Perspectives - Pastore

Are RIAs Eligible for PPP?

Posted on May 4, 2020July 1, 2021 by Liam Mennitt

Is a Registered Investment Advisor (“RIA”) eligible to participate in the Payment Protection Program (the “PPP”) administered by the Small Business Administration (“SBA”)? The short answer is “yes.”

The PPP was promulgated as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which in part set aside hundreds of billions of dollars to help small businesses retain their employees during the COVID-19 crisis and the resultant work from home orders set forth by governors across the country.

Background

We understand that many RIAs applied for and were granted a loan under the CARES act, and that some of these RIAs may be unsure of whether they were granted the loan in error, how they may spend the loan funds or if they can spend the loan funds. The guidance below will hopefully answer some of these questions because applying for and receiving a PPP loan in a knowingly false fashion is a criminal offense, and we strongly encourage any RIA unsure of its PPP eligibility to seek particular legal advice.

The guidance below hinges on whether an RIA engages in speculative operations, holds any securities or other speculative assets, or is simply engaged in financial advisory services.

SBA Guidance

The SBA published an Interim Final Rule on April 2, 2020 (the “Interim Final Rule”). Specifically, the Interim Final Rule provides that “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2….” (the “SOP”).

Some of the ineligible financial markets and funds businesses listed in the SOP include, without limitation:

Banks;
Life insurance companies (but not independent agents);
Finance companies;
Investment companies;
Certain passive businesses owned by developers and landlords, which do not actively use or occupy the assets acquired or improved with the loan proceeds, and/or which are primarily engaged in owning or purchasing real estate and leasing it for any purpose; and
Speculative businesses that primarily “purchas[e] and hold[ ] an item until the market price increases” or “engag[e] in a risky business for the chance of an unusually large profit.”

On April 24, 2020, the SBA issued its Fourth Interim Final Rule on the PPP (the “Fourth Interim Final Rule”). The Fourth Interim Final Rule explicitly states that hedge funds and private equity firms are not eligible for a PPP loan.

Discussion

Ineligible Companies.

If the RIA is also a hedge fund or a private equity firm, then it may not be eligible to receive a PPP loan. If, however, the RIA is legally distanced from those entities through appropriate corporate structures, and the loan is only used for the RIA business, then the RIA should be eligible to receive the PPP funds.

Because most RIAs are not also banks or life insurance companies, the exclusions should not apply. However, as some RIAs also sell life insurance products, such individual situations may require more research.

Finance companies are also ineligible under the SBA guidelines to receive PPP funds. The SBA guidelines define a finance company as one “primarily engaged in the business of lending, such as banks, finance companies, and factors.” (Sec. 120.110(b) of the SBA’s Business Loans regulations). Thus, this exclusion should not apply. Similarly, an RIA may not be deemed an investment company, which is a company organized under the Investment Company Act of 1940, unless the RIA was in fact incorporated under that Act.

An RIA also may not meet the definition of a “speculative business” as defined above in the Interim Final Rule. If an RIA does not purchase or hold assets until the market price increases or engage in a risky business for the chance of an unusually large profit, then it will not meet this definition. Speculative businesses may also include: (i) wildcatting in oil, (ii) dealing in stocks, bonds, commodity futures, and other financial instruments, (iii) mining gold or silver in other than established fields, and (iv) building homes for future sale, (v) a shopping center developer, and (vi) research and development. (Sec 120.110(s) of the SBA’s Business Loans regulations, SBA Eligibility Questionnaire for Standard 7(a) Guaranty and SOP Subpart B D (Ineligible Businesses). It is our understanding that an RIA that merely provides portfolio management services would not be deemed to be involved in a “speculative” business based on the examples of such businesses provided by the SBA. If the SBA had taken the position that financial advisory services are speculative, it could easily have so indicated by including such services in its lists of speculative services.

Financial Advisory Services.

Consistent with this view, the SBA has provided clear guidance that financial advisory services are eligible for SBA loans, including loans under the PPP. In the SBA’s SOP, the SBA provides the following: “A business engaged in providing the services of a financial advisor on a fee basis is eligible provided they do not use loan proceeds to invest in their own portfolio of investments.” (SOP Sec III(A)(2)(b)(v) pp.104-105) (emphasis added).

