Author: Liam Mennitt

Charitable Donations for Non-itemizers Still Available for 2020

Posted on by Liam Mennitt

Charitable organizations and their donors should be aware that the $300 deduction made available under the CARES Act expires at the end of 2020.  Because this addition to the standard deduction has had such an appreciable and positive effect on charitable donations so far this year, eligible organizations might timely remind potential donors of this opportunity to support their missions.

The data suggest that many donors, particularly smaller donors, have increased giving in 2020 because of the provision in the CARES Act, P.L. 116-136,1 which provides a $300 above the line charitable deduction to taxpayers who use the standard deduction and do not itemize. 2  While first quarter donations of less than $250 were up 5.8% year on year in the first quarter of 2020, they rose 19.2% at the end of the first half of the year, strongly indicating that the CARES Act, which went into effect on March 27, incented smaller donors substantially more than larger donors. Figure 1 illustrates the first quarter and first half donor data.

< $250 $250-$999 ≥$1,000
Q1 2020 + 5.8% -2.2% -7.4%
Q1 & Q2  2020 +19.2% +8.1% +6.4%

 

These data further suggest that small donors would increase their giving were the ceiling for qualified charitable contributions to be raised.

Nearly nine out of ten taxpayers now take the standard deduction and no longer itemize since the Tax Cuts and Jobs Act, P.L. 115-97 increased the standard deduction, nearly doubled the standard deduction, and eliminated or restricted many itemized deductions for years 2018 through 2025.

The deductibility of qualified charitable contributions may be further limited by each donor’s circumstances and they should be advised to consult with their professional advisors. Organizations which receive donations of $250 or more from any donor in a calendar year are obliged to provide that donor timely written acknowledgment of the donation that complies with Reg. §§  1.170A-16(b).

These notes are provided to illustrate general principles only. They are not legal or tax advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action.

__________

1. Fundraising Report January 1, 2020- June 30, 2020, Association of Fundraising Professionals Foundation for Philanthropy [downloadable from my server here until December 20, 2020]
2. See, §2204 of the CARES Act, referring to donations made under this provision as “qualified charitable contributions.” §2205(a)(3)(A)(i) of the Act further limits the deduction to  contributions “paid in cash during calendar year 2020 to an organization described in section 170(b)(1)(A) of such Code.”

Business Interruption Insurance Update

Posted on by Liam Mennitt

In the legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a pair of recent cases have sided with the policyholders. This is positive news for theatres, restaurants, hotels, sporting teams, and other businesses that purchased business interruption insurance with the expectation that a pandemic such as COVID-19 would be covered under the policy. Business interruption insurance generally covers revenue lost while the property is out of commission due to some physical damage or loss to the business premises.

In North State Deli, LLC v. Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Sup. Ct. Oct. 7, 2020), the court granted the plaintiffs motion for a declaratory judgment and concluded that the business interruption insurance policies provide coverage for COVID-19 related losses. The court ordered the insurance providers to provide coverage for the increased expenses policyholders had to incur as a result of the pandemic, and for the loss of income to the policyholders due to being forced to close their premises during the pandemic.

The legal disputes over business interruption insurance frequently turn on the court’s evaluation of whether being mandated to temporarily close a business because of the pandemic constitutes a “physical loss.” In North State Deli, LLC, the North Carolina superior court stated that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess … the full range of rights and advantages of using or accessing their business property.” No. 20-CVS-02569, slip op. at *6. As the businesses in this case were “expressly forbidden” by a government order to access their properties and use their business premises to generate income, the court concluded that this was a “direct physical loss” that the defendant insurance companies must provide coverage for. While the court determined that the businesses did not suffer any “physical damage,” the court determined that the plaintiffs suffered a “physical loss.” The court stated that the government orders “resulted in the immediate loss of use and access without any intervening conditions,” which constituted a “direct physical loss.”

