As a business owner, you put a great deal of thought and money toward contingency planning, and your family and employees count on you. Will your contracts and insurance policies protect you in case of a major emergency?
From floods and power outages, to violence and infections, crises come in many forms. When these crises arise, business owners commonly look for protection in two places – the business interruption coverage contained in their comprehensive insurance policy and the “force majeure” clauses in their material contracts. Both exist to provide a lifeline in times of trouble, but both are commonly more limited than you might expect.
Business Interruption Insurance
Perhaps, like many other business owners, you purchased business interruption insurance. The idea being that if you needed to close your business for any period due to a “covered event,” you would receive funds to receive “lost income” needed to pay expenses, such as rent, payroll and relocation. The problem, as many businesses have recently found out, is that many of the events they might expect to be covered are, in fact, not covered.
Typically, this coverage is usually associated with a physical loss arising from a fire, flood, earthquake or other similar casualty. Policies will typically exclude loss due to communicable disease outbreaks, such as the coronavirus pandemic. Further, some policies which may exclude coverage for a “communicable disease” outbreak, may provide coverage if government action causes the business interruption, even if the shut-down arises from a disease outbreak.
For instance, recently filed Louisiana suit, a restaurant owner has argued that a disruption arising from a communicable disease outbreak constitutes property damage. The restaurant owner contends that the infection triggers the business interruption coverage, citing statements from city officials that infection damages property. The key is to understand the exact terms of your coverage, which may require that you seek knowledgeable legal counsel for interpretation and insight.
Business contracts commonly contain force majeure clauses. Force majeure means “superior event” and is sometimes referred to as an “Act of God”. These clauses excuse businesses from their failure to perform when that failure is due to powerful, unforeseen circumstances, such as wars, strikes, riots, or natural catastrophes, etc. When such events occur, force majeure causes can be difficult to invoke because:
· The clauses are typically highly specific, rather than “open-ended” and exclude certain catastrophic events
· The clauses often require the business to prove an event rendered performance “impossible”, rather than merely inconvenient
· Interpretations and enforcement of force majeure clauses may differ from state to state
This may be good for you if the people invoking force majeure are in your distribution chains. However, if your business is coping with disaster, you must understand the exact terms of your contract and how courts in your jurisdiction has interpreted such provisions.
In many cases, it may be best for you and your business partners to find alternate methods of resolving your contract disputes. Most business relationships are mutually beneficial, so partners commonly suffer or succeed together.
Don’t assume your contracts and insurance policies protect you
Now may be a very good time to review important contracts and insurance policies to determine exactly what kind of business disruption protection you have. If a catastrophic event occurs, you do not want to be burdened by expensive litigation as you struggle to save your business.