This guidance is clear that the focus of ineligibility is at the portfolio company level, not the advisory level, and this is consistent with the guidance noted above making hedge funds and private equity firms ineligible. Hedge funds and private equity firms make money based upon speculative investments and/or appreciation of the markets. An investment advisor operates at the consulting or services level. In other words, the SBA has distinguished between true speculative operations such as wildcatting, speculative real estate development and investing in securities, and service-based operations such as the investment advisory business. Assuming that an eligible RIA did not use any proceeds of the PPP loan at any investment level, such RIA should not be deemed a speculative business and is eligible for a PPP loan.

SEC Guidance

SEC guidance affirms that RIAs are eligible for PPP loans. While the SEC imparts certain burdens on RIAs that accept PPP loans, the fact that the SEC even acknowledges such burdens should give most RIAs confidence that a PPP loan is available to them.

For RIAs who are eligible to receive PPP funds under the SBA guidance set forth above, the SEC instructs that they must comply with their fiduciary duty under federal law and make a full and fair disclosure to their clients of all material facts relating to the advisory relationship. The SEC further posits that “If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.” An example of a situation the SEC would require such disclosures would be an RIA requiring PPP funds to pay the salaries of RIA employees who are primarily responsible for performing advisory functions for clients of the RIA. In this case the SEC would require disclosure as this may materially affect the financial well-being of an RIA’s clients.

The SEC additionally provides that “if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure). (SEC Division of Investment Management Coronavirus (COVID-19) Response FAQs).

Summary

While the Cares Act and PPP are recently enacted, and there is some confusion surrounding the eligibility requirements for the PPP, the SBA had a clear opportunity to deem financial advisors ineligible in the Interim Final Rule and Fourth Interim Final Rule, but specifically chose not to do so. Instead, the SBA followed the direction of its historical eligibility requirements, holding to ineligibility at the fund and portfolio company level, but continuing to permit loans to firms operating at the advisory level.

While it is possible that the SBA could interpret its own rules and regulations inconsistently with the specific guidance provided in the Interim Final Rule and Fourth Interim Final Rule, the weight of the evidence strongly suggests that an investment advisor is eligible for a PPP loan as long as it does not use the proceeds for fund or portfolio company purposes.

When It Rains, It Pours: The Psychology that Makes Us More Vulnerable During a Crisis

Posted on April 22, 2020July 14, 2021 by Liam Mennitt

I received the following email alert from a cybersecurity client of mine:

“6x increase in cyber attacks over the last 4 weeks.”

“Information about COVID-19 should only come from a legitamate source. Don’t trust unsolocited emails or open unknown links”

“Really?,” I thought to myself; “We’re on lock-down, stressed about family and friends, not to mention business and jobs, and I’m getting cybersecurity alerts?” Frankly, I usually ignore them when I’m not distracted, but who has time for this now?

However, the more I thought about it, the more I realized that’s exactly what cybercriminals are thinking too and why people need to stay alert and resist the temptation to click on those compelling links.

The truth is, despite the fancy hardware and software solutions available, most cybersecurity breaches occur due to human error or phishing attacks. Unless you have relatively sophisticated automated solutions, the people IN your organization may represent your greatest internal threat.

While companies see high risks from external threat actors, such as unsophisticated hackers (59%), cyber criminals (57%), and social engineers (44%), the greatest danger, cited by 9 out of 10 firms, lies with untrained general (non-IT) staff. In addition, more than half see data sharing with partners and vendors as their main IT vulnerability. Nonetheless, less than a fifth of firms have made significant progress in training staff and partners on cybersecurity awareness (ESI ThoughtLab/WSJ Pro Cybersecurity, 2018).

And this was before COVID hit us between the eyes. Let’s take a quick look at the psychology at play that makes us even more vulnerable during a crisis.

The Neuroscience of Crisis

As humans, we are prewired for crisis.

Whether you think of this brain system as the “reptilian brain,” attributed to Paul MacLean and his Triune Theory (Sagan, 1977), or the fight-flight reaction of the sympathetic nervous system (System 1) which is our immediate, emotional reaction (Kahneman, 2011), it is clear that our brain protects us in times of danger.

This system, which is buried deep in the interior of the human brain, is both evolutionarily older and more immediate than simple cognitive thought; it is pre-cognitive. When the danger is ambiguous, System 2 thinking (which, in contrast with System 1 is slower, more deliberative and more logical) is nice; go through your options, take your time, don’t rush.

But when there is a perception of crisis, the need to ACT is immediate.

