On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. On March 13, 2020, the President of the United States declared that the COVID-19 outbreak constitutes a national emergency, and the Governor of Texas similarly declared a state of disaster for all counties in Texas. On March 17, 2020, Harris County Commissioners Court extended the Harris County Judge’s declaration of local disaster for a public health emergency through March 24, 2020.
The attorneys at Burford Perry, LLP have assembled a list of immediate considerations for businesses affected by the COVID-19 pandemic.
The COVID-19 pandemic gives rise to many contract-related considerations. New contracts should be drafted to specifically address and include protections from consequences of COVID-19. Businesses should review existing contracts to determine how COVID-19 may affect the obligations and performance of each contract party.
For example, COVID-19 may constitute a force majeure event, and there may be deadlines for contracting parties to declare an event of force majeure. However, companies should consider the implications of declaring a force majeure event—such as the right of the other party to terminate the contract, the duty to mitigate damages, or whether improperly declaring a force majeure event constitutes repudiation of the contract.
In addition to force majeure provisions, businesses should consider whether any other contractual or common law defenses to performance may apply. COVID-19 may constitute a “material adverse change” or have a “material adverse effect” under certain contractual provisions. Further, the defenses of “frustration of purpose” or “impossibility” may apply. However, like force majeure provisions, these contract-based and common-law doctrines are narrowly applied.
Businesses should also review performance-related contract requirements to determine whether they may be implicated or whether contractual dates for performance can be met. If the time of performance is likely to be affected by COVID-19, the contract may require advanced notice of potential delays.
Insurance may provide a remedy to businesses suffering from COVID-19 related losses.
Business interruption insurance coverage may provide coverage for lost income sustained as a result of disruptions to operations. Contingent business interruption coverage similarly provides insurance for financial losses resulting from disruptions to a business’s customers or suppliers, usually requiring that the underlying cause of damage to the customer or supplier be of a type covered with respect to the business’s own property. However, business interruption insurance is typically purchased as part of a company’s commercial property insurance policy and, accordingly, requires direct physical loss of or damage to property absent an extension of coverage for losses caused by communicable or infectious diseases.
Event cancellation policies may provide relief to businesses that have to postpone or cancel events due to COVID-19. Specifically, these policies may cover lost profits and revenue, amounts paid to reimburse vendors, ticket holders, or other third parties due to the canceled event, and additional amounts that must be spent to host the event at an alternate time or place. Coverage may also be available for out-of-pocket or unexpected costs, lost advertising, lost ticket sales, or other contractual obligations a business must pay as a result of the canceled event. However, businesses should review their policies for exclusions for communicable diseases and restrictions limiting coverage to necessary cancellations due to a government order. Even when in doubt, policyholders must timely file a claim for losses that could be covered.
Directors and officers of companies may face shareholder suits alleging that the company suffered economic losses as a result of unreasonable actions (or inaction) in response to COVID-19. Or shareholders may allege that the company’s directors and officers failed to disclose risks to the company’s financial performance posed by COVID-19, failed to observe recommended protocols, or failed to develop adequate contingency plans. Directors and officers’ insurance policies, however, may provide coverage for such shareholder claims.
Conversely, while commercial property insurance policies typically provide coverage for business income losses sustained when a civil authority prohibits or impairs access to the policyholder’s premises, commercial property insurance policies generally require some type of physical damage to covered property. General liability insurance policies similarly provide coverage for bodily injury and property damages but typically exclude coverage for viruses, bacteria, or pollutants.
The Treasury Department and the Internal Revenue Service have extended the 2019 income tax filing and payment deadlines for all taxpayers who file and pay their federal income taxes on April 15, 2020 to July 15, 2020. The extension is automatic; taxpayers do not need to file any additional forms to qualify. Note, however, that the deadline for March 15, 2020 filers has not been extended, and the Texas Comptroller is currently collecting state taxes on sales pursuant to the normal rules and deadlines.
The declarations of disaster at the state and federal level have opened access to some forms of COVID-19 relief that would not usually be available. The Federal Emergency Management Administration (FEMA) maintains a website with many forms of federal government assistance available.
Small businesses may qualify for a Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL). These loans, for up to $2 million, are designed to help businesses meet working capital needs caused by the disaster and are available regardless of whether the business suffered any physical property damage. The SBA recently granted Texas’ Economic Injury Disaster Loan assistance declaration, making loans available statewide to small businesses help alleviate economic injury caused by COVID-19. Businesses should apply at SBA’s website. The online application is the fastest method to receive a decision about loan eligibility.
The Occupational Safety and Health Administration (OSHA) outlined steps small business can take to protect their workforce in its recently published Guidance on Preparing Workplaces for COVID-19. OSHA’s guidance and recommendations are advisory in nature and do not create new legal obligations.
Similarly, the Equal Employment Opportunity Commission (EEOC) recently clarified its rules related to COVID-19’s impact on the American workforce. The EEOC also reaffirmed its prior guidance on pandemics. ADA-covered employers may ask employees if they are experiencing symptoms of a pandemic virus and may ask employees to seek medical attention. However, employers must maintain all information about employee illness as a confidential medical record in compliance with the ADA. An employer may also advise workers to go home, but COVID-19 symptoms are not considered disability related.
Small businesses need efficient and experienced representation to navigate the unique challenges they are facing as a result of the COVID-19 pandemic. If your business has concerns regarding potential or existing contract disputes, insurance coverage disputes, or employment issues, it is important to contact an experienced business litigation attorney like those at Burford Perry that can advise you on your next move.
**LAST UPDATED: March 22, 2020