Does Business Insurance Cover Damage from Civil Unrest?

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Will Business Insurance Cover Property Damage From Civil Unrest?

By Brian Selogie

Just as businesses across Southern California and much of the United States were beginning the long process of recovering from forced closures and dismal earnings caused by the ongoing COVID-19 pandemic, recent protests and demonstrations, in some instances accompanied by violence, damage and looting, now threaten the economic survival of many businesses across the country.
 
How and when affected businesses respond to the property damage, lost inventory, and business interruption posed by this latest challenge will depend largely upon whether insurance coverage applies under business owners’ general liability and special form insurance policies.  This provides an overview of the terms included and the coverage typically provided under a business owner’s policy, and it provides general guidance regarding the process of submitting an insurance claim, as well as the obligations owed to policyholders by insurers.
 

What does a General Liability Insurance policy typically cover?

As an initial matter, the terms of and coverage provided under various insurance policies differ widely based largely on premiums paid, deductible amounts, the policies of the particular insurance carrier, and the election of business owners to secure coverage for specific causes of loss.  In that regard, most “general liability” insurance policies provide coverage for “bodily injury” or “property damage” resulting from “covered causes of loss.” Often times, the definition of “property damage” under general liability policies will include phrases such as “physical injury to tangible property, including all resulting loss of use of that property, as well as loss of use of tangible property that is not physically injured”.  Of course, reading and understanding your specific policy is critical.
 

Understand your “Covered Causes of Loss” in your Policy

Although the definition of “property damage” mentioned above appears broad and wide-ranging, policyholders should be aware that most policies explicitly limit the scope of coverage for losses resulting from such damage to only those losses arising out of a “covered cause of loss”.  Again, the events that constitute a “covered cause of loss” vary widely from policy to policy, although a typical list of covered causes of loss may include: “fire; lightning; explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.”
 

Can I add a policy for more protection?

Yes. In addition to “general liability” policies, many business owners elect to hold coverage under so-called “special form”, “fire”, or “all-risk” policies.  The scope of such a policy is typically broader than that of a general liability policy, and includes coverage for all losses except those expressly excluded under the policy.  Special form policies may include coverage for losses related to issues such as damage to equipment, personal property, improvements, and inventory, as well as business interruption and rental loss. 

 

Review what is included and what is not included in your policy

Of note, policyholders should review the language of their policies very carefully to determine whether any losses or causes of loss are expressly excluded by the insurance company.  As an example all too familiar to myriad policyholders, many insurers have adopted the position that no coverage applies for any loss related to the COVID-19 pandemic, as those losses are specifically identified in so-called “virus exclusions”.  Accordingly, policyholders would be prudent to confirm that no such exclusion applies for the losses arising out of recent vandalism, riots, violent demonstrations, and looting.  As discussed further below, business owners should consider consulting with attorneys to evaluate the specific terms of their insurance policies, including both general liability and special form policies, in order to determine the coverage provided thereunder.
 

How do I submit a business insurance claim?

The first step in submitting an insurance claim for any loss, including a loss arising out of recent violence, looting, and civil unrest, is for business owners to become familiar with the details of their particular policies.  Of course, reviewing an insurance policy can present a challenging, mind-numbing task, as policies often contain hundreds of pages of arcane, convoluted language along with myriad references, cross-references, and defined terms.  Nevertheless, an in-depth understanding of the terms of each particular policy is indispensable to preparing and submitting an informed, effective notice of claim or “tender” to an insurance carrier.
  
Once a business owner becomes familiar with the terms of a policy, he or she should evaluate the policy in order to determine whether coverage applies for the particular loss at issue— in this case, such losses may include damage to physical property, personal property, inventory, equipment and/or business interruption or lost revenue.  If the business owner believes that coverage applies, he or she ought to confirm whether the particular “cause of loss”— in this case likely vandalism, riot, or civil commotion— is also covered under the policy.  If so, the policyholder should attempt to articulate the basis for the claimed loss in a well-reasoned and comprehensive fashion.  Of course, the assistance of an effective attorney often makes the difference between acceptance of or denial by the insurance company of an insured’s tender of claim. 
 

