Issues with Lenders & Loan Agreements
Businesses that borrow money to finance inventory or for working capital should look at various components of their loan agreement to see if they’re impacted by the coronavirus outbreak. Some examples include one-time expenses that may impact net income or EBITDA calculations, whether you can draw additional cash from a revolving line of credit, if there are any mandatory pre-payment provisions that could be triggered, and if there are any defaults on financial covenants. Loan agreements can be complex documents and it’s important to understand all your rights and obligations so that you can continue to borrow cash as needed and not receive a notice from your lender demanding repayment.
A force majeure clause excuses one or both party’s performance under a contract if circumstances arise, beyond the parties’ control, that make it impossible or impractical to perform. Such circumstances typically include acts of God (flood, fire, earthquake, etc.), wars and terrorism, and labor disputes. Some force majeure clauses also include epidemics, such as the coronavirus outbreak, and governmental actions, such as emergency closure of businesses.
A party that invokes a force majeure clause will typically not have to perform its obligations under the contract. Certainly, the coronavirus is having a significant harmful impact on many businesses throughout the world and this could potentially implicate a force majeure clause in a contract. However, force majeure clauses are different in every contract and interpretation of a force majeure clause is different in every state. Whether contract performance is excused because of the coronavirus impact is a case-by-case analysis and you should speak with your legal counsel to determine the impact on your business.
Business Interruption Insurance
Many business owners question whether the interruption to their business caused by the COVID-19 pandemic is covered under their business interruption insurance policy. Insurance companies say "no", business interruption insurance covers interruption caused by physical damage to a property. Business owners point to clauses in their policies providing coverage for business interruption related to government orders to close a business location. However, insurers retort that coverage only applies if such government order is related to physical property damage (caused by a landslide, etc.).
It has yet to be determined whether a court or regulator will step in and instruct insurance carriers on how to handle business interruption claims related to COVID-19. We know that there is not enough surplus in this market to cover the hundreds of billions in losses suffered by businesses due to COVID-19 interruptions. So, if there is some form of mandate that insurers provide coverage it would likely be backed by a government fund.
In the period of uncertainty, the best course of action is to contact your commercial lines broker to ask whether you should file a notice of claim. Your agent is in the best position to help you determine coverage and whether your business would be prejudiced by failing to file a notice of claim.
A more comprehensive article on the topic is located here.