Practical Business and Insurance Considerations for Hotels, Restaurants During COVID-19 Crisis
The effects of this new normal can, at a minimum, last weeks but most likely several months. However, the challenges presented as a result of this situation could easily affect people's livelihoods for years!
April 03, 2020 at 11:45 AM
5 minute read
COVID-19 has thrown our way of living into treacherous and unchartered waters. With each passing day, the scare of this novel virus is causing our emotionally charged government officials at every level to react with decisions that effectively strip our ability to work, shop, play and interact normally in order to slow or prevent the spread of this viral outbreak while causing economic mayhem. The effects of this new normal can, at a minimum, last weeks but most likely several months. However, the challenges presented as a result of this situation could easily affect people's livelihoods for years!
The government's utilization of its civil authority to force shutdowns of our entire way of life and ability to operate our businesses, especially restaurants and hospitality, is having a major impact on our life savings, restaurant's bottom lines and our ability to follow through on our contractual obligations to our business partners. This ripple effect includes the requirement of closing our restaurants, creating an absent and fearful workforce with obligations for their employees' compensation, disruption of supply chains, cancellations of reservations and bookings, relying on previously rare and somewhat untested technologies to work virtually and remotely, and so much more.
Restaurants and hotels are undoubtedly stressed to find ways to manage decreased cash flows and stop the bleeding losses to recoup or minimize the damage for their losses of income, assets, and brand value during and in the aftermath of this unforeseen tragedy. What follows is a discussion of some but not all of the legal principles that may come into play as we consider a multitude of legal arguments and strategies we have used over the last 35 successful years in practice to protect the economic interests of hotels, restaurant and franchise owners as it relates to their contractual and other business obligations.
Business interruption insurance is an extremely important type of coverage in an insurance policy which is intended to cover for lost income sustained as a result of a covered peril in order to allow for the continuity of your business into the future. Often, specific exclusion language exists in a policy that make the case seem completely defeated and untenable. Insurance companies will continue to seek an escape from their contractual obligations, but there are legal tactics that can help navigate the treacherous waters of these obstructive defenses.
Civil authority coverage, for instance, applies when a local, state, or federal government mandates to limit access to any aspect of your business that is critical to a business owner's ability to conduct his normal operations. Contingent business interruption insurance is when the loss is indirect as caused, for instance, by the inability of a supplier to perform his obligations with the Insured (business owner) due to no fault of his own and is considered covered by the business owner's insurance policy. Both of these principles will play a huge role in navigating the contractual obligations and legal strategies that will recover the loss of income as well as the expenses required to be paid during this crisis.
Under the contract doctrines of impossibility of performance and frustration of purpose, a party is discharged from performing a contractual obligation due to no fault of their own, if it is impossible or futile to perform, the party could neither have foreseen the risk at the time of entering into the contract, or could they have prevented the event(s) in question from occurring in the first place. These and other legal doctrines provide legal defenses for business owners not to have to continue to perform their contractual obligations. In other words, most contracts contain language that requires the party to take proactive steps to meet and perform their contractual obligations with prudence, diligence, and care by reasonable efforts subject to the above defenses. However, these doctrines still provide the much needed protection from having to continue to perform.
Force majeure is a defense to contractual obligations to perform and arises when parties cannot reasonably foresee nor control an event, which prevents either party to perform their contractual obligations. An Act of God may be considered as force majeure; it refers to a [natural phenomenon that is exceptional, inevitable, and irresistible, and which its effects could not be prevented or avoided by the exercise of due care or foresight.] (Black's Law Dictionary 11th ed. 2019) It stands to reason that businesses would not have the ability to prevent the COVID-19 outbreak by reasonable care or foresight. In fact, the director-general of the World Health Organization, on March 2, in a media briefing said "We are in unchartered territory. We have never before seen a respiratory pathogen that is capable of community transmission, and which also cannot be contained with the right measures." This is where the various governmental entities stepped in to mandate by civil order quarantines, lockdowns and business closures in attempts to prevent the spread of the virus and shorten its life cycle. The punitive measures imposed upon us all include the required closure of businesses, imposed travel bans, etc. Clearly, none of this is within the control, fault or negligence of the businesses gravely affected, however instead the government chose an imposition of its civil authority for the benefit of the communities at large. In essence, the existing contractual obligation(s) between the parties having been rendered objectively impossible to perform.
Robert Zarco, founding partner of Zarco Einhorn Salkowski & Brito, focuses his practice on business and commercial law, estate planning and litigation.
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