Additionally, in Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., No. 6:20-cv-1174-Orl-22EJK, 2020 U.S. Dist. LEXIS 184774 (M.D. Fla. Sept. 24, 2020), the court denied the insurance providers’ motion to dismiss plaintiff gynecologist’s claim to demand coverage under his business interruption insurance policy. Even though the insurance policy stated that any loss or damage regarding the “presence, growth, proliferation, spread, or any activity of … [a] virus” is excluded, the court stated that denying coverage for “losses stemming from COVID-19 … does not logically align” with the exclusions listed in the provision, such as “fungi, wet rot, dry rot, [and] bacteria.” The court also emphasized that COVID-19 has had a dire effect on our society, and therefore is distinguishable from prior cases that have analyzed exclusions to business interruption insurance.

The primary factor in these cases is the interpretation of “physical loss” and “physical damage.” Some states have determined that “physical loss” can exist “even in the absence of structural damage,” while other states have adopted narrower interpretations. David Yaffe-Bellany, U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic, Bloomberg Businessweek (Nov. 2, 2020). If the court determines that the business suffered “physical loss,” the court will then analyze whether the insurance provider intended to exclude a virus such as COVID-19 from the policy.

The fight over business interruption insurance providing coverage for COVID-19 related losses is still in the early stages. As of October 5, 2020, there are 1,288 lawsuits in the United States alleging that the plaintiff businesses should be provided coverage for COVID-19 related losses. Covid Coverage Litigation Tracker, U. Penn. L. Sch. (last updated Oct. 5, 2020). While 71.6% of the 60 cases that have entered the motion to dismiss stage have been dismissed, courts have sided with the policyholders on multiple occasions.

SPACs Have Grown Up

Posted on by Liam Mennitt

In 2010, only $500 million of the IPO market was generated through special-purpose acquisition company (“SPAC”). SPACs have evolved from being an ignored strategy in reaching the public markets to becoming an attractive method to take a company public, pursue merger opportunities, and to create liquidity for existing shareholders.

As of October 16, 2020, there have been 143 SPAC IPO transactions in 2020. According to Dealogic, SPAC IPOs have raised $53 billion this year. SPACs have raised more money in 2020 than in the last ten years combined. Melissa Karsh & Crystal Tse, SPACs Have Raised More in 2020 Than the Last 10 Years Combined, Bloomberg (Sept. 24, 2020), https://www.bloomberg.com/news/articles/2020-09-24/spacs-have-raised-more-in-2020-than-the-last-10-years-combined.

Historically, Pastore & Dailey LLC has worked on SPAC offerings, litigation, and regulatory proceedings. SPACs have become popular in comparison to a traditional IPO because SPACs are cost-efficient and less time-consuming, and they face fewer amounts of due diligence and disclosure requirements than a traditional IPO. In the past, SPACs were generally used by small companies, but now small, mid-size, and large companies are using SPACs to become a public company and raise capital. While historically SPACs had a connotation of a back door method of taking a less than pristine company public, this is no longer the case.

A SPAC is a publicly traded company that raises capital with the intention of using that capital to acquire a private company. Through the acquisition, the SPAC takes the private company public. Many well-known companies have entered the public markets through a SPAC IPO, such as: DraftKings; Virgin Galactic; Nikola; and Opendoor, a real estate technology company.

Until a SPAC acquires a private company, the SPAC is just a company that holds cash. The cash is generally held in an escrow account until the SPAC acquires a private company. SPACs typically have a deadline of two years to acquire a private company. Andrew Ross Sorkin et al., SPACs Are Just Getting Started, N.Y. Times (Sept. 16, 2020), https://www.nytimes.com/2020/08/25/business/dealbook/spac-ipo-boom.html. If the SPAC does not acquire a private company in the two-year deadline, the SPAC is required to return the cash to its shareholders.

