Construction Law Alert:  COVID-19

  
 

COVID-19 and the Construction Industry

By Scott Hathaway, Chris Warzecha, and Melodie Freeman-Burney

The COVID-19 pandemic is rapidly forcing a shift in “business as usual” across all industries, and the construction industry is no exception. A recent survey of 909 construction professionals conducted by the Associated General Contractors of America ("AGC") found that 28% of respondents replied yes to the question, “Has any owner, government agency or official directed you to halt or delay work on any projects that are either active or expected to start within the next 30 days?” Additionally, 22% of respondents indicated they had been notified by a supplier that deliveries would be late or cancelled. Nearly one out of five reported failures of required government actions or personnel, for instance, to issue permits or certificates of occupancy, conduct inspections or lettings, or make project awards.

Contractors fortunate enough not to have directly felt the impact of this pandemic almost certainly will in the weeks and months ahead. Accordingly, preparing for that eventuality is prudent, if not critical. Included here are thoughts from Conner & Winters’ Construction Law, Insurance Law, and Employment Law Practice Groups to assist contractors in navigating the uncharted waters approaching. We invite you to contact us for any additional questions you may have relating to issues arising from the COVID-19 pandemic or otherwise.

Impacts on Construction

Q. Can a contractor obtain additional time to perform for delay caused by COVID-19?

A. Possibly. The answer largely depends on the terms of the applicable construction contract. Most construction contracts contain a provision often referred to as a “force majeure” clause or a “delay” clause. The purpose of these provisions is to list particular circumstances not within a contractor’s control that may entitle the contractor to an extension of the agreed contract time for completion of the project.

Force majeure clauses can vary significantly from contract to contract, but typical provisions will include language providing at least an argument for additional time where delays in performance are caused by an event beyond the contractor’s control and which the contractor could not have reasonably foreseen. Perhaps the most frequently utilized delay clause in commercial construction contracts is that found at Article 8.3.1 of the American Institute of Architects’ (“AIA”) A201-2017 General Conditions of the Contract for Construction. That clause contemplates the provision of additional contract time where any of 1) “unusual delay in deliveries,” 2) “unavoidable casualties,” 3) “other causes beyond the Contractor’s control,” or 4) “other causes that the Architect determines may justify delay” are found to be the cause of Contractor’s delay in “progress of the Work.” Another common industry form contract, the ConsensusDocs 200, contains a delay clause at Section 6.3.1(j) that specifically lists “epidemics” as grounds for an excused delay.

Irrespective of the specific language used in the applicable contract, contractors should promptly tender written notice of a claim for additional time to the owner as soon as delay caused in any way by COVID-19 is reasonably anticipated. The applicable contract should be consulted for any requirements with respect to the timing or form of such notice. Additionally, where notice is given early on, the contractor may benefit from taking a broad approach in its description of the events giving rise to the delay claim so as not to potentially exclude grounds for an extension of time that have not yet but may still become applicable. The AGC has prepared a helpful form notice letter with this approach in mind that can be found at the “Coronavirus (COVID-19)” section of the AGC website.

Q. Does COVID-19 provide contractors with a legal basis upon which to terminate a construction contract?

A.  Likely, yes, in the event that an act of government directs the relevant project be stopped. Again, the applicable contract must be consulted. Many construction contracts, including the AIA A201-2017, provide certain instances in which the contractor may unilaterally terminate its contract with the owner without recourse. While most such instances involve significant failures by the owner, one common occurrence giving rise to a right of termination in favor of a contractor is where all work is required to be stopped by an act of government or by local authorities.

In the case of the AIA A201-2017, a contractor may terminate the contract if work on the project is stopped by an act of government for 30 consecutive days. That agreement requires the contractor, in such circumstances, to give the owner and architect seven days’ notice of termination, and entitles the contractor to recover payment in full for work already executed, reasonable overhead, and profit for work not executed, as well as any costs incurred as a result of termination.

Even apart from an express contract term giving rise to a right of termination, an extended stoppage of all work on a given project may give rise to a common law right of nonperformance on the grounds of impossibility in some jurisdictions. However, the existence of such a right would likely be dependent upon a showing that the applicable government-directed work stoppage was anticipated to extend far enough into the future that performance as contemplated by the parties’ contract would truly be rendered impossible.