The fight-flight response makes us want to DO something, and now! From an evolutionary point of view, in times of danger, those who acted first were often safer than those who took their time.

The COVID-19 pandemic is, of course, a crisis.

Have people noticed how much more tired they are these days, even though we aren’t even leaving the house? It’s because crisis mode requires more energy. During a crisis, the thoughtful, reflective parts of our brain shut down. In other circumstances, we might hover over a suspicious link, while we process whether it seems risky or not.

But that requires fully functional frontal lobes, or executive functioning, which need time and undivided attention to work properly. In crisis mode, frontal lobe functioning is significantly diminished, or may go offline altogether, in favor of a quick (albeit less considered) action or reaction.

To make matters worse, cybercriminals know this: They know what emotional buttons to push to make you afraid (just click the link) or try to help (just click the link), or maybe even register your opinion (just click the link).

But if you do click that unfamiliar or disguised link, you may have just let criminals into your personal computer and, by default, into your company’s IT system.

Wait, consider, relax. Let System 2 kick in before you commit yourself, your computer, and your company to whatever those “black hat” cybercriminals have in mind.

Motivation During a Crisis

After the fear comes a desire to help.

This is one of the ways that cybercriminals trick well-meaning people. Whether it’s a donation, or a message of support, or some other activity to help, we are again motivated in ways that leave us open to online criminal behavior.

McClelland’s Social Motive Theory suggests there are three primary social motives: Achievement, Affiliation, and Power (McClelland, 1987).

We all have the capacity for all three, and genetics and socialization as well as cognitive choice determine which motive wins the day in a given situation. In times of individual crisis, needs for achievement (e.g., successful social distancing) or needs for power (e.g., controlling the situation) may come to the fore.

But in a social crisis, many of us are “hard-wired” to help, triggering a need for affiliation.

That desire to help may cause people to act impulsively in what they believe is a pro-social, affiliative manner. Just click the link to make your donation, just click the link to show your support, and on and on, the cybercriminals never stop trying. Like the very best advertisers, they are clever about pushing your emotional (non-cognitive, pre-cognitive) buttons to get you to act in ways that benefit them.

I am assuming everyone reading this has the best of motives. Those very motives make you susceptible to the manipulation of cybercriminals.

If your current impulse is to put this away, turn to something else, then you have experienced exactly what cybercriminals are counting on.

Information fatigue, too much bad news, or just a desire to put some positive energy back out into the world, may all leave you vulnerable.

Don’t click suspicious links, or even links that look well-meaning, without doing some simple checks and reviews first.

Hover over a link and see if the URL is the same as whom the email purports to be from.
Don’t provide any information, on any social media, whether at work or elsewhere, that can be used against you.
Hackers are clever and unscrupulous so check and double-check links that looks suspicious in any way.
Do a bit of research before you agree to anything and certainly before sending money or private information.

What’s Your Story?

Narrative is the final pillar in this little tripartite approach to cybercrime. I have come to believe that personality is a story we tell ourselves (and the world) about ourselves (Bruner, 1985).

This story comprises our identity, it is who we think we are and often these beliefs about who we are dictate how we behave in the world and how we process information.

For example, as a psychologist (not to mention a human being), I think of myself as a helpful person. I try to be kind and considerate. I don’t like to walk past beggars without giving them something (yes, yes, I know that would cause me to lose points on the WAIS IQ test but there you go, despite my cognition telling me this could be a trick, he or she will just buy cigarettes and beer, I often give in anyway).

Cybercriminals will use these ideal images we have of ourselves to manipulate our thoughts, emotions, and purse-strings.

I am good, so I give to the sick and needy.
I love children, so I’ll give to those orphaned by COVID.
I support healthy behaviors, so I’ll do most anything to protect my health.
I’m a good parent, so I will click the link that shows me 10 ways to protect my family from infection.

Your personal narrative is the core of your personal identity. We sometimes value it more than life itself (think of martyrs).

If a clever cybercriminal hacks your social media, understands what makes you “tick,” that information can be used against you in a cybercrime.

The threats are real and so are the psychological levers cybercriminals pull to manipulate your fear.

We are all overwhelmed, trying our best to hang in there, and help each other where we can. Don’t let your best intentions, and fatigue, allow you to be manipulated to behave unsafely online. COVID is real, and so is cybercrime. We must be alert to both.

Written by: Dr. Mark Sirkin, CEO at Sirkin Advisors

References

Bruner, J. (1986). Actual minds, possible worlds. Cambridge, MA: Harvard University Press.