While SPACs are gaining a lot of momentum, they have historically had less success then traditional IPOs. From the start of 2015 through July 2020, 223 SPAC IPOs had been conducted; but 89 of the 223 SPACs have managed to take a company public. Ciara Linnane, 2020 Is the Year of the SPAC – Yet Traditional IPOs Offer Better Returns, Report Finds, MarketWatch (Sept. 16, 2020), https://www.marketwatch.com/story/2020-is-the-year-of-the-spac-yet-traditional-ipos-offer-better-returns-report-finds-2020-09-04. Just 26 of those 89 companies that went public through a SPAC acquisition generated positive returns, and the shares of those companies had an average loss of 18.8%.

This current year, however, has proved to be a different story. SPACs in 2020 have generated a rate of return of 35%, significantly higher than the S&P 500’s year-to-date return of approximately 6%. Many of the large banks are starting to work on SPACs, as Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, and Deutsche Bank have all conducted underwriting for SPAC IPOs. Richard Henderson et al., The Spac Race: Wall St Banks Jostle to Get In On Hot New Trend, Financial Times (Aug. 11, 2020), https://www.ft.com/content/1681c57d-e64d-4f58-b099-8885e85a708e.

Over the past ten years, the IPO market has significantly diversified. Direct listings gained a lot of momentum, and now SPACs are adding another strategic option in the IPO market.

Pastore & Dailey Managing Partner Receives AV Preeminent Rating for the year 2021

Posted on by Liam Mennitt

Pastore & Dailey LLC is proud to announce that Managing Partner, Joseph M. Pastore III has been named by Martindale-Avvo to receive the AV Preeminent Rating for the year 2021. This rating is the highest possible rating in both legal ability & ethical standards for practicing attorneys. Mr. Pastore received this honor for his exemplary devotion to judicial standards and ethics practices as an attorney. Mr. Pastore has been a recipient of this honor for the past 18 consecutive years. In addition, Corporate Counsel & The American Lawyer magazines have named Mr. Pastore as a Top-Rated Litigator for the year 2021.

 

Business Interruption Insurance Update

Posted on by Liam Mennitt

On August 13, 2020, the Superior Court of New Jersey denied defendant’s argument that business interruption insurance does not cover financial losses due to the COVID-19 pandemic. Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Aug. 13, 2020). Defendant’s made two primary arguments. Its first argument was that the COVID-19 pandemic did not create a “physical alteration or change” plaintiffs’ premises, rather the pandemic created only a risk for retail businesses with no physical alteration to the premises. Defendant’s Motion to Dismiss, Optical Servs. USA/JCI, No. BER-L-3681-20, at *3. The second argument was that defendant’s business interruption insurance policy only covers businesses physically unable to access the premises due to events such as a “fire, collapse, or other loss to an adjacent premises,” and the pandemic did not prohibit people from accessing the premises. Id. at *9.

Plaintiffs in Optical Services are one of many businesses looking to have their losses from the pandemic covered by its business interruption insurance policy. Although the court in Optical Services denied defendant’s arguments, most courts so far have agreed with insurers’ legal arguments in concluding that losses from the pandemic are not covered under business interruption insurance policies. As of September 1, 2020, insurers have had policyholders’ claims dismissed in “state courts in California, Michigan, and the District of Columbia, and in federal courts in Texas and California.” Leslie Scism, Insurance Firms Gain Early Lead in Coronavirus Legal Fight With Businesses, Wall. St. J. (Sept. 1, 2020).

According to University of Pennsylvanian Carey Law School’s Covid Coverage Litigation Tracker, business across the United States have filed 1,230 cases seeking coverage from their business interruption insurance. Ten of these cases have been dismissed and decided in favor of insurance companies, while four of these cases have denied an insurance company’s motion to dismiss. Large quantities of insurance policies explicitly exclude coverage of claims arising from viruses, and many policies state that coverage under business interruption insurance require “direct physical loss or damage.” The courts have generally interpreted “direct physical loss or damage” to explicitly require “some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014).

