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Our blog team has taken some time off over the last few weeks...

Hope you and your family are able to take some time as well.

CAConnect is back, and here’s what we are thinking about…

Michigan Court Rules Against Insured’s COVID-19 BI Claim

As you know, companies are racking up billions of dollars of losses as a result of COVID-19 related closures, and, more often than not, their claims for business interruption losses are being denied by property insurers. As a result of these denials, insured entities are filing both direct individual actions and, along with other similarly situated insureds, class actions, against their carriers. The lawsuits are multiplying. In fact, according to an article in Law360, of the reported 560 pandemic related class actions that were filed by the end of May, 25% of them were “…against insurance companies regarding business interruption coverage”.

On July 1, a Michigan state court dealt a blow to an insured restaurant group seeking to recover business interruption losses it sustained as a result of COVID-19 closure. The court dismissed the group’s $650K complaint brought against Michigan Insurance Co. The insurance policy “extended coverage for (the group’s) loss of business income due to a ‘suspension of operations’ caused by direct physical loss or damage to at least of the insured properties.” The insured argued that two of their restaurants “were damaged during the pendency of the (governor’s) [executive orders (closing the restaurants)] because people were physically restricted from dine-in services.’”

The judge in the case found that the restaurant’s arguments were “’simply nonsense’, saying during the July 1 hearing that she was persuaded by Michigan case law finding that direct physical loss or damage must take a tangible form and somehow alter ‘the physical integrity of the [insured] property.’” Specifically, the judge held that “(t)he complaint here does not allege any physical loss of or damage to the property…The complaint alleges a loss of business due to executive orders shutting down the restaurants for dine-in services due to the COVID-19 threat. But the complaint also states that at no time has COVID-19 entered (a restaurant) through any employee or customer, and in fact states that it has never been present in either location. So there simply are no allegations of direct physical loss or damage to either property.’”

It is important to keep in mind that this is a Michigan case. As policyholder attorneys have pointed out, the law in a number of other jurisdictions has held that “an insured’s mere loss of the ability to use its property for its intended purpose can satisfy the direct physical loss or damage requirement.” Additionally, it is important to note that no one on either premises was found to be infected so the judge “did not address whether the direct physical loss or damage requirement could be fulfilled if the virus were to be detected at an insured property. Other policyholders that have at least alleged the presence of the novel coronavirus on their premises could withstand insurers’ bids for dismissal.”

Paycheck Protection Program Extended:

The Paycheck Protection Program ("PPP") was set to expire on June 30th. The program, which was set up to help alleviate small business hardships emanating from COVID-19, went through two rounds of legislative funding. The first round was passed in March, and businesses gobbled up the almost $350B in less than two weeks. The $310B second round passed in April. The consumer uptake on this second round of funding was less frenzied, and approximately $130B was "left-over". As a result, last week Congress passed legislation to extend the PPP through August 8, 2020. Small businesses have until then to apply for and make use of these forgivable loans.

Chapter 11 Bankruptcies--We Knew They Were Coming:

Almost every day since the pandemic began, we have seen Chapter 11 bankruptcies being filed. As the first half of the year has come to a close, Epiq Systems, Inc., a legal services firm that tracks bankruptcy filings, reported that Chapter 11 filings were up 26% for the first half of 2020 over 2019. For June specifically, the year-over-year increase was 43%. In total, 3,604 companies filed for Chapter 11 in the first six months of 2020.

Experts predict that the number of Chapter 11 bankruptcy filings will continue to increase as the federal stimulus efforts start to expire. For example, the PPP has no doubt helped buoy small businesses. The cash available from the program is going to run out, and, if financially strapped companies cannot get back to business as usual, they may have no choice but to file for bankruptcy protection. For larger businesses, certain industry classes are more susceptible to financial turmoil as a result of the way the virus continues to drive consumer behavior. One obvious example is retail stores which are suffering as many shoppers are wary of returning to physical stores.

Deregulation and the Volcker Rule:

The Volcker Rule, a part of Dodd-Frank, a broad-sweeping regulation put into place post the 2008 market collapse, was eased by the FDIC in late June. As most know, after the 2008 crisis, Congress attempted to limit banks from irresponsible actions by passing broad sweeping regulations. Many believed that the Volcker Rule went too far and therefore limited business. Among other things, the Rule "...barred banks from making potentially speculative investments using customers’ FDIC-insured deposits. That included venture capital funds... (The FDIC will now)...allow banks to invest more of their own capital in venture capital funds that invest in start-ups and small businesses alongside clients.

Sources:Emma Cueto, COVID-19 Accelerating Growth of Class Action Cases, Law360, July 8, 2020.

Jeff Sistrunk, Mich. Eateries’ Loss Highlights COVID-19 Coverage Hurdles, Law360, July 7, 2020.

Ruth Simon and Peter Rudegeair, PPP Loans: What You Need to Know About the Latest Changes, WSJ.com, July 6, 2020.

Aisha Al-Muslim, Chapter 11 Business Bankrupties Rose 26% in First Half of 2020, WSJ.com, July 2, 2020.

Hugh Son and Jesse Pound, Bank stocks surge after regulators ease Volcker Rule, JP Morgan Chase climbs 2%, CNBC.com, June 26, 2020.

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