Advisen

The pandemic insurance unicorn and 'force majeure'

By Gfeller Laurie, LLP

The following is an overview from law firm Gfeller Laurie. It is republished here with permission. This is Part I. Look for Part II tomorrow.

One month into COVID-19 reality, insurance for business interruption losses has become a widely reported topic in the popular press and is in the crosshairs of State and Federal legislators and even Presidential commentary. However, far less “airtime” has been devoted to the types of insurance that were available, but not purchased, prior to the COVID-19 pandemic. We discuss the little-known pandemic coverage that was previously available and a few notable purchasers thereof, below. We also assess other contract-based legal theories that are likely to come into play in the coming wave of COVID-19-related litigation and provide an update on the latest developments in COVID-19 coverage litigation and legislative initiatives directed at business interruption coverage.

Pandemic Insurance Coverage – A Unicorn That Actually Exists

It seems the insurance industry is under fire from every front, with legislators demanding retroactive changes to policy terms previously approved by State regulators, businesses demanding coverage and alleging bad faith and the general public villainizing insurers for including a virus exclusion in their policies following the SARS pandemic. What has not been widely discussed, however, is that the industry did not turn its back on pandemic coverage after SARS.

In fact, major players in the industry had pandemic products on the market, but they were not widely purchased. For example, as reported in the April 3, 2020 issue of Insurance Journal, in 2018, Marsh, in conjunction with Munich Re and technology firm Metabiota, created a parametric insurance policy, entitled PathogenRX, that provided business interruption coverage in the event of a pandemic. Not a single PathogenRX policy was sold when it initially was rolled out. Not surprisingly, there is now significant demand for the product.

Fast forward to the current crisis. Wimbledon and the Open Championship (a/k/a the “British Open”) both recently announced that they would be cancelled this year. The cancellation of these events contrasts with similar events in the United States that are being rescheduled, rather than cancelled. Notably, Wimbledon and the British Open have longstanding ties to the Lloyds market and therefore, unsurprisingly, reportedly have pandemic insurance policies in place providing coverage for event cancellation due to pandemic. It was recently reported that the All-England Club (i.e. Wimbledon) will receive $141 million from its pandemic insurance policy purchased with an annual premium of $2 million.

Ultimately, contrary to public perception, the adage still applies: “if you show me a risk, the market will show you an insurance policy.”

Force Majeure and COVID-19 – What You Need to Know

The COVID-19 pandemic is the most unique global health crisis of the past 100 years. No one alive today and working in business or government has ever experienced a situation even remotely close to what we are experiencing now. In a matter of weeks, the global economy has largely shut down. In the United States alone, for the first time in the nation’s history, every State is under a declared state of emergency and at least 95% of Americans are under stay-at-home orders. Businesses deemed “non-essential” have been ordered by State and municipal governments to shut down. Schools are closed. Long-distance travel has effectively ceased. The United States government has taken unprecedented steps to provide financial assistance to businesses and individuals. Even the notion that death and taxes are the only two sure things in life has changed – the perennial April 15th tax filing deadline has been pushed to July 15th. These are uncertain times, and many businesses are suddenly and unexpectedly unable to perform certain contractual obligations.

In short, the COVID-19 crisis compels a review of the concept of force majeure in the contract law context.

What is Force Majeure?

Generally speaking, force majeure references a specific type of contractual provision that limits liability due to unforeseen events outside the control of the parties, which events delay or prevent performance under a contract. It is a provision that effectively acts as a “Get Out of Jail Free Card” for a party seeking to be excused from its contractual obligations. Black’s Law Dictionary defines force majeure as an “event or effect that can be neither anticipated nor controlled.”

Contracts are typically governed by State law, and so the ability to claim force majeure depends on (1) the existence of a force majeure provision in a particular contract, (2) the language of said provision, and (3) the law of the State that governs the agreement.

Invoking Force Majeure

In considering whether the force majeure provision of a contract may apply, courts typically consider the following:

Whether the event qualifies as force majeure under the contract;
Whether the risk of non-performance was foreseeable;
Whether the risk can be mitigated; and
Whether performance of the contract is truly impossible.

The analysis starts with the language of the contract. Courts typically focus on whether the event giving rise to non-performance is specifically enumerated in the force majeure provision at issue. For example, if listed, the following triggering events could be implicated by COVID-19:

Epidemic/Pandemic/Viral or Communicable Disease Outbreak;
Quarantine;
“Act of God;”
Act/Order of Government;
National Emergency;
War (President Trump has consistently characterized this situation as a war against the COVID-19 virus and characterized himself as a “Wartime President”);
Labor Disruption;
Supply Chain Disruption;
Transportation System Disruption; and/or
Catch-all type language such as “or other similar causes or events beyond the parties’ control.”