Many businesses are attempting to work around the physical-damage requirement by arguing that COVID-19 particles “stick to surfaces and renders workplaces unsafe.” Leslie Scism, Companies Hit by Covid-19 Want Insurance Payouts. Insurers Say No., Wall St. J. (June 30, 2020). A federal court in Missouri agreed with this argument when the court asserted that the plaintiffs “plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.” Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-CV-03127-SRB, at *12 (W.D. Mo. Aug. 12, 2020).

While courts have leaned towards insurers on this issue, the court in Optical Services illustrated that coverage of business losses and additional expenses from the pandemic is still an open issue, with many states and federal courts yet to have decided on the issue.

A Brief Review of Some, and Only Some, of the Nondiscrimination Tax Tests Applicable to Qualified Plans Under Section 401 of the Internal Revenue Code

Posted on by Liam Mennitt

The mathematics of the annual testing for compliance with the rules requiring qualified plans to demonstrate nondiscrimination are spread though several sections of the tax law, rendering the calculations needed somewhat opaque. This note attempts to summarize some of the calculations so that plan sponsors might feel better empowered to assess the effect on compliance of both current and anticipated plan features.

Among the many compliance tests that qualified plans must meet in order to retain their qualified status are nondiscrimination tests which assure that the benefits of tax-deferred compensation do not accrue disproportionately to highly compensated employees (HCEs). There are several tests within this regime, but two of the more important tests, for our purposes, are the annual Actual Deferred Percentage (ADP) and Actual Contribution Percentage (ACP) calculations. While ADP considers only employee deferrals, ACP also includes employer contributions. Plan sponsors of non-exempt plans must conduct both tests, whether or not their results match.

The purpose of 401(k) nondiscrimination tests is to ensure that all employees are benefitting from plan participation. Otherwise, those who own the company and Highly Compensated Employees (HCEs) would stand to benefit disproportionately from being able to defer their income for tax purposes over Non-Highly Compensated Employees (NHCEs).  Because, for example, a plan to increase the share of compensation that only HCEs may defer could cause a non-exempt plan to fail one or more nondiscrimination tests, thereby exposing the plan sponsor to penalties and possible loss of the qualified status of the plan, it is worth considering the calculations used in the ADP and ACP tests and how those calculations might be affected by adding the feature of increased deferral rights for HCEs.

For purposes of this testing, an HCE is an individual who either:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than$125,000 (if the preceding year is 2019 and $130,000 if the preceding year is 2020), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

One of the qualifications a plan must meet to be or remain a “qualified plan” within the meaning of Code Section 401 is that it not discriminate in favor of highly compensated employees. This condition is described at §401(a)(4):[[

(4) if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C) [providing definitions for, respectively, the “year of service” and “hours of service” generally allowed as conditions for vesting]

Actual Deferral Percentage – 26 C.F.R. §1.401(k) -2

The ADP test calls for employers to compare the average annual deferral rates of HCEs and NHCEs. This test excludes employer matching and measures only employee deferrals. See, Reg. §1.401(k)-2. The ADP test also measures employee compensation only in cash and stocks. Health insurance and other fringe benefits are excluded. The employer (usually the plan administrator handles this tax, but the employer is responsible). This equation is used, separately, for both HCEs and NHCEs:

Equation

Where

n= total number of either HCEs or NHCEs

D= total employee deferrals, both pretax and Roth, for each employee

C=each employee’s total annual compensation

 

Actual Contribution Percentage – 26 C.F.R. §1.401(m) -2

The ACP test follows a similar patter but uses different variables. This test also measures HCE and NHCE results separately:

Equation

Where

n=total number of either HCE or NHCEs

T=total of each employee’s deferrals, after tax contributions, and employer matching

C=each employee’s total annual compensation

 

The largest difference between the two is that the ADP test compares relative deferrals among HCEs and NHCEs but the ACP test compares the contributions of both groups that include employer matching.

