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NY May Force Insurers to Pay Business Interruption Claims

New York is one of several states where legislation has been introduced that would require insurers to pay business interruption claims related to the coronavirus pandemic. Photo by Anastasiia Chepinska on Unsplash

It may be worthwhile to file a claim for coronavirus-related losses under your company’s business interruption insurance policy, even if the policy specifically excludes coverage for losses related to virus outbreaks.

A bill introduced in the New York State Assembly would require policies that include business interruption insurance to cover interruption claims incurred during the state emergency resulting from the coronavirus pandemic. The bill would apply to policies held by businesses with fewer than 250 eligible employees, defined as full-time employees who normally work 25 or more hours per week.

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. Coverage may include lost revenues, rent or utilities, among other things. A contingent business interruption provision generally provides coverage for a loss of income related to a problem experienced by a supplier or vendor.

Thousands of businesses in New York State have been forced to close as a result of the COVID-19 outbreak and the resulting state of emergency, which was declared by Governor Andrew Cuomo on March 7. The state has ordered nonessential businesses to close, and many businesses that continue to operate have been hampered by a combination of supply chain interruptions, staffing issues and plunging demand.

Insurers typically do not provide coverage for closures related to widespread illness. In fact, some insurers began to specifically exclude diseases from policies in response to the SARS outbreak of the early 2000s. The Assembly bill would nullify any policy provisions that allow insurers to deny coverage based on “a virus, bacterium, or other microorganism that causes disease, illness, or physical distress.”

Similar legislation has been introduced in several other states, including New Jersey and Pennsylvania.

Companies with 100 or fewer employees face business continuity losses of $255 billion to $431 billion per month because of the pandemic, according to the American Property Casualty Insurance Association, which opposes bills such as the one introduced in New York.

“Pandemic outbreaks are uninsured because they are uninsurable,” David Sampson, president and CEO of the association, said in a prepared statement. “Any action to fundamentally alter business interruption provisions specifically, or property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies.”

New York’s bill was introduced March 27, 2020, and is currently before the Assembly’s Insurance Committee. It would apply to any policies in effect on and after March 7. It calls for any business interruption policies that expire during the period of the declared state emergency to be subject to an automatic renewal at the current premium. It would allow insurers to seek state reimbursement for business interruption payments. The state, in turn, would be permitted to raise funds for these reimbursements through a levy against all insurance companies doing business in the state.

To learn more about the quantification of lost profits, please contact Advent. You can read more about business interruption insurance claims related to COVID-19 here: https://adventvalue.com/are-your-companys-covid-19-losses-covered/

Lost Profit Claims Face High Hurdles in NY

Photo by Shopify Partners from Burst

Lost profits claims are difficult to prove under New York law. This is particularly true for a new business, or an existing business entering a new market or line of business.

A recent decision in a case heard in Arizona District Court – but involving a supply agreement governed by New York law – provides some insight into the hurdles faced by such claims.

In IceMOS Technology Corporation v. Omron Corporation (2:17-cv-02575) , the plaintiff, a business that sells semiconductor components, sued the defendant alleging breach of the supply agreement. The plaintiff’s claims included lost profits. The defendant countersued, and the case is ongoing.

In November, the court granted the defendant’s motion to dismiss the lost profits claim, finding that the plaintiff did not establish lost profit damages with reasonable certainty.

Three-Part Test

As explained in the decision, under New York law, there are two broad categories of damages that can result from a breach of contract. The first is the general damages that are the natural and probable consequence of the breach. The second is special or extraordinary damages that do not flow directly from the breach. A claim for lost profits is an example of a claim for special or extraordinary damages. New York uses a three-part test to determine if a party is entitled to recover lost profits:

  1. The damages must be caused by the breach of contract. 
  2. The loss must be proven with reasonable certainty. 
  3. The party making the claim must demonstrate that the lost profits were foreseeable, that they were in “the contemplation of the parties at the time the contract was made.”

For a new business, the bar is set even higher. In order to establish reasonable certainty, a new business making a lost-profits claim must generally support the claim “with evidence of a history of profit or comparison of the new business with other comparable and profitable businesses.”

In addition, a new company must consider general market risks that might hurt its future profits, such as new competitors, technological or regulatory changes, or general market movements.

The hurdles for new businesses also apply to existing businesses entering new markets. This was the case for IceMOS, which reached an agreement with Omron Corporation in 2011 under which Omron would fabricate semiconductor wafers for IceMOS over several years. IceMOS purchased just a small fraction of the agreed-upon quantity. The court found that the plaintiff was a new business, as IceMOS was entering a new market, and held it to the higher standard.

The plaintiff’s lost profits claim relied on projections by the company’s president and a pair of experts. The plaintiff did not show a history of profits or any comparisons with profits of similar businesses. The court noted that, in New York, projections are generally not sufficient to establish lost profits with reasonable certainty. “Without a history of profit or evidence showing the profitability of other like-businesses, Plaintiff cannot establish lost profit damages with the reasonable certainty New York law requires for new businesses.”

The decision builds upon a series of earlier rulings that address aspects of the three-part test and the heightened evidentiary burden for new businesses. You can read the decision here.

Advent Valuation Advisors provides a variety of litigation support services. Please contact us if you have questions about the determination of lost profits or the calculation of other types of damages.