Many businesses may find out the hard way that they have little to no insurance coverage for Business Interruption losses due to the current COVID-19 pandemic. This persistently disruptive event highlights the need for business resiliency combined with adequate insurance to protect against the low-frequency, high-severity scenarios that are too catastrophic to ignore.
How does one determine whether they have any relief available? One approach is collaborative and constructive in nature and requires finance, legal, and insurance expertise at your disposal.
Businesses may find financial relief internally through a combination of established financial resiliency, enacting contingency and risk mitigation plans, credit access, and other self-imposed, financial measures. Some examples include the following:
- “Rainy Day” Funds – establishing and investing financial reserves from a portion of business profits to have available in the event of an emergency such as an outbreak;
- Executives reducing their pay – this effort relieves some financial pressure and provides good will to other employees and stakeholders;
- Accessing business credit lines – exercising credit lines can provide short- and medium-term financial relief to maintain ongoing operations and payroll; and
- Telework – enacting virtual work practices demonstrates effort to reduce the potential spread of contagious disease among employees, mitigating operational disruption due to aggregated sickness and reduced productivity.
Such internal options help mitigate the financial strains associated with business operations in spite of outbreaks and pandemics. Those businesses who proactively made the effort to develop and invest in these solutions experience positive results and fewer disruptions. Developing these internal solutions requires a coordinated effort by leadership and finance. To the extent that these internal relief options are unavailable or inadequate, businesses may look for additional external relief.
Businesses may find financial relief externally through a combination of contractual relief or remedy; external financial support; insurance proceeds; and in extreme cases, governmental and / or regulatory action. Capitalizing on any of these require a concerted effort by legal, finance, insurance, and leadership:
- Legal - Survey all third-party contracts to identify:
- Which have Force Majeure provisions that provide excused non-performance;
- Which provide liquidated damages or other financial remedy to your business for third parties’ unexcused non-performance;
- Which operate in take-or-pay fashion for goods and/or services, guaranteeing revenue; and
- Which have recovery and/or recourse in the event of cancellation.
- Finance – Coordinate with investors, lenders, and both internal and external finance resources to:
- Tap existing credit lines/facilities to fund ongoing operational costs, including payroll;
- Negotiate temporary relief for debt and equity obligations;
- Coordinate voluntary compensation reduction among staff, management, and leadership; and
- Seek additional investment sources and/or bridge financing.
- Insurance and Risk Management – Coordinate with insurance and risk management professionals to:
- Analyze all in-force insurance policies that may provide coverage for non-Physical Damage Business Interruption
- Make good-faith insurance claims and allow the insurance and claims professionals to determine whether any policies afford coverage;
- Work with insurance and risk management professionals to execute any crisis management plans; and
- Document and record all expenses related to operations to the extent they may be insurable (and may be necessary to benefit from other relief discussed later).
- Government and Regulatory Relief – Coordinate with legal, tax, accounting, finance, and other experts to request and receive any available relief from applicable government and regulatory authorities:
- Encourage dialogue with legislators that may craft temporary or permanent relief programs;
- Exercise legal rights to recover from contract breaches;
- File for temporary or permanent financial assistance (grants, loans, deferrals, etc.); and
- Monitor and adhere to tax and legal guidance that accounts for existing rules and laws, including any proposed or recently enacted changes.
Collectively, these external relief sources may help businesses maintain viability throughout their recovery period and require a coordinated effort to increase the likelihood of a successful outcome.
Whether you or your business are among those who stand to benefit from any combination of charitable donations, volunteers, government assistance, or insurance coverage, we are all positioned to collaborate and learn from this situation.
Hendershot Cowart P.C. represents businesses across Texas and beyond in matters involving business interruptions, contracts, and insurance law– including those arising from COVID-19. Call to speak with an attorney.