ESI ThoughtLabs/WSJ Pro Cybersecurity (2018). The cybersecurity imperative: Managing cyber risks in a world of rapid digital change. New York: Author.

Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus and Giroux.

McClelland, D. (1987). Human motivation. New York: University of Cambridge.

Sagan, C. (1977). The dragons of Eden. New York: Penguin Random House.

Can Broker-Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies?

Posted on April 7, 2020July 2, 2021 by Liam Mennitt

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances. Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be explicitly named, or the coverage may apply to all customers and suppliers.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments are many, and those arguments will be the subject of litigation over the coming years.

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

Damage to the policyholder’s own property (business interruption)
Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
Government action such as evacuation orders (order of civil authority)
Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.

In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.

Thus, many may argue that property damage has occurred in places where the virus is present.

Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles. Arguably, these closures have caused economic collapse and significant losses, particularly for companies that make their money trading securities.

That poses the question as to whether securities firms can use business interruption insurance to claim losses from the collapse of markets. Certainly, a more direct correlation arises from losses suffered because the trading firm physically shut down. While of course insurance companies will defend such claims on multiple grounds, these claims are much more direct.

But, what about trading losses or lost banking deals caused by the market meltdown arising from the pandemic, and related governmental shutdowns? While less direct, an answer could lie in the banks of the Mississippi River.

In the summer of 1993, the Mississippi and its tributaries experienced unprecedented flooding that affected nine Midwestern states. Twenty million acres of farmland were damaged, resulting in $6.5 billion in crop damage (See Doc. 35, Tab 28 at A172) (The Great Flood of 1993 Post-Flood Report U.S. Army Corps of Engineers September 1994). Total damage from the flood is estimated to be between $15 and $20 billion. Id. River, road, and rail transportation systems were disrupted on a large scale. Id.

Archer Daniels Midland Company and its subsidiaries (collectively, “ADM”) process farm products for domestic and international consumption. As a result of the Great Flood of 1993, ADM incurred substantial extra expenses and losses of income because of increases in both transportation costs and the cost of raw materials. ADM submitted claims to its insurance providers, who paid ADM approximately $11 million for losses sustained from the flooding. (See Compl., Doc. 1, Exhs). The insurance companies denied approximately $44 million in additional claims submitted by ADM. ADM brought suit, under multiple policies in the Southern District of Illinois, and the insurance companies defended.

According to the Southern District of Illinois, business interruption insurance is insurance under which the insured is protected in the “earnings which insured would have enjoyed had there been no interruption of business.” Archer-Daniels-Midland Co. v. Phoenix Assurance Co. 975 F. Supp. 1124 (S.D. Ill. 1997). In other words, business interruption insurance protects earnings that are lost or diminished because of a business interruption. ADM prevailed at the District Court.

On a related appeal, the 8th Circuit took up the issue. Archer-Daniels-Midland Co. v. Aon Risk Services. 356 F.3d 850 (8th Cir. 2004). The insurance companies argued that ADM could not recover because it did not suffer any business interruptions as a result of the flood. The insurance companies argued that Archer had actually continued production at its plants.

The 8th Circuit stated that “interruption of business” did not require ADM to show that its corn processing plants stopped or slowed down. “An interruption of business means some harm to the insured’s business” but the damage could have been caused to the property of a supplier. Most hedge funds, broker-dealers, and RIAs continued to trade during the governmental shutdowns, but the interruption to their business through the market meltdown, other than those hedged on short, was significant.

Under the ADM decision, coverage may be available, even where the policyholder incurred lost income or losses unrelated to the shutdown of its premises. While these issues are complicated, the flood of the Mississippi may provide securities trading firms with arguments that the shutdown of the economy is damage done to a supplier, above and beyond losses incurred from the physical closing of any offices. Thus, the trading losses caused by the government shutdown arising from COVID-19 could be seen as “harm to the insured’s business.” Of course, these issues will develop once the crisis subsides, but a battle looms on the scope of the insurance and the economic losses covered, including trading and securities losses.

Can Broker-Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies?

Posted on April 7, 2020July 1, 2021 by Liam Mennitt

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

Damage to the policyholder’s own property (business interruption)
Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
Government action such as evacuation orders (order of civil authority)
Damage to properties that attract customers to the policyholder’s business (leader property)
The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

Thus, many may argue that property damage has occurred in places where the virus is present.