What obligations does an Insurer owe to a beneficiary?

Under the law, an insurance carrier owes the insured a contractual duty as well as a duty of good faith and fair dealing with respect to the handling and payment of any claim.   Of note, the insurance carrier’s duty to protect the insured’s interests obligates it to investigate any claim thoroughly: “[I]t is essential that an insurer fully inquire into all possible bases that might support the insured’s claim … [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”  Indeed, adequacy of investigation is “[a]mong the most critical factors bearing on the insurer’s good faith”.  In addition, “the insurer’s early closure of an investigation and unwillingness to reconsider a denial when presented with evidence of factual errors will fortify a finding of bad faith.”
 

What do I do if my claim is denied?

In our experience, insurance companies often deny claims as a matter of course. We are hearing from our clients that these claims for property damage from vandalism and looting are being denied.  If this happens to you, reviewing your policy with an attorney can help you determine if pursuing litigation for recompense for your damages or a cause of bad faith is a wise option for you.
 
Ultimately, the impact that any disruptive, damaging event might have on a particular business owner hinges on a number of factors, not the least of which is whether coverage applies under any applicable insurance policy.  In light of the foregoing, affected business owners ought to review their policies and consult with an attorney if necessary to gain an in-depth understanding of the coverage afforded thereunder.  Insurance premiums represent a significant expenditure for most policyholders, and business owners should strive to be well-informed of their rights and the obligations of their insurance carriers in relation to bargained-for insurance coverage.  In the event that policyholders find their coverage inadequate protection from certain causes of loss, it may be prudent to consider renegotiating the terms of their respective policies in order to secure coverage for potentially catastrophic losses such as those currently suffered by business owners all over the country.
 
 
Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.
 

See, e.g., Gruenberg v. Aetna Ins. Co. (1973) 9 C3d 566, 573, 108 CR 480, 485California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 CA3d 1, 54, 221 CR 171, 200Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co. (2001) 90 CA4th 335, 346, 108 CR2d 776, 783

See, Egan v. Mutual of Omaha Ins. Co. (1979) 24 C3d 809, 819, 169 CR 691, 695-696 (emphasis added); Agricultural Ins. Co. v. Sup.Ct. (MKDG/Rhodes SC Partnership) (1999) 70 CA4th 385, 402, 82 CR2d 594, 604 (citing text); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 CA4th 847, 879, 93 CR2d 364, 386

Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 CA4th 847, 880, 93 CR2d 364, 387 (emphasis added).  

 

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Summary of Tenant Approaches to Rent Abatement due to COVID-19

Hermosa Beach Ready for a Storm

 

Summary of Tenant Approaches to Abatement of Rent Related to COVID-19

March 27, 2020

Businesses large and small are being dramatically affected by the Shelter in Place orders of government due to the COVID-19 crisis.  Rent is one of the most significant costs for most businesses.  This is a Summary evaluating the potential bases for excusing (or at least delaying) the obligation of commercial tenants to pay rent during closures related to the COVID-19 pandemic. 

Although the Summary provides analysis of applicable legal authorities in the context of terms commonly included in most commercial lease agreements, it is important to recognize that each particular lease will include unique terms and each particular jurisdiction will apply unique rules of law, and may or may not be subject to governmental moratoria.  Therefore, the viability of relief under the various theories discussed in the Summary will ultimately require independent analysis of the terms of each specific lease as well as the laws and authorities applied in each governing jurisdiction.

With the foregoing in mind, please find a summary of the various approaches to negotiating abatement of rent during closures related to the COVID-19 pandemic below:

  • Express Rent Abatement Provisions: Some leases might expressly provide tenants with the right to abate rent in the event that they are unable to use the Premises for reasons beyond tenant’s reasonable control. Each specific lease will need to be reviewed accordingly. Generally speaking, the abatement provisions in each lease will yield tenants’ strongest argument in negotiating abatement of rent.

