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Legal issues for managers during an epidemic

Jonathan Pray
Shareholder, Brownstein
Hyatt Farber Schreck

Over the last few weeks, coronavirus (COVID-19) has reached a pandemic level, creating a crisis for businesses across industries. Here are four legal questions we have considered in helping clients navigate this unprecedented situation.

1. Would business interruption insurance cover losses stemming from a pandemic?

Most businesses purchase some level of “business interruption” coverage as part of their commercial property insurance policies. But to what extent would this coverage apply in the event that a business suffers losses as a result of a potential or actual coronavirus pandemic?

Kevin Walsh
Shareholder, Brownstein
Hyatt Farber Schreck

Property insurance policies, by definition, are intended to cover casualties to the policyholder’s real and personal property. While many businesses will suffer business interruptions and lost profits as a result of a pandemic, before most property policies are triggered, however, two conditions must be met.

First, the loss must result from a covered cause of loss that is not excluded by the policy. Second, there must be a “direct physical loss of or damage to” insured property.

The “direct physical loss” requirement will be particularly important in determining whether losses resulting from a coronavirus outbreak will be covered under a property insurance policy. This is a fact specific inquiry. On one hand, there would likely be

Anna-Liisa Mullis
Shareholder, Brownstein
Hyatt Farber Schreck

coverage for losses resulting from the contamination of covered property, such as might be the case if an insured premises becomes uninhabitable because an employee who worked in the space contracted coronavirus. By contrast, if a business loses money merely because of a voluntary quarantine or a decline in the demand for its product, there would likely not be a “direct physical loss.”

Some property policies will contain specific endorsements for losses resulting from “communicable or infectious diseases,” and policyholders should determine whether their policy contains this type of endorsement.

2. Are you responsible for reporting coronavirus cases? Colorado law requires reporting known or suspected coronavirus cases and of any unusual illness, outbreak or epidemic of illnesses that may be of public concern, including cases of a newly recognized disease. The definition in the regulations of who must make such a report is exceedingly broad and requires that any “health care provider or other person knowing of or suspecting a case” must report.

“Other person” is defined to include, but is expressly not limited to, coroners, persons in charge of hospitals or other health care institutions as well as persons in charge of schools and licensed day care centers. Because this list is illustrative and not exhaustive, arguably it should be read broadly to mean what it says – that “any person having knowledge” must make a report.

Additionally, beyond state law, private businesses must evaluate whether they have any reporting obligations under federal law – including under the Occupational Safety and Health Act – or under local or municipal law. Private businesses that operate in multiple jurisdictions also should be aware of any additional or different reporting obligations in each jurisdiction in which they operate.

However, given the rapid development of the situation, government authorities may issue guidance narrowing who must report or may become so inundated that they are no longer able to take reports. For example, as of this writing, the Colorado Department of Public Health and Environment’s phone lines are answered by a message that the department is not currently taking any calls because of the high volume. Thus, it will be necessary to check current guidance at the time a report is contemplated.

3. What do nonhealth care businesses need to know about Health Insurance Portability and Accountability Act compliance during the coronavirus outbreak? HIPAA applies to “covered entities,” defined as health care clearinghouses, health care providers and health plans. Additionally, persons or entities performing services on behalf of a covered entity that involve the use or disclosure of protected health information – referred to as “business associates” – also must comply with HIPAA. If a business does not meet the definitions for a covered entity or business associate, it is not subject to HIPAA. This means that businesses that do not operate in or service the health care industry may not be required to comply with HIPAA.

One exception is that an employer-sponsored group health plan with more than 50 participants is considered a covered entity. There are specific HIPAA rules governing the relationship between an employer-sponsored group health plan and the employer who sponsors it, which are beyond the scope of this article. However, as businesses formulate their plans for managing coronavirus, it is important to undertake an analysis and determine whether they must comply with HIPAA – either directly, as a business associate, or as an employer-sponsored health plan.

4. What are parties’ rights under the AIA owner-contractor agreements in the event of a pandemic? A pandemic could dramatically affect the construction labor force and delay the delivery of materials – all of which could cause significant delays to the completion of projects.

But who bears the risk of these delays under the widely used AIA contract documents?

The contractor’s right to make a claim for delays and extensions of time is governed primarily by Section 8.3.1 of the AIA A201-2017 general conditions. As it is written in the standard form, that provision provides five grounds on which the contractor can make a delay claim. At least two of these grounds – “unusual delay in deliveries” and “other causes that … justify delay” – arguably give the contractor a basis for seeking an extension of time under the contract in the event of a pandemic. Indeed, Section 8.3.1 usually entitles the contractor to a time extension as a result of any delay that the parties couldn’t have anticipated when they entered into the contract.

By contrast, the owner has a right under the AIA agreements to suspend or terminate the contractor for convenience and without cause. In some cases, it may become attractive, or even necessary, for the owner to exercise its rights of suspension and/or termination to control the costs of the project.

Featured in CREJ’s April 2020 Property Management Quarterly

Edited by the Colorado Real Estate Journal staff.