The employer then compares the test outcomes to this table:

Data table

A plan must pass both tests or the employer must take prescribed corrective action. That corrective action is not within the scope of this memo.

Using these equations, an employer can calculate its plan’s compliance at given HCE deferral rates and evaluate the effect on compliance with the nondiscrimination rules.

To be sure, the compliance tests for qualified plans are numerous, and these notes do not address the many nuances and exceptions to nondiscrimination testing. Rather, I seek here to pull back the curtain on but two often baffling, and always important, tests for qualified plans.

These notes discuss general principles only and are not intended as tax or legal advice.  The reader is encouraged to discuss his or her specific circumstances with a qualified practitioner before taking any action.

How to Valuate the Start-Up Enterprise

Posted on by Liam Mennitt

As with most transactions involving buyers and sellers, the valuation of a potential investment in a business is often a matter of perspective. The founder views the business equity as full of promise of future returns. The investor, holding cash and, therefore, access to alternatives as to where to deploy that liquidity, apprehends that same equity as opportunity cost, because his or her election to invest in a given enterprise ends access to alternatives. This opportunity cost looms larger for investors, and larger in proportion to their experience.

Reconciling this tension in valuation perspectives, especially with early stage ventures, between founders and investors is often left to a sort of ersatz market clearing mechanism of road shows and elevator pitches, leaving it to the experienced investors to apply their experienced, if subjective, valuation metrics to an otherwise unknown company. Less confident investors then step in behind the seasoned players to acquire an apparently lower risk, and lower value, portion of the equity.

Investors and their advisors should work with the information they have to evaluate their risk tolerance. Negotiations between the investor and the founder all too often focus on subjective hopes and dreams for the marketplace and overlooks objective calculation of the magnitude of the equity share that a startup investor should seek in exchange for a cash infusion. That is, the metric of equity share should be deployed as part of the discussions between the parties, as a goal, and not merely as an incident, of valuation. These calculations are drawn from the Venture Capital Method of valuation. Here, I briefly review this method.

Simply put, an investor that wants to obtain a desired return is obliged to follow a mathematical map to achieving that return. This calculation is accomplished using the functions of present value, future value, and percentage ownership. Let’s consider an investor who wants to deploy $1 million today in order to participate in a start-up’s anticipated $40 million exit value in five years.

The present value of the proposed $40 million exit va​lue is calculated by discounting $40 million at the rate of 40% per year for five years. The equation for this is:

So, to accomplish the desired return on the initial investment, an investor should obtain an equity interest calculated as the initial investment divided by the present value of the exit value, or:

In other words, the investor should negotiate for about a 13.5% equity interest in order to achieve the desired return. A common way of referring to the present value of the exit value is the postmoney value of the business. We can think of it as the present value of the potential of the business if the investment is made. The term premoney value is the postmoney value less the investment, or $7,437,377 – $1,000,000 = $6,437,377.

Observe that the target rate in our calculations should be distinguished from an expected rate of return. The target rate rests on the presumption that the business grows as planned.

Next, consider what happens to our equity expectation when we raise the exit value of the enterprise to $60M.

The higher exit value raises the present value of the exit figure and reduces the equity percentage the founder will be expected to part with in return for an early stage investment. This relationship calls for both investors and founders to be aware of the incentive to under or over-estimate the likely growth of the company.

To be sure, the valuation of a startup involves as much art as it does science. Additional methods of valuation including, but not limited to, the Berkus Method, Scorecard Valuation Method, and the Risk Factor Summation Method might be productively used in addition to the Venture Capital Method to provide a broad set of metrics for understanding the potential of a new enterprise. The proper use of these tools is necessary for the success of any venture.

These notes are intended to provide a review of general principles only and are not legal or tax advice. The reader is encouraged to discuss his or her particular circumstances with a qualified professional before taking any action.

