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First Round Goes to Insurers in COVID-19 Court Fight

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More than 140 lawsuits have been filed against insurers over claims for business interruptions caused by the COVID-19 pandemic. Photo by Matthew Henry from Burst

An insurer scored a significant win in what is believed to be the first court decision involving a COVID-19-related business interruption claim. 

On July 1, 2020, 30th Circuit Judge Joyce Draganchuk in Ingham County, Michigan, dismissed a lawsuit by the owner of two restaurants in Lansing Michigan, siding with the insurer’s decision to deny a claim for business-interruption coverage because the eateries did not sustain “direct physical loss or damage.”

The decision in Gavrilides Management Company v. Michigan Insurance Co. was previously reported by the National Law Review, among others.  Gavrilides Management sought $650,000 from Michigan Insurance Co. for losses it sustained after Gov. Gretchen Whitmer issued executive orders in March that limited its two restaurants to delivery and take-out orders.

Judge Draganchuck said it is clear from the wording of the insurance policy that only direct physical loss to the properties is covered. She rejected as “simply nonsense” the plaintiff’s claim that the restaurants were damaged “because people were physically restricted from dine-in services.”

“Direct physical loss of or damage to the property has to be something with material existence, something that is tangible, something … that alters the physical integrity of the property. The complaint here does not allege any physical loss of or damage to the property,” the judge said during the July 1 video court session. “The complaint alleges a loss of business due to executive orders shutting down the restaurants for dining … in the restaurant due to the COVID-19 threat, but the complaint also states that, at no time has COVID-19 entered the Soup Spoon or the Bistro through any employee or customer.”

The judge noted that the insurance policy also has a virus and bacteria exclusion, and that loss of access to the premises due to government action is not covered. 

You can watch a recording of the virtual court appearance here.

Testing the Limits of Coverage

Business interruption insurance typically covers the loss of income that a business suffers due to the disaster-related closing of the business and the rebuilding process after a disaster. The COVID-19 pandemic is testing the limits of this coverage and its applicability to unprecedented circumstances.
Countless businesses were forced to close as a result of the COVID-19 pandemic and the ensuing emergency orders. While many businesses have been able to reopen since, often on a limited basis, the losses sustained have been steep and, in many cases, ongoing. 

Several state legislatures, including New York’s, have introduced bills that would require insurers to cover business-interruption losses stemming from COVID-19, even if the policies specifically exclude such coverage. Meanwhile, more than 140 COVID-19-related business interruption cases have been filed in federal courts nationwide, including several filed in U.S. District Court for the Southern District of New York. To read three of the complaints, click on the links below.

Broadway 104, LLC, dba Café Du Soleil, v. Axa Financial, Inc.; XL Insurance America, Inc., No. 1:20-cv-03813, SDNY

Food for Thought Caterers Corp. v. The Hartford Financial Services Group, Inc., and Sentinel Insurance Company, LTD., No. 1:20-cv-03418, SDNY

Gio Pizzeria & Bar Hospitality LLC v. Certain Underwriters at Lloyd’s, London, No. 1:20-cv-03107, SDNY

Advent Valuation Advisors provides a variety of litigation support services, including the assessment of damages from business interruption. For more information on business interruption claims, read our blog posts here and here. If you have any questions, please contact us.

Protect Cash Flow to Survive the Financial Crisis

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Many businesses will need to restructure their finances to emerge from the financial crisis brought on by the COVID-19 pandemic. Photo by Kelly Sikkema on Unsplash

There is a substantial amount of information out there about how small businesses should respond to the COVID-19 pandemic, and the fear and uncertainty about the virus and what comes next. It is not hard to find articles about how to protect employees, customers and suppliers from infection and how to talk about the virus. In this article, I will focus on what businesses and their lenders and stakeholders must do to minimize losses and maximize financial stability in this unprecedented time.

Businesses, even high performers, need to consider the detrimental impact on cash flow resulting from the steps taken to slow the spread of the virus and “flatten the curve” of new cases. Some businesses are completely closed, while others are suffering disruptions such as reduced hours due to government restrictions. Supply interruptions are hurting business as well. Regardless of the industry, the inability to generate adequate cash flow endangers the ability to meet obligations to lenders, trade creditors and investors. Here are some things owners can do to navigate the crisis.

Generate Projections

While no one really wants to look, it is critically important that businesses recast operating cash flow projections or generate new ones. This includes revising assumptions, forecasts and business plans to reflect the new reality. Prepare projections that consider the best and worst cases for the next few months and longer.

If management hides its head in the sand, the company is likely not going to survive. Hiring an experienced restructuring advisor and legal counsel early can provide credibility when dealing with lenders, creditors and investors. It may also preserve business value.

Develop a New Financial and Operating Plan

Triage is important. Some businesses are proficient at managing operations in times of stress. However, few companies have ever faced a dramatic, escalating crisis like the current one. Businesses have little choice but to pivot meaningfully, and planning is key to survival. This planning must address the new reality reflected by revised and updated cash projections and should include these steps:

  • Protect working capital. This includes taking an inventory of existing working capital, drawing on existing lines of credit and developing and implementing a cost-reduction plan to achieve positive cash flow. Cash is king and needs to be preserved.
  • Identify any collateral that could secure additional financing. Seeking such financing may not be feasible in the current environment, but this may change. To the extent a company has unencumbered assets, additional liquidity may be easier to arrange. It is important to identify assets that might be available to secure financing, including real property, inventory and accounts receivable.
  • Monitor federal and state government relief initiatives.
  • Consider working with a professional financial advisor and legal counsel to open lender communications. Some business owners who need to obtain financing on an emergency basis think that engaging a professional is a sign of weakness or requires cash that the company would prefer not to use. In fact, involving professionals in the process provides significant credibility when asking creditors for relief. Lenders and stakeholders may be more willing to respond quickly and positively if provided with information that has been reviewed by the company’s financial advisors. Attempting to save money by not hiring a professional can put at risk the ultimate success of discussions with lenders and creditors.

What if maintaining existing financing is not viable?

Once management is aware of the business’s inability to perform, it must work with stakeholders to establish strategies for employees, lenders, suppliers, customers and investors. This strategy must include developing communication plans for each of these groups. Retaining advisors is critical to address potential debt defaults, contractual performance defaults and other obligations.

Management must have a plan in place to address these issues, and outside help may be necessary to weigh the options, minimize risk and maximize value. Management is accustomed to operating in a normal environment and may have no experience dealing these kinds of challenges. If the company has a board of directors, outside guidance is critical to its duty-of-care responsibility.

It is important to determine what requests for relief from lenders are necessary to allow the business to continue to operate in this unpredictable environment. Considerations include what is needed to avoid default on short- and long-term financing obligations and what is needed to maintain relationships with vendors and suppliers. This includes “asks” that reflect reduced operations. Relationships with lenders, investors and other creditors can be more easily maintained if communication is open and frank and if professional advisors help the company determine which “asks” are likely to be successful.

This article merely scratches the surface of the complexities businesses face because of COVID-19. This disaster will likely rewrite the playbook for financial and operating restructuring. It is clear that credit providers and businesses, in order to survive, must be unified in focusing on preserving business value until the “new normal” emerges.

If you have questions about how to address your business’s financial difficulties, please contact the professionals at Advent Valuation Advisors.