Q. How can a contractor protect itself in contracts going forward?

A.  It would be prudent for a contractor to negotiate for inclusion of a delay clause that expressly lists “pandemics” so that currently unforeseeable pandemics will expressly constitute grounds for an excused delay when they occur. However, since the COVID-19 pandemic is now known, such language in a contract executed today will not likely operate to provide contractors relief for delay caused by COVID-19, which at this point is foreseeable. Contractors should also strongly consider adding contract language to account for the clear risks of delay and disruption, seeking to at least share these risks with the owner. Contract language addressing potential price escalations and how that risk will be allocated given current market uncertainty would also be advisable. Additionally, in an effort to avoid the increased risks of delay and uncertainty associated with litigation and arbitration throughout the course of the COVID-19 pandemic, contractors should meet with project stakeholders in advance of contracting in an effort to reach a consensus on the foreseeable impacts of COVID-19 on the project so that any shared understanding may be included in the contract.   

Insurance Considerations

NOTE: As is always true when evaluating coverage, the specific policy language controls, and the unique factual circumstances are critical. Circumstances differ, insureds purchase various coverages, and insurers have divergent forms. There is no one-size-fits-all. Further, courts in different jurisdictions interpret policy language in different ways. The following is intended only as a general discussion. Please contact us if you need experienced coverage counsel to assist with your distinct coverage issues.

Q. Does business interruption insurance cover COVID-19--related shutdowns?

A.  Initial COVID-19 insurance issues will likely focus on business interruption ("BI") coverage. BI coverage is a type of first-party property insurance. It often covers lost business income and extra expenses arising from physical damage to the insured’s own premises that results in a shutdown, and it may also cover losses from business closure by order of civil authority, possibly subject to a sublimit. It may further include “contingent” BI coverage for loss due to physical damage to someone else’s business, such as a critical supplier. However, these BI coverages are typically triggered only by “direct physical loss of or damage” to some property. Even civil authority BI coverage usually (but not always) applies only when a civil authority prohibits access to the insured’s premises because of “direct physical loss of or damage” to property in the same vicinity.

Insurers will argue that there is no direct physical loss or damage, in the traditional sense, if an insured’s virus-related losses result simply from an economic slowdown or from an insured’s voluntary or a government’s preventative quarantine order. However, a policy may define “physical loss” as including “loss of use.” We expect the requirement for physical loss or damage to be tested. For example, after shutting down casinos and other businesses, two Indian Nations have filed lawsuits in Oklahoma seeking a declaration of BI coverage due to the “United States of America [becoming] infected by COVID-19 resulting in a pandemic,” which resulted in the Nations' loss of use of their property. See Chickasaw Nation Dept. of Commerce v. Lexington Ins. Co., et al., Case No. CV-2020-35, Pontotoc County District Court, Oklahoma; Choctaw Nation v. Lexington Ins. Co., et al., Case No. CV-20-42, Bryan County District Court, Oklahoma.

Where the virus is actually present at a location, there is a potential argument that “physical damage” has occurred so as to trigger BI coverage. Compare Gregory Packaging, Inc. v. Travelers Property & Cas. Co., No 12-cv-03318, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014) (the presence of ammonia inside a facility is a direct physical loss), with Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008) (the presence of mold which could be removed by cleaning is not physical damage). This will likely become a significant point of contention very soon. A suit has already been filed by a restaurant in Louisiana seeking coverage for business interruption losses under this theory. See Cajun Conti, LLC, v. Certain Underwriters at Lloyd’s London, Civil District Court for the Parish of Orleans, Louisiana. Some policies may contain a “Communicable Disease” extension for BI coverage. In that case, policy language should be analyzed to determine whether coverage is available only after the virus is documented on the premises, or whether it covers a shutdown to avoid contamination. 

Even if physical damage has occurred, certain exclusions may prevent coverage. A 2006 ISO form entitled “Exclusion for Loss Due to Virus Or Bacteria” is expressly applicable to “business income.” ISO form CP 01 40 07 06. This form excludes coverage for any “loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” The form was drafted to explicitly exclude loss of business income and other losses due to property contamination by any viruses or bacteria, specifically including rotavirus, SARS, influenza, legionella, and anthrax. See ISO’s July 6, 2006, circular LI-CF-2006-175 (prepared in connection with filing the exclusion with state regulators). However, not all policies contain this exclusion. Also, New Jersey is contemplating legislation that would compel insurance companies to cover business interruption claims suffered by small businesses because of the state’s emergency “stay at home” declaration, regardless of policy language. Other exclusions that might be cited by insurers include those for “Pollution,” “Mold,” “Contaminants,” or “Loss of Market or Loss of Use.”

