Practical take-away: Overtime claims are ticking time bombs for many employers in the era of telework. It is critical to create, maintain, and enforce strict timekeeping policies and procedures. If possible, shutoff remote computer access for a non-exempt employee at the end of their work shift and keep it off until their shift is scheduled to start the next business day.
Premises Liability Claims
Under long-standing legal principles, business owners and landlords must exercise reasonable care in protecting persons who enter their property, which means that they cannot unnecessarily expose a visitor to foreseeable harm. Thus, if a premises owner knows of a confirmed case of COVID-19 in someone who had been on the property, the owner would likely be required to alert other tenants and employees of the exposure and to take reasonable steps to abate it, including thorough cleaning.
The good news for business owners and landlord is that even where an employee or guest is infected, given how extensive COVID-19 infections are, and how rapidly it spreads, it will be difficult for potential claimants to prove where they were infected and that the landlord/business owner is responsible. Business owners and landlords also can limit their liability by following all CDC guideline and other government instructions on limiting the disease outbreak.
Industries/types of businesses likely affected: Landlords, retail establishments, businesses open to the public.
Practical take-away: If you learn of a COVID-19 infection in someone who spent time on property you own or do business at, take immediate proactive steps to remediate, and follow all governmental guidelines on business operations.
Insurance Coverage Disputes/Business Interruption Claims
While most businesses have insurance to guard against all kinds of risk, one lesser known type of coverage is known as business interruption insurance, which can provide coverage for loss of revenue due to a myriad of triggering causes, including government shutdown orders, that would impair an insured’s ability to operate.
Most business interruption coverage, however, requires a direct physical loss or damage to the insured’s property, which in theory might limit the amount and scope of claims. Other policies, moreover, include exclusions for business loss caused by infectious diseases, including flu outbreaks and other epidemics. Notwithstanding these potential barriers, there unquestionably will be a large number of challenges to coverage denials in light of the number of businesses affected by the shutdown, with the claim that the virus has contaminated the insured’s property and thus has created a direct physical loss.
It is critical for policyholders to read their insurance policies closely, and quickly put their insurance carrier on notice of a possible claim, especially if there is not a virus, epidemic, or pandemic exclusion.
Industries/types of businesses likely affected: Any business closed by government order with business interruption insurance coverage.
Practical take-away: If you think you might have insurance coverage for business interruption, it is critical to consult with your insurance broker or advisor immediately and put the insurer on notice of a possible claim while you investigate the potential losses. You should also consult counsel to discuss particular claims.
Litigation is inevitable in the wake of the COVID-19 outbreak, and it is important to stay informed about the specific triggers and how to avoid them. Lerch Early’s business attorneys and litigators are up to speed on how COVID-19 affects the business community during the pandemic and are happy to discuss your particular situation.
Bill Goldberg’s broad litigation practice in these areas includes significant trial and appellate experience in the state and federal courts of Maryland, the District of Columbia, and Virginia, as well as alternative dispute resolution. For more on COVID-19 and any of these related litigation issues, contact Bill at 301-907-2813 or [email protected].