The burden rests with the party seeking to invoke force majeure to establish that the triggering event qualifies as such under the terms of the contract. However, even if the invoking party meets this burden, it cannot invoke force majeure if non-performance was foreseeable, or if mitigation was possible. Stated another way, the fact that performance was merely impracticable or economically difficult, as opposed to truly impossible, will not suffice to successfully invoke force majeure.

States differ in their treatment of force majeure. For example, while California allows parties to invoke force majeure where performance has become “impossible or unreasonably expensive,” New York courts take a much more narrow approach to force majeure, requiring a triggering event to be extreme, unforeseeable, and beyond a party’s control and without its fault or negligence. See Kel Kim Corp. v. Central Mkts., Inc., 70 N.Y.2d 900, 902 (1987) compare In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012). Under existing New York law, performance must be objectively impossible. See Kel Kim Corp.

Accordingly, when considering the potential applicability of force majeure, one must (1) review and understand the language of the contract at issue, (2) check the law of the applicable jurisdiction, and then (3) apply the facts to both.

Force Majeure and COVID-19

COVID-19’s classification as a pandemic by the World Health Organization and reference to COVID-19 as such by the United States government should trigger a force majeure clause that specifically lists “pandemic” as a triggering event. Force Majeure clauses that are silent on the issue of pandemic may not necessarily be triggered by the circumstances COVID-19 has presented. Generally, to the extent that COVID-19 clearly amounts to a force majeure, the party seeking to invoke the clause will still need to show that it took steps to mitigate and that performance was truly impossible.

As an example, consider the case of Macromex SRL v. Globex International, Inc., S.D.N.Y., 2008 WL 1752530. In this case, Globex had contracted to deliver chicken to Macromex, a Romanian company. In June 2006, because of the “bird flu,” the Romanian government declared – with no prior notice – that chicken could no longer be imported into Romania. Accordingly, Globex invoked the force majeure provision in the contract seeking to be excused from performance.

Macromex proposed an alternative delivery procedure, requesting that the chicken be delivered to the neighboring country of Georgia, but Globex refused to do so. Globex then proceeded to sell the chicken on the open market, presumably at a higher price. Meanwhile, other suppliers with whom Macromex had contracted for the purchase of chicken agreed to the Georgia alternative. The matter went to arbitration and Globex failed in its attempt to invoke force majeure because the arbitrator found that performance was not impossible – the chicken could have been delivered to Georgia. The United States District Court for the Southern District of New York confirmed the award.

Given the flurry of governmental regulations and executive orders designed to contain the COVID-19 outbreak, which have caused American business and industry to largely grind to a halt, proving (1) the inability to mitigate and (2) impossibility may be easier than normal. Moreover, given that Federal, State, and local governments have taken extreme and unprecedented actions to alleviate financial burdens otherwise applicable to businesses and individuals, it can be anticipated that the invocation and subsequent enforcement of force majeure clauses may be widespread in the aftermath of the COVID-19 pandemic.

Common Law Alternatives

In the absence of specific force majeure language, there are certain common law doctrines that may excuse a party from performance under a contract. These doctrines are impossibility and impracticability. Under these doctrines, non-performance may be excused if a party establishes that: (1) an unexpected intervening event occurred; (2) the parties’ agreement assumed such an event would not occur; and (3) the unexpected event made performance under the contract either impossible or impracticable. See Restatement (Second) of Contracts § 261 (Am. Law Inst. 1981). Generally, parties assume the risk of their own subjective incapacity to perform contractual obligations. Accordingly, courts objectively determine whether the non-performance was either impossible or impracticable. The latitude with which courts analyze the doctrines of impossibility and impracticability varies from State to State. There is little doubt that the COVID-19 pandemic will require courts to strongly consider more liberal interpretations of these doctrines.

What Is Next?

In short, the actions taken by our Federal, State, and local governments to stop the spread of COVID-19 have been extreme, unprecedented, and unexpected. Otherwise lock-tight agreements are being torn up, re-written, and/or abandoned altogether. Force majeure and the other common law doctrines discussed herein will likely be given a wide berth in the days, weeks, months, and possibly even years ahead. We may also see more robust liquidated damages provisions incorporated into force majeure clauses to prevent complete loss by the party left “holding the bag.”

Tomorrow: Part II – COVID-19 Litigation and Legislation

Sincerely,

Gfeller Laurie LLP

The memorandum is for informational purposes only. It does not constitute the rendering of legal advice or opinions on specific facts or matters. The distribution of this memorandum to any person does not constitute the establishment of an attorney-client relationship.