A Brief Summary of Portions of the New CARES Act and What It Could Offer in Financial Relief to Churches and Other Tax-Exempt Organizations

Posted on April 2, 2020July 13, 2021 by Liam Mennitt

It may be worth considering that many non-profits, including churches, might utilize provisions in the new Coronavirus Aid, Relief, and Economic Security Act or CARES Act (P.L. 116-136) to provide some economic relief. Potential applicants should review the new law in detail and discuss its requirements with their attorneys.

The new law sets aside about $349 billion for loans to various nonprofit organizations, including churches. The bridge period is from February 15, 2020 to June 30, 2020. It also includes a provision that can make the loans forgivable. Employers with up to 500 employees are eligible. Availability is first come, first served, so prompt application is recommended.

How the Loan May Be Used

Loan proceeds may be used for:

Payroll
Group health insurance, paid sick leave, medical and insurance premiums
Mortgage or rent payments
Utilities
Salary and wages
Vacation, parental leave, sick leave
Health benefits

Payroll includes:

Salary or wages, payments of a cash tip
Vacation, parental, family, medical, and sick leave
Health benefits
Retirement benefits
State and local taxes (excludes Federal Taxes)

Limited up to $100K annual salary or wages for each employee

The application to Pastoral housing allowances is presently unclear, so I suggest that this be included in payroll costs.

The lenders will likely include the organization’s current banker, as funding will be routed through the SBA. The term of the loan is two years (unless forgiven) and it has a .5% interest rate.

Maximum loan amount is limited to:

Total average monthly payroll costs for the preceding 12 months (April 2019 to March 2020) multiplied by 2.5 or
$10,000,000 if you are a new church plant church or organization, use average payroll costs for January and February 2020 multiplied by 2.5.

No loan payments are due under this program for 6 months. No loan fees apply. No collateral or personal guarantees will be required.

Good Faith Certificate

Applicant organizations will need to provide a Good Faith Certification at Application and after coverage period – post July 2020.

Organization needs the loan to support ongoing operations during COVID19.
Support ongoing operations
Funds used to retain workers and maintain payroll or make mortgage, lease, and utility payments.
Have not and will not receive another loan under this program.
Provide lender documentation verifying information of funds used
Everything is true and accurate.
Submit tax documents and that they are the same submitted to IRS. Legal counsel should be involved here.
Lender will share information with the SBA and its agents and representatives.

Loan Forgiveness

The entire loan amount loan can be forgiven, if the borrower qualifies. In general, the loan is forgivable if the borrower employed the same number of people during the loan period as it did last year.

Full-Time Equivalent Employee (FTE) (as defined in section 45R(d)(2) of 11 the Internal Revenue Code of 1986)
The goal of this loan is for your 2020 FTEs to be equal to or greater than your 2019 FTEs. Essentially, the law provides that you must have equal to or more employees from February. 15, 2020, to June 30, 2020, as you did last year from February 15, 2019, to June 30, 2019.
If you will have fewer employees in 2020 than in 2019, then you need to complete a calculation:

Average FTEs per month in 2020 from February 15, 2020-June 30, 2020 / (divided by)

Average monthly FTEs from February 15, 2019-June 30, 2019 or Average monthly FTEs from January 1, 2020 to February 29, 2020.

Limitations on Forgiveness

Only so much of the loan as is used for the payroll costs, benefits, mortgage, rent, or interest on other debt obligations can be forgiven.
Not more than 25% of the forgiven amount may be for non-payroll costs.
Loan forgiveness will be reduced if the borrower decreases its full-time employee headcount.
Loan forgiveness will also be reduced if the borrower decreases salaries by more than 25% for any employee that made less than $100,000 in 2019.
Borrower has until June 30, 2020 to restore its full-time employment and salary levels for any changes between Feb. 15 to April 26, 2020

No collateral or personal guarantees will be required.

This note is intended only as an illustration of general legal principles and is not legal or tax advice. The reader is directed to discuss his or her specific circumstances with a qualified practitioner before taking any action.

Can Broker Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies

Posted on April 2, 2020July 14, 2021 by Liam Mennitt

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

Damage to the policyholder’s own property (business interruption)
Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
Government action such as evacuation orders (order of civil authority)
Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

Thus, many may argue that property damage has occurred in places where the virus is present.

Will Federal and State Governments Alter Insurance Contracts to Require Coverage for COVID-19 and Should Congress Fund Insurance Companies to Help Provide Coverage?

