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Alleviating COVID-19 Business Struggles: Your Insurance Policy and Lease Agreement



No one has been able to escape the effects of the Coronavirus pandemic. If you’re an employee, then your boss has already gone through the difficult thought process of whether or not to keep you employed. In California, 2.7 million people have filed unemployment insurance claims in the past four weeks because of the COVID-19 layoffs and furloughs.


Business owners face a particularly difficult struggle as they’re forced to decide who is more deserving of their money: their employees, their landlords, or their vendors. Some recent government programs may help alleviate these struggles, but they’ll be short-term in nature given the long-term impacts of the COVID-19 pandemic. You can read about these government programs and resources in my earlier blog post, Financial Resources to Survive the COVID-19 Crisis: The CARES Act Explained.


Force Majeure in Lease Agreements


As a business owner, you need immediate financial relief. If you lease commercial space for your business, pull out your lease agreement and look for a clause or section titled “Force Majeure” in your lease. In contract law, force majeure, French for “superior force”, refers to one party being excused from its obligations due to events out of their control as a result of a catastrophe. Examples of these force majeure events are widespread riots, times of war, natural disasters, labor strikes, or pandemics. Another common example of a force majeure is a governmental moratorium or mandate to cease business operations. California law states, in broad terms, “No man is responsible for that which no man can control” in California’s Civil Code, Section 3526. Given that the COVID-19 crisis has caused dire situations and severe operational limits on every business, this justifies a good look at whether the force majeure language allows for some excuse of your tenant obligations.


As a general rule, the broader the force majeure language is, the better it is for you. Some contracts will only excuse physical impediments to your operations, such as an earthquake, war time conditions or fire damage. Other tenant-friendly leases will include any business interruption as a force majeure. Look for language in your lease agreement that references either: (1) a health pandemic, as the COVID-19 crisis has been designated, or (2) a government shutdown, mandate, or business moratorium, as would apply in California for “non-essential” businesses.


If you find that the COVID-19 crisis qualifies as a force majeure according to your lease’s language, then you need to find what remedy and relief is available to you. Most leases have a clause that excuses tenant obligations and duties during a force majeure event, but once the force majeure event ends, then the tenant obligations resume. Additionally, these lease agreements often extend your tenancy for the same period of time the force majeure event took place. For example, if the force majeure event lasted 60 days, then the final day of your lease would be extended by 60 days.


Other lease agreements, while surely in the minority, will permit the tenant to terminate the lease agreement if the force majeure event continues for an extended period of time. Whether or not the COVID-19 pandemic falls into the force majeure category of your lease, and you get appropriate relief as a result, will depend on what’s written in your lease agreement. Having an attorney review your lease agreement will help guide you in this regard.


Business Interruption Coverage


As a business owner, do you wonder if you’re covered for some type of financial relief from ongoing business costs and lost revenue? Lately, there has been much discussion about whether business interruption coverage, common in many commercial insurance policies, can cover Coronavirus-related losses. This coverage can help offset losses incurred from the COVID-19 pandemic. Many business insurance policies include similar language as leases that define what a business interruption is, or force majeure. Recently, Travelers Insurance notified their business customers in New York that the COVID-19 pandemic does not qualify as an interruption under its insurance standards. The letter stated, in part:


Insurance for business interruption can provide coverage when a policy holder suffers a loss of income due to direct physical loss or damage to covered property at its location or another location. It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage. Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms.” (emphasis added)


On the other hand, California businesses are taking legal action against their insurance companies to enforce this promised coverage. In a pending Los Angeles County case, Scratch Restaurants LLC et al v. Farmers Group Inc. et al, business owners are seeking Court direction determine if the orders from the City and County of Los Angeles are considered a “prohibition of access” event, which can additionally lead to a claim that there has been a “physical loss and damage to the property” in the area where the business is located. If the Court determines that the city and county orders to close are enough to cause “physical loss”, insurance companies may be obligated to recognize the business interruption caused by the COVID-19 pandemic and provide these businesses with coverage for their business losses.


More and more businesses are taking their insurance companies to court to enforce these business interruption provisions and get the desperately-needed relief that they have been promised. Time will tell whether or not insurance companies will be forced to pay businesses for lost income from COVID-19 business interruptions.


The effects of the COVID-19 pandemic will be around for long after the stay-at-home orders are lifted. Small businesses, as always, face particular vulnerability. Having an experienced attorney review your lease agreement and insurance policy may bring to light various forms of relief that you were unaware you had.


Tawfiq Morrar is an attorney in Elk Grove, California who handles all aspects of business and transactional law, in addition to estate planning services. Mr. Morrar can be reached at (916) 968-7973 or via email at tjmorrar@morrarlaw.com.

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