All leases will address abatement resulting from casualty.  In the event of a casualty, tenants may have the right to abate rent to the extent the premises is untenantable. “Casualty” is generally not defined in leases, although a common definition is “accident, mishap, or disaster”.  Nonetheless, whether a casualty has occurred will likely be subject to legal argument and interpretation by courts. As such, the right to abate rent on the basis of a casualty provision will ultimately hinge on the language of the particular provision at issue, as well as the authorities applied in a particular jurisdiction.  In any event, taking the position that COVID-19 is a casualty and rent should abate, should be an argument generally used in all cases.

  • Force Majeure: Force majeure provisions typically delay or excuse performance when extraordinary events occur that are unforeseeable and beyond the control of the parties. Force majeure may excuse tenants’ obligation to remain open during the COVID-19 pandemic. However, a force majeure provision, on its own, likely does not excuse tenants’ refusal to pay rent. Of note, leases frequently state that tenants’ obligation to pay rent cannot be excused by force majeure.
  • Compliance with Law: Most leases provide that tenants must operate from their leased premises in compliance with all applicable laws. In jurisdictions where all non-essential businesses have been ordered closed during the COVID-19 pandemic, operating from the premises would be illegal. This may create a frustration of purpose argument.
  • Common Law Principle of Frustration of Purpose: This principle provides that a party may be excused from performing its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different. This principle may provide tenants with a reasonable basis to abate rent during business closures related to the COVID-19 pandemic. Unlike the doctrine of impossibility of performance, frustration of purpose applies where performance remains possible, but the reason the parties entered the agreement has been frustrated by an overriding circumstance that was not anticipated, such that the value of performance by the party standing on the contract (likely, the value of operating a business from a leased premises) is substantially destroyed. Tenants may have a strong argument that frustration of purpose excuses the obligation to pay rent during the COVID-19 pandemic.  It is worth noting that some leases will attempt to have tenants waive all equitable defenses.
  • Common Law Principle of Impossibility of Performance: Impossibility of performance is a defense to a breach of contract action and the burden of proof in establishing it rests on a defendant. “Impossibility” is defined in section 454 of the Restatement of Contracts, as not only strict impossibility but as impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved. This principle does not provide tenants with a strong argument to abate rent, as landlords will contend that payment of rent has not been rendered “impossible” by COVID-19, regardless of whether tenants can operate their businesses during the pandemic.
  • Moratoria on Commercial Evictions: A number of jurisdictions, including the County of Los Angeles, have now issued temporary prohibitions on evicting commercial tenants during the COVID-19 pandemic. However, the Los Angeles moratorium and similar prohibitions generally do not excuse the obligation to pay rent and often postpone payment to a later date.  Rather, they provide that tenants may not be evicted as a result of inability to perform under a lease as a result of the pandemic.  Again, the applicability of these prohibitions will depend entirely upon the language of each specific moratorium.
  • Business Interruption and Business Income/Rent Loss Insurance: The tenants to commercial leases may look to business interruption insurance as a source of relief during the COVID-19 pandemic and landlords may look to business income/rent loss insurance. Business interruption insurance typically provides coverage in the event of losses sustained as a result of direct interruptions to business operations. We anticipate that insurance carrier(s) will vigorously contest these claims both on the basis of lack of physical damage and specific policy exclusions.

Commercial landlords may seek reimbursement under business income/rent loss insurance for income lost while a tenant ceases operations or the leased premises is repaired or rebuilt as the result of a covered loss.  Whether such coverage will be effective during the pandemic will depend on the language of each policy and specific exclusions thereto.

  • Cautionary Note: On a cautionary note, commercial tenants should be aware that California Civil Code section 1951.4 provides landlords with a draconian remedy in the event that tenants vacates the premises prior to receiving notice to vacate. Under section 1951.4, a landlord faced with a tenant who has prematurely vacated the premises, can continue the lease for the unexpired lease term and continue to collect rent with no duty to mitigate damages.  This landlord remedy only applies in situations where: it is specifically provided in the lease; and tenants have the right to assign or sublet the premises.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.