LEGAL/LEGISLATIVE ALERT FOR JUNE, 2020

Published on: May 27, 2020

LEGAL FOOTING

Companies have been seeking a legal foothold to support their claim that business interruption insurance should cover losses resulting from government-ordered pandemic shutdowns. A recent decision by the Pennsylvania Supreme Court may have provided one.

The case wasn’t precisely on point (it didn’t involve an insurance claim), but it did address a key question: Whether the pandemic has caused property damage – a prerequisite for business interruption coverage under most insurance policies. Insurers cite standard policy language, restricting the coverage to occurrences resulting in direct physical loss” to an insured property, as the basis for denying pandemic-related claims. Although the pandemic disrupts business activities and the revenue they generate, insurers contend, it does not physically damage property.

In this Pennsylvania case (Friends of DeVito, et al v. Tom Wolf, Governor, et al.), four businesses challenged the state order closing “non-life sustaining” businesses, arguing that they should be allowed to operate if they used appropriate measures to reduce contagion risks. The state Supreme Court upheld the lockdown order, ruling that the governor has broad authority to protect the public from “damage, injury and loss of life and property resulting from disasters.”

Significantly, the court held that COVID-19 qualified as a “natural disaster,” which the Pennsylvania Emergency Code defines as “any hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property (emphasis added), hardship, suffering or possible loss of life.

Like other natural disasters, the court noted, the pandemic involves “substantial damage to property, hardship, suffering or possible loss of life.” The court rejected the argument that the disease must actually be present at a specific location before it can be deemed to have suffered damage requiring it to be shut down. Because of the way the virus is spread (from person to person) and the length of time it can live on surfaces, any business is by definition within the pandemic disaster area and is damaged as a result, the court ruled.

The decision will bolster the argument of companies seeking business interruption coverage for their pandemic-induced losses, an article in JD Supra predicts. “If a pandemic is indistinguishable from other natural disasters where coverage for losses would be expected,” the article notes, “insurance companies may have a difficult time maintaining a denial of coverage on that basis alone.”

NO SURPRISE ─ JUST BAD

We knew the April labor report was going to be bad, and it was. “Dismal.” “Devastating.” “Catastrophic.” Economists, who usually refrain from hyperbole, gave in to it in the face of statistics unlike any they had ever seen or expected to see. The economy shed 20.5 million jobs for the month and the unemployment rate hit 14.7 percent, both numbers shattering previous records.

It is not just the size of the “devastation,” but the speed with which it has occurred, Nick Bunker, an economist at Indeed, a worldwide employment search engine, told Business Insider. “The fact that we’re seeing magnitudes that big in [just] two months, it’s hard to wrap your mind around,” he said. It is also hard to believe that just two months ago, the economy was churning out an average of 150,000 jobs a month and the unemployment rate was 3.5 percent – a 50-year low.

Hourly wages increased in April, but that wasn’t good news. It indicates that low-wage workers have borne the brunt of the job losses. And we haven’t seen the worst of those losses yet, private sector economists and government officials agree. Kevin Hassett, a White House adviser, has cautioned that the unemployment rate could hit 20 percent by June. What happens after that depends on how quickly, and how strongly, the economy rebounds.

The hope, expressed by some analysts, is that many of the unemployed workers will be rehired as states lift their lockdowns and the economy shifts from reverse into drive. “If that is true, this will be the shortest depression in history,” Robert Frick, chief economist for Navy Federal Credit Union, suggested.

The fear, shared by many, is that some of the businesses shuttered during the pandemic won’t reopen and temporary job losses will become permanent. The even greater fear, also widely shared, is that states easing COVID-19 restrictions too early, without adequate strategies for containing future outbreaks, could be forced to backtrack, kneecapping any fledgling recovery before it gains traction.

SHAPING THE RECOVERY

“Swoosh,” symbolized by the Nike logo, suggests the impressive speed of a runner. But it also describes the shape of the post-pandemic recovery many analysts are predicting ─ a steep decline followed by a prolonged recovery. That’s a far cry from the V-shape (steep drop and then a rapid return to pre-pandemic conditions) analysts had been expecting before the depth of the pandemic’s impact, medical and financial, became clear.