Posted on March 30, 2020July 14, 2021 by Liam Mennitt

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by a business due to a slowdown or suspension of its operations at its premises, under certain circumstances. Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a policy holder or supplier.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.

On March 10, 2020 members of the United States House of Representatives requested that four major insurance trade organizations cover business interruption claims arising from COVID-19. The letter was addressed to the CEOs of the following organizations:

– The American Property and Casualty Insurance Association;

– The National Association of Mutual Insurance Companies;

– The Independent Insurance Agents & Brokers of America; and

– The Council of Insurance Agents & Brokers.

Members of Congress stated that business interruption insurance is intended to protect businesses against income loss as a result of operational disruption, and covering losses resulting from COVID-19 would “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”

In response, the CEOs stated, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” While recognizing the impact of the pandemic, the CEOs argued: “The proposed retroactive application legislation would fundamentally change the agreed-upon transfer of prospective risk-of-loss exposure to coverage for a known and presently occurring loss, something the parties did not agree to, the insurer did not rate for, and the policyholder did not pay for.”

New Jersey has taken preliminary steps to directly alter the terms of insurance contracts issued to insureds in New Jersey. On March 16, 2020, New Jersey Bill A-3844 was introduced with the goal of assisting businesses impacted by COVID-19.

The principal provision of draft Bill A-3844 states:

“Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”

While no other state has taken any measure as extreme as the draft bill in New Jersey, it is possible other states will seek to influence whether insurers provide coverage for claims relating to COVID-19. On March 10, 2020, the New York Department of Financial Services mandated property casualty insurers provide to the department, “Certain information regarding the commercial property insurance it has written in New York and details on the business interruption coverage provided in the types of policies for which it has ongoing exposure.” Insurers must also provide the same information to policyholders. Several observers have noted this move could be a precursor to a draft bill similar to NJ A-3844 being introduced in New York.

With the anticipated passage (not finalized yet at the time of this article) of a $2 trillion economic relief package, it seems appropriate that Congress should assist insurers if they are going to ask insurance companies to pay for business interruption arising from COVID-19. By encouraging insurance companies to honor such claims, Congress seeks to support business and provide capital to the economy. Other industries such as the cruise industry and the aviation industry are receiving large bailouts as a result of COVID-19, under the theory that it’s “not their fault.” Perhaps given the extraordinary situation, the insurance industry can receive similar help in exchange for increasing the scope of coverage. In that way, the insurance industry would be required to be more reasonable when it considers coverage claims for COVID-19.

Business Interruption Insurance and COVID-19: Ocean Grill.

Posted on March 30, 2020July 2, 2021 by Liam Mennitt

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.

The first case involving a business interruption loss due to COVID-19 has been filed. Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, complaint filed March 16, 2020). The Plaintiffs, owners of a popular restaurant in New Orleans, Ocean Grill, seek a declaration from the court that this insurer, a Lloyd’s syndicate, must cover business interruption losses. New Orleans Mayor LaToya Cantrell ordered all restaurants in the city to limit operations to delivery only. That followed an order by the governor that barred any congregations of more than 250 people. Louisiana’s governor also closed bars and restricted restaurants to takeout orders until April 13 to prevent the disease’s spread. The policy at issue provides coverage for “property, business, business income, and extra expense…” The Complaint alleges that the policy is an “all risk policy” which covers all risk unless clearly and specifically excluded. The policy has only excluded losses due to biological materials such as pathogens in connection to terrorism. According to the Complaint, the policy therefore provides coverage for other viruses or global pandemics. Plaintiffs allege that Lloyd’s have accepted the policy premiums with no intention of provding coverage due to physical loss and/or from a civil authority shut down due to a “global pandemic virus.”

Also, according to the Complaint, the coronavirus is “physically impacting public and private property, and physical spaces in cities around the world” and “any effort by Lloyd’s to deny the reality that the virus causes physical damage and loss would constitute a false and potential fraudulent misrepresentation that could endanger policyholders and the public.”

The lawsuit maintains that the virus physically infects and stays on surfaces for up to 28 days and that contamination of the insured premises by the virus would be a “direct physical loss needing remediation to clean the surfaces of the establishment.”

It likens the coronavirus infection to cases where the intrusion of lead or gaseous fumes has been found to constitute a direct physical loss.