Other issues may also arise. The quantum of damages covered may be determined by how quickly the physical damage can be repaired. Insurers may argue that any “damage” due to the presence of coronavirus can be repaired by simple cleaning, with minimal cost. Also, property policies typically have a waiting period, a kind of time-lapse deductible, that must expire before losses are covered. Policies additionally have caps, or limits, on the number of business income loss-days that are covered.

Q. Does a CGL policy cover coronavirus claims by third parties?

A.  If an insured is sued for allegedly exposing a third party or its property to virus contamination (think of cruise ships), the first response would be to look to a Commercial General Liability ("CGL") policy. However, CGL policies generally only cover claims for bodily injury or property damage (including loss of use) caused by an “occurrence.” An occurrence is typically defined as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” What constitutes an accident in specific contexts has been fiercely litigated for decades. One key question is whether the insured’s actions must be accidental, meaning unintentional, or whether only the damages or injuries must be accidental or unintended. Many courts focus on whether the injury or damage was foreseeable by the insured. Jurisdictions deal with these issues differently, so it is imperative to know how the applicable jurisdiction defines an “accident” for coverage purposes. With history as a guide, establishing that coronavirus-related bodily injury or property damage resulted from an “accident” will likely be problematic.

However, an insurer’s duty to defend a claim is broader than its duty to indemnify, and, especially if it is impossible to determine at the outset of a suit whether there has been an “accident,” the insurer would likely be required to at least provide a defense. Insureds should also check their policy for a “Communicable Disease” coverage extension and any coverage extension under pollution coverage for “Biological Agents.”

Insurers might argue that the “Fungi or Bacteria” exclusion prevents coverage. However, it typically only excludes coverage for bodily injury which would not have occurred but for the exposure to “any bacteria,” and the COVID-19 microorganism is a virus.

Some CGL policies may additionally contain a “Communicable Disease” exclusion disclaiming damages or injuries arising out of a “communicable disease, virus, or syndrome,” or specific “Virus,” “Pathogen,” or “Biological Agents” exclusions. 

CGL policies also cover personal injury claims, such as false detention or slander, and advertising injury claims, such as product or service disparagement. Those claims may not require an “occurrence” to trigger coverage, but exclusionary language may apply, such as professional liability or criminal acts exclusions.

Q. Does Event Cancellation Insurance provide coverage for coronavirus cancellations?

A.  Parties should first look to the event agreement to determine the scope of any force majeure clause. However, any Event Cancellation Insurance should also be reviewed to determine the scope of coverage. Some policies only cover mandatory cancellations and not voluntary ones. Additionally, coverage may not apply if there is no attempt to immediately reschedule the event. Going forward, insureds should anticipate express coronavirus exclusions.

Q. Will Employment Practices Liability Insurance play a role?

A.  Because employers are being forced to reduce employees due to voluntary or mandatory shutdowns or the general economic downturn, there may be a spike in wrongful termination, discrimination, retaliation, and even defamation claims by terminated employees.  Insureds should review their Employment Practices Liability Policies now, so they will be prepared.

Q. What about Directors and Officers Liability Insurance?

A.  Directors and officers liability insurance is designed to protect executives, board members, and the company (and potentially others) from liability for alleged wrongful acts in their official capacities, including for security fraud class action lawsuits and governmental investigations. They typically exclude claims for bodily injury or property damage. In addition to staff reductions, another result of the coronavirus pandemic is global market volatility. It is easy to imagine claims being filed by stockholders seeking damages as a result of the insureds’ actions or inactions taken in response to the pandemic or to the financial fallout. Regulators may also investigate such actions. Insureds should review their D&O policies for pertinent provisions and should specifically identify any “Intentional Acts” or “Personal Profit or Advantage” exclusions.

Q. What are some basic tips regarding claims?

A.  If you have suffered a coronavirus-related loss, you want to preserve your rights, so make a claim even if you believe coverage is doubtful. Some policies are “claims-made,” which means that only claims made against the insured during the policy period are covered, and there is typically a short reporting period. However, under some policies, claims must also be reported to the carrier within the policy period. Review all policies for notice provisions, and report any claims as soon as possible, even if all facts and damages are not yet known. Strategically document your claim in real time, including your claim preparation costs, and hire your own expert to evaluate the claim. Once you file a claim, seek a written coverage determination, and also seek a reconsideration of any denial of coverage. Consider engaging coverage counsel.

Again, coverage advice is impossible to provide in the abstract. If you have specific questions about your circumstances, please contact our insurance coverage attorneys.

This summary is provided as an informational tool. It is not intended to be and should not be considered legal advice, and receipt of this information does not establish an attorney-client relationship.