A second wave of infections in the fall, whicih many health experts are predicting is more likely than not, will give the “swoosh”-shaped recovery a jagged edge, in which the economy recovers in fits and starts – two or three steps forward, one or two steps back.

The less than upbeat outlook reflects the slow pace with which many local and state governments are relaxing lockdowns, the even slower pace with which consumers are expected to be comfortable resuming normal activities, even when they are free to do so, and the staggering job losses that have decimated household finances.

The Congressional Budget Office (CBO) is predicting that employment will remain well below pre-pandemic levels through the end of next year. The CBO also estimates that the nation’s Gross Domestic Product (GDP) for the second quarter of this year will fall 11.2 percent below the first quarter rate.

More than 70 percent of the consumers responding to a Coresight Research survey said they expect to avoid some public spaces after lockdowns end; more than half said they are reducing their holiday shopping plans this year.

“This is not going to be a quick recovery,” said Mark Schneider, chief executive of Nestlé SA, told the Wall Street Journal. “This is going to be a several-quarter, if not several-year kind of process.”

WHO NEEDS OFFICE SPACE?

The title of a book by humorist James Thurber asked, “Is Sex Necessary?” Some business executives are beginning to ask the same question about office space – not is it necessary, but will companies need as much of it in the future as they have in the past. The question arises because hundreds of thousands of employees have been forced to work from home to comply with local and state shelter-in-place orders. The experience has demonstrated to workers and managers, that many jobs can be performed as productively – and in some cases, even more productively, from home – challenging contrary assumptions that have slowed the growth of flexible work-from-home assignments in many business sectors.

Virtually all (96 percent) of the executives responding to a J.P. Morgan survey in April said they were working from home, half of them for the first time. More than three quarters described the experience as positive and 83 percent said like to work more often from home when the lock-downs end. “If feels to us as if offices are likely to continue seeing headwinds until a new norm is found,” the survey’s authors concluded.

Some industry executives – Twitter CEO Jack Dorsey among them – are predicting that many employees will work from home indefinitely, possibly “forever,” suggesting that the headwinds for the office market may turn into a wall. Analysts at UBS are less pessimistic.

““We believe it is too early to write the epitaph for the entire office sector as there are a number of counterbalancing forces at work,” Jonathan Woloshin, UBS analyst for real estate and lodging, told CNBC.

“However, the realities are that landlords, companies and tenants alike will all be forced to improvise, adapt and overcome a number of challenges in the post COVID-19 world,” he acknowledged, and those adjustments will likely include at least some increase in the work-from-home option for employees.

CONDO LOCKDOWN

As the pandemic has unfolded, condominium industry professionals have been debating how much authority association boards have to restrict the movements of residents and monitor their health in order to control infection risks in their communities. Many have limited outside visitors or barred them entirely; some have required owners to self-report if they have contracted the virus or been exposed to it. But none have gone as far as local authorities in Kuala Lumpur, who locked down an entire 500-unit condominium after 17 residents contracted COVID-19. The Enhanced Movement Control Order issued by the country’s defense minister requires the 3,200 residents to remain in their units for two weeks and prohibits outsiders from entering the building. Health department representatives will conduct “unit-by-unit,” contract tracing exercises during the lockdown, government officials said. Police and military personnel will be stationed around the building to enforce the order. The Kuala Lampur government previously locked down two cities identified as virus hotspots, but this is the first time they have targeted a specific building.

IN CASE YOU MISSED THIS

States with the largest concentration of COVID-19 cases are getting proportionately less help from the small business loans than states where the impact has been less severe.

Previous economic downturns have triggered a major sell-off of private jets, but not this one. The relative safety of flying in a private jet with few passengers, vs. a commercial jet with hundreds of them, has led owners concerned about contracting COVID-19 to hang on to the equipment they own. “So far, you can’t pry private jets from owners’ hands, despite crazy economic gyrations that would normally spook them into selling,” an aviation analyst told the Wichita Business Journal.

Families sheltering at home are generating considerably more trash, and waste management firms want to charge them more for removing it.

Fannie Mae’s Home Purchase Sentiment Index fell to a nine-year low in April. Sellers are most depressed – 65 percent of the respondents said this is not a good time to sell, compared with 36 percent in March.