CT Department of Revenue Services’ Guidance on Effects of CARES Act on Taxpayers

Posted on by Liam Mennitt

On July 6, 2020, the Department of Revenue Service (“DRS”) released initial guidance, in a Q&A format, addressing some of the issues concerning the impact of the federal Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, on interpretation of Connecticut tax law. These notes provide a summary of some of the more important issues reviewed in the guidance.

Individual Income Tax

DRS observes that, because calculation of Connecticut state income tax begins with the individual’s federal adjusted gross income (“AGI”), which is then subjected to certain state law modifications to arrive at Connecticut adjusted gross income, and the federal economic impact payments are excluded from federal adjusted gross income, they are, therefore, not included in Connecticut adjusted gross income and not subject to Connecticut income tax.

Coronavirus Related Distributions from Qualified Retirement Accounts

Likewise, Connecticut law includes no modifications to include coronavirus-related distributions from qualified retirement accounts. Hence, insofar as federal law includes or excludes such distributions in or from income, Connecticut tax law will do the same.

Coronavirus-related distributions from a qualified retirement account, as allowed under the CARES Act, are, however, subject to the statutory 6.99% withholding unless the recipient submits a Form CT-W4P to the payor requesting that no or a lesser amount of Connecticut income tax be withheld.

Inclusion in Income of Loans Forgiven in Business or Individual Income Tax

Loans forgiven under the CARES Act Paycheck Protection Program are excluded from AGI under federal law. Because Connecticut law includes no modification of the federal treatment of AGI for state tax purposes with regard to PPP loan forgiveness, such forgiven loans are not included in Connecticut AGI for either individual income tax or corporation business tax purposes.

State Law Effects of CARES Act NOL Provisions

Corporations

Connecticut corporation business taxes are not affected by the federal carryforward and carryback rules.

Individuals

The carryback of federal net operating losses that affect an individual’s state tax liability must be done consistent with the 2014 Connecticut Superior Court opinion of Adams v. Sullivan. In that case, the court held that, because Connecticut law makes no provision for individual taxpayers to deduct federal Net Operating Losses (“NOLs”) from Connecticut AGI, those NOLs may offset Connecticut AGI for a given year only to the extent the taxpayer used those NOLs to offset federal AGI for that year. These NOLs are also subject to C.G.S. §12-727(b) (generally requiring that taxpayers filing a federal amended tax return also file with DRS a corresponding Connecticut tax return).

Note that individuals with a Connecticut source loss but with no corresponding federal loss are not affected by the NOL treatment changes of the CARES Act. Such individuals are still required to comply with Connecticut Regulation §12-711(b)(6).

Business Loss Limitation

The Tax Cuts and Jobs Act (P.L. 115-97) created a new Section l in Code Section 461. This section, among other things, disallows business losses of noncorporate taxpayers in excess of $250,000 ($500,000 for joint filers).  This threshold is subject to indexing for inflation.  Any amount disallowed is carried forward to the next tax year. This provision sunsets on December 31, 2025.

The CARES Act, however, repeals the excess business loss limitation for tax years 2018, 2019, and 2020. The Act also provides two additional important revisions to the law:

  • NOLs incurred in a year beginning after December 31, 2017 and before January 1, 2021 can be carried back for up to five years preceding the year in which the loss was incurred and
  • The CARES Act suspended the rule limiting NOL utilization to 80% of taxable income for tax years beginning before January 1, 2021

Because Connecticut law provides no specific statutory modifications to the excess business loss limitation, that calculation is applied to federal adjusted gross income calculations and thence to Connecticut AGI calculations under applicable state law.

The Department of Revenue Services is likely to update its guidance on this issue as more information becomes available.

These notes are intended only to review general principles and are not intended as legal or tax advice. The reader is encouraged to discuss his or her specific circumstances with a qualified professional before taking any action.

PPP Flexibility Act of 2020 Update

Posted on by Liam Mennitt

As of June 17, 2020, the Small Business Association (SBA), along with the Department of Treasury, has passed revisions to the loan forgiveness application under the Paycheck Protection Program (PPP) Flexibility Act of 2020 that was signed into law by President Trump on June 5, 2020. 