Plaintiffs ask the court to affirm that because the policy provided by Lloyd’s does not contain an exclusion for pandemic viruses, the policy provides coverage to Plaintiffs for any future civil authority shutdowns of restaurants in New Orleans due to physical harm from coronavirus contamination.

While Lloyd’s has not yet had the opportunity to respond, the CEOs of the four large insurance trade organizations sent a letter to Congress on March 18, 2020 stating, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

Commentators supporting the insurers have suggested that any business interruption claims may be denied because government shutdowns are usually ordered as a precaution, not because of known contamination. Coverage can also be limited by the duration of any contamination. Commentators have argued that “in some ISO forms, the period of restoration has a waiting period, such as 72 hours, before coverage begins. And the period lasts only as long as it should take to repair the physical loss or damage using due diligence and dispatch. If the ‘physical damage’ is the particles of virus on surfaces of a building, how long should it reasonably take to use soap and water, or bleach, to clean those surfaces? It seems as though the battle lines are being drawn, and that the business interruption claims will be met with a fight.

Connecticut Approves Recovery Bridge Loan Program as of March 25, 2020

Posted on March 26, 2020July 2, 2021 by Liam Mennitt

The State of Connecticut will immediately roll out a no-interest loan program, “The Connecticut Recovery Bridge Loan Program,” with assistance of up to $75,000 over an 18-month period for small businesses effected by the COVID-19virus (Coronavirus) crisis. “This plan is a meaningful and flexible plan, stated by David Lehman, Gov. Ned Lamont’s economics chief. Funding for the plan will be derived from the banking system, primarily because it is faster and would infuse cash into the economy rapidly for businesses. “The banks have the network, the relationships, and the ability to deploy the money efficiently,” stated Mr. Lehman. The program will be broken down into rounds of financing, the first of which will infuse a total of $20 – $25 million to small businesses, enough to finance about 600 businesses with a quick cash infusion in the range of $40,000 per business. The CT Recovery Bridge Loan Program is similar to those launched around the United States in the wake of the COVID-19 crisis. Similarly, Massachusetts has launched a program that is comparable in size (Dollar amount) and targeting small businesses. As per a Department of Economic and Community Development survey, approximately 90% of CT businesses have taken a hit to revenue. However, 50% are still working near full capacity.

This Statewide plan will be implemented in addition to the existing Loan Forbearance program, which 800 existing borrowers in the Small Businesses Expense Program received a 3-month reprieves for payments (a benefit worth approximately $5 million). In addition, the plan will fall under the legislative authorization Small Business Express Program and financed with paybacks from prior loans, reducing the need for legislation to be passed for the program. The CT program is in addition to the Federal Stimulus and Bailout which includes $50 billion for small businesses administration backed loans, which would infuse an additional $4 billion into the Connecticut economy in direct Federal aid alone. Major concerns for the CT Recovery Bridge Loan Program are related to banks’ lending more money to small businesses with current debt obligations, especially because the COVID-19 crisis has killed vast consumer and business spending. The federal and state stimulus in addition to unlimited Federal Reserve buying of Treasury Securities will have the effect of filling banks’ balance sheets with low or no-cost capital. Known as quantitative easing, or QU this practice could potentially drive down Treasury interest rates, which will provide private investors, businesses, and consumers to look for deals to help revive the economy.

Interest When Enforcing a Money Judgement and the Discretionary Power of Connecticut Courts to Impose a Reasonable Rate of Post-Judgement Interest

Posted on September 20, 2019September 15, 2021 by Liam Mennitt

Prior to its repeal in 1983, General Statutes § 52-349 had provided generally for the collection of “legal interest in the amount of the judgment from the time it was rendered.” Presently, General Statutes § 37-3b provides for post-judgment interest in connection with actions “to recover damages for injury to the person, or to real or personal property, caused by negligence.” Additionally, General Statutes § 37-3a serves as the source for post-judgment interest on claims to which General Statutes § 37-3b does not apply (i.e. interest awards in certain civil action not involving negligence).[1]

Most credit agreements contain terms that allow for interest to accrue on unpaid balances. These interest rates are usually anywhere from single digits to the high-teens. Until recently many Connecticut courts would alter the contractual interest rate when entering judgment against a defaulting client. Courts were doing so based on Conn. Gen. Stat. § 37-3a which provides that post-judgment interest is discretionary and is capped at 10%. Many Connecticut courts read this to mean that 10% was the most interest they could order after judgment but that they could award interest at a lower rate or even no post-judgment interest as they saw fit. Therefore, the discretionary nature of an order for post-judgment interest has become a product of case law development and interpretation rather than statutory provision.