Before the pandemic began to smother the housing market in April, home ownership had reached its highest level in nearly seven years. The 65.3 percent mark in the first quarter of this year tied the rate for the third quarter of 2013.

LEGAL BRIEF

GROUP HOUSING ACCOMMODATION

Condominium associations challenging requests from residents seeking fair housing accommodations must demonstrate that the accommodations are unnecessary or would impose unreasonable administrative or economic burdens on the community. The association in this dispute (Harmony Haus Westlake v. Parkstone Property Owners Association) fell short on both counts.

The plaintiff, Harmony Haus, operates group homes for individuals recovering from alcohol or drug addictions, and purchased a residence in this Texas HOA for that purpose. The City of Austin approved a rooming house license allowing 12 unrelated individuals to occupy the home. Harmony then asked Parkstone to waive covenants prohibiting business uses for the property and limiting on-street parking so that 12 individuals could occupy the group home and up to 8 cars could be parked on the street. Parkstone agreed to waive the restriction on non-residential use, but said it would allow no more than 6 unrelated residents in the home, would not ease the parking restrictions, and would fully enforce noise restrictions and other nuisance provisions in the covenants against the occupants.

Harmony said its phased recovery model required a minimum of 12 residents to prevent isolation and to provide a mix of residents, including some further along in the recovery process to monitor those in earlier recovery stages. When Parkstone refused to grant the accommodations, Harmony sued the association for violating the Fair Housing Act’s requirement that disabled individuals have an equal opportunity “to use and enjoy” their dwelling.

Focusing first on the base line issue – whether the accommodations sought were necessary – the Texas Appeals Court ruled that Harmony had demonstrated that a minimum of 12 residents were needed to create the “critical mass” required for residents to enjoy fully the therapeutic benefits of the group housing structure.

Parkstone had argued that Harmony had failed to prove that 12 residents were required to make the program financially viable, and the court agreed. But the lack of financial necessity “was not fatal” to Harmony’s Fair Housing claim, the court said, because the organization “is not required to prove both therapeutic and economic necessity.” Economic viability is only “one means of showing necessity,” the court explained, and failure to establish it “does not diminish the persuasiveness of [the] evidence showing that 12 is a necessary number from a therapeutic standpoint.”

While Harmony had met its evidentiary burden – demonstrating the need for the accommodation—the court said, Parkstone had not supported its contention that the accommodation would impose an undue financial burden on the community. “In balancing the needs of the parties and examining the particular circumstances,” the court ruled, “nothing indicates that having 12 residents rather than six would impose an undue hardship or would require a fundamental alteration” in the nature of the community.

Parkstone’s willingness to allow six unrelated individuals to live in the home indicates that its concern “was the number of residents, not their relatedness,” the court noted. “And there is nothing in the Declaration that limits the number of persons who can live in the home.”

The court was also unpersuaded by Parkstone’s concerns about increased traffic in the community, or the risk that on-street parking might impede access by emergency vehicles. Although Parkstone presented evidence that the six Harmony Haus residents already living in the home parked on both sides of the street, the court noted, Harmony Haus presented evidence that Parkstone residents do the same thing. Moreover, the court noted, the city expressed no concern about on-street parking when it approved the lodging house license for the home. “Any potential double parking (which itself does not violate the Declaration) does not fundamentally alter the nature of Parkstone or itself impose any undue hardship distinct from the hardship all Parkstone residents place by parking on both sides of the street,” the court said.

As for Parkstone’s refusal to waive its rules on noise and nuisance behavior, the court noted, Harmony Haus did not request an exemption for its residents. ‘Nothing here suggests that Harmony Haus residents have free reign to violate any provisions of the Declaration,” the court said. “Each resident is expected to know all relevant deed restrictions,” and Parkstone is free to enforce those restrictions against all residents, including occupants of the group home, however, the court emphasized, “any such enforcement must be applied in an evenhanded manner that treats handicapped and non-handicapped residents alike.”

WORTH QUOTING:

“This crisis must serve as a wake-up call and a call to action for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years.” ─ Jamie Dimon, Chief Executive, J.P. Morgan Chase


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island, and New Hampshire.