The newly issued application forms and instructions are available in both a full and an EZ version. The EZ application is less intensive and requires fewer calculations and documentation for borrowers. If an applicant wants to use the EZ form, it must be able to answer at least one of the three questions on the face of the EZ Instructions in the affirmative. Both applications offer borrowers the choice to use the 8-week covered period if their loan was made before June 5, 2020, or an extended covered period of 24 weeks. 

It is particularly important that eligible applicants for PPP loan forgiveness have available all the necessary documentation at the time of application. Late submission of documentation will disqualify an applicant for forgiveness.

These changes were made with the intention of increasing the efficiency and availability of full loan forgiveness for businesses. 

Business Interruption Insurance Update

Posted on by Liam Mennitt

This is an update on the business interruption insurance claims related to the COVID-19 shutdowns as of May 29th, 2020. Across the United States, businesses are calculating both the sunk and future revenue losses resulting from the COVID-19 pandemic. Numerous businesses have filed complaints against their insurers for wrongful coverage of certain losses due to the government-mandated shutdowns of regular business operations.

As of March 16th, The Oceana Grill of New Orleans, LA was the first business to sue an insurance company on the grounds of wrongful coverage of monetary loss as a result of the Coronavirus. In the case of Cajun Conti, LLC et al. v. Certain Underwriters at Lloyd’s of London, the owners of The Oceana Grill argue that Lloyd’s is responsible for insuring their restaurant because they hold an “all risks” policy, which does not specifically exclude losses incurred from a pandemic or virus. All risk policies are most often used in reference to physical damages, however, at this time many businesses are arguing that contamination from the virus constitutes physical damage. There have not been any further proceedings with this case, however, a variety of other businesses have followed suit and filed complaints against their insurers as well.

Currently, there have been eight lawsuits in six different states, including Louisiana, Illinois, California, Texas, Florida and Oklahoma. All eight of the pending complaints are from small business owners, six of the suits being from restaurant and bar owners. A majority of these cases claim that the national government shutdowns have majorly impacted their business operations and earnings.

In Chicago, movie theatre and restaurant owners are collectively suing their insurance carrier for wrongful coverage of work interruptions due to the pandemic. In this case, Big Onion Tavern Group, LLC v. Society Insurance, Inc., the small business owners claim that Society Insurance is wrongful in denying their businesses coverage from losses incurred due to “necessary suspension” of daily business when their policies explicitly promise coverage of government shutdowns. Furthermore, Society Insurance did not conduct coverage investigation which is required under Illinois law. Insurance companies in Illinois, like other states, are claiming that the existence of COVID-19 in a business does not qualify as property damage. In the state of Illinois, this is contradictory to laws as courts have held “dangerous substances” in the past to constitute “physical loss or damage.” Insurance industries are creating specific exclusions related to losses consequential to COVID-19, which would not be necessary if, in fact, the virus did not result in “physical loss or damage.”

In California, French Laundry Partners, LP et al. v. Hartford Fire Insurance Co. et al. (Napa County), argues that the government issued stay-at-home order was instituted as a result of evidence that the Coronavirus can live on surfaces and damage property. Many state guidelines are requiring businesses to fumigate their property before reopening to the public, furthering the argument that the Coronavirus has physically impacted business and thus insurance companies should be held accountable for upholding their policies regarding damaged property. Many of the business interruption insurance cases are filing similar claims for the wrongful representation of existing policies.

As the Coronavirus continues to ebb and flow over time and affect daily business procedures, it is expected that other policyholders will take similar legal action against their insurers. Certain states such as Massachusetts, New Jersey and Ohio have acknowledged this trend and have proposed laws related to insurance companies paying certain claims to support small businesses as a result of the economic strains caused by the COVID-19 pandemic. Currently, no bill has been passed.