Written by Brian Clarry, Esq.
Edited by Bill Pfund, Esq.
Amid COVID-19, companies across industries including construction, logistics, healthcare, education, and entertainment are reassessing their positions in this new risk environment. Business interruptions and evolving areas of exposure are forcing companies, and their insurers, to gauge potential mitigation measures. In this context, popular legal terms of “Force Majeure” and “Act of God” are being discussed. But do they apply to COVID-19, and if so, how?
An Act of God or Force Majeure (FM) event is a natural occurrence that causes losses for which no other individual or entity can be blamed. Earthquakes and tsunamis are common examples. A pandemic such as COVID-19 would seem to apply. Predictably, however, it is not that simple. It is important to consider how this concept applies in the context of commercial contracts, insurance contracts, and tort liability.
An Act of God contractual provisions, also called Force Majeure clauses, relate to events outside human control, such as flash floods, earthquakes, or other natural disasters. Such clauses can free a contract’s parties from obligations if such an event occurs. A close look at the contractual language is necessary to assess and mitigate commercial and operational risks during the ongoing health crisis.
There is no single “standard” FM clause. In fact, they often vary widely by industry. FM clauses often list specific items that qualify as a FM event, e.g., strikes, wars and riots. Many clauses will also include an “Act of God” in the list. Others will include a catchall phrase such as “any other event beyond the reasonable control of a party,” or “any other like events.” A global pandemic such as the one we are currently experiencing would seem to fall within such catchall clauses, unless of course it is specifically excluded.
The first step is to see if the contract defines an Act of God, force majeure, or “other like event.” Does it specifically include an epidemic, pandemic or infectious disease outbreak? The precise language is crucial because such provisions tend to be interpreted strictly by courts.
If “disease” or “epidemic” is not expressly included or excluded, but does include another catchall term, including Act of God, that is sufficient ground to argue that COVID-19 applies to exclude contractual performance.
The next step is to determine precisely how the virus has prevented, hindered or delayed your ability to perform a contractual obligation(s) and gather supporting evidence. Then, comply with the contract’s notice and mitigation requirements.
Bear in mind that some Act of God provisions differentiate between naturally occurring disasters and government actions. Is the basis for non-performance due to the naturally occurring component (the virus itself) or a government action component (e.g., quarantines, limitations on transportation, business shutdown orders, etc.)? Document the genesis and course of events leading to the present challenge.
Even if your company could assert a contractual defense, it is important to understand how far-reaching this pandemic is and the interruptions that it has and will continue to cause–not only to your company but to your contractors, competitors, and customers. This environment presents an opportunity to negotiate with partners to achieve a mutually beneficial outcome.
If your contact language is unfavorable to your position, you may be able to rely on the concept of impracticability. This contact defense is available for service contacts under each state’s common law and for goods’ contracts under the Uniform Commercial Code. Specifically, under UCC 2-615, failure to deliver goods sold may be excused by an “Act of God” if the absence of such act was a “basic assumption” of the contract, and the act has made the delivery “commercially impracticable.”
This defense, if established, essentially relieves a party from its contractual duties if they become extremely burdensome or unfeasible. However, this defense is far less reliable than having concrete contract language to excuse performance. Nonetheless, defense can be used in negotiations with business partners with whom you owe services or goods in order to formulate a mutually beneficial continuation of business agreement.
Another potential avenue for relief for companies facing financial and business strains from the effects of COVID-19 is a business interruption insurance policy. While most businesses have such a policy included in a comprehensive package policy or as an add-on or rider to their property/casualty policy, nearly all such policies exclude pandemic-caused losses. Moreover, they rarely contain Act of God clauses. Another roadblock is that such policies generally require direct physical loss of property for coverage to apply. However, Congress and a handful of states have considered or introduced bills that would force insurers to retroactively cover business interruption claims due to COVID-19. Small and mid-size businesses in particular should monitor state and federal legislation aimed at alleviating their current financial stress.
In tort law, owners and operators of venues with the capacity to house large numbers of people for events (e.g., parks, senior care facilities, cruise lines) face potential exposure if for example a specific outbreak of the virus could be traced to a hosted event or facility.
An Act of God such as COVID-19 has the potential to serve as a liability defense for these companies by severing proximate causation. See e.g., Portsmouth v. Culpepper, 192 Va. 362 (1951). However, case law suggests that venue owners or senior care facilities, for example, can only use the unforeseeability of a COVID-19-like event as a defense if those entities used reasonable care to protect against a similar event. “Reasonable care” means enacting policies and procedures before the event, following those procedures when applicable, and taking positive steps to mitigate the risk as the event is unfolding.
COVID-19, and its ripple effects, present a host of challenges to businesses and risk managers. In this rapidly evolving environment, challenges and risks will continue to grow. Rely on KPM LAW’s team to help navigate you through this unfamiliar territory by providing concrete and practical advice.
 Defined as “that act or omission which, in natural and continuous sequence, unbroken by an efficient intervening cause, produces the event, and without which that event would not have occurred.” Beale v. Jones, 210 Va. 519, 522 (1970) (emphasis added).