The Connecticut Supreme Court in Sikorsky Fin. Credit Union, Inc. v. Butts, clarified the circumstances and interest rate for creditors to receive post judgment interest. In Sikorsky, a lender sued its borrower to obtain a deficiency judgment after the loan collateral (automobile) was repossessed and liquidated leaving a balance due on the loan. The loan documents contained an interest rate of 9.14 percent and further stated that the lender “may charge interest at a rate not exceeding the highest lawful rate” until the deficiency is paid.[2]

The Sikorsky Court found that Connecticut law provides for two distinct types of interest by statute under §§ 37-1 and 37-3a. First, Connecticut General Statutes § 37-1 provides that the court, as part of a judgment enforcing a loan, must award post judgment interest at the rate of interest agreed upon by the parties, or eight percent if the parties did not specify the rate for post judgment interest. The court is only relieved of this obligation if the parties disclaimed post judgment interest. Second, Connecticut General Statutes § 37-3a provides the authority for the court to award discretionary interest up to ten percent as damages for the detention of money, when the duty to pay arises from an obligation other than a loan of money or when the parties to a loan have waived or disclaimed interest.[3]

In Hartford Steam Boiler Inspection and Insurance Co. v. Underwriters at Lloyds and Companies Collective, the Connecticut Supreme Court awarded post-judgment interest in a commercial dispute, holding that “post-judgment interest is intended to compensate the prevailing party for a delay in obtaining money that rightfully belongs to him.”[4] In DiLieto v. County Obstetrics and Gynecology Group, P.C., the Connecticut Supreme Court held that “in the context of § 37-3a, a wrongful detention of money, that is, a detention of money without the legal right to do so, is established merely by a favorable judgment on the underlying legal claim, so that the court has discretion to award interest on that judgment, without any additional showing of wrongfulness, upon a finding that such an award is fair and equitable.”[5]

In Cavolick v. Desimone, a Superior Court held that maximum statutory rate of 10% was appropriate for an award of post-judgment interest even though greater than the rate generated at the time by conservative investments because it was less than the interest charged on other sorts of debt such as credit cards and “an amount greater than that generated by conservative investments may well provide some incentive to pay a judgment.” The 10% interest rate expressed in General Statutes § 37-3a is, however, not a required rate but, rather, is the maximum rate of interest that a trial court, in its discretion, may award.[6] Finally, in Cadle Co. v. Steiner, a Superior Court held that an award of post-judgment interest is discretionary and denied an award of post-judgment interest where the plaintiff sought execution on property and repeatedly demanded more post-judgment interest than it was entitled to. The court also held that when a judgment is ordered paid in installments, with no provision for interest, post-judgment interest does not run prior to a default in the payments ordered.[7]

In conclusion, the determination of a reasonable port-judgment interest rate pursuant to General Statutes § 37-3a is not a mandatory rate that applies generally to all applications of post-judgment interest. Rather, the statute and case law application provide that the 10% interest rate provided in § 37-3a, is a cap on post-judgment interest for damages. Additionally, the order for application of post-judgment interest is in the discretion of the Court, and determined on a case by case basis that requires a factual analysis in order to determine a reasonable rate of interest to be applied in order to compensate the aggrieved party.

Disclaimer: this article is for educational purposes only and to give you a general understanding of the law, not to provide specific legal advice. No attorney-client relationship exists by reading this article. This article should not be used as a substitute for legal advice from a licensed professional attorney in your state.

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[1] § 6.8.Interest, 12 Conn. Prac., Unfair Trade Practices § 6.8.

[2] Sikorsky Fin. Credit Union, Inc. v. Butts, 315 Conn. 433 (2015).

[3] Sikorsky Fin. Credit Union, Inc. v. Butts, 315 Conn. 433 (2015).

[4] Hartford Steam Boiler Inspection and Ins. Co. v. Underwriters At Lloyd’s and Companies Collective, 121 Conn. App. 31 (2010).

[5] DiLieto v. County Obstetrics and Gynecology Group, P.C., 310 Conn. 38 (2013).

[6] Cavolick v. Desimone, 39 Conn. L. Rptr. 781 (Conn. Super. Ct. 2005).

[7] Cadle Co. v. Steiner, 51 Conn. L. Rptr. 480 (Conn. Super. Ct. 2011).