“Spit-balling” Enterprise Risk in the Time of COVID – 19: What You Better Be Doing if You’re Not Already

The unprecedented circumstances in which we now live our days in the midst of the global COVID – 19 pandemic raise a plethora of unprecedented risk management issues for every entity you can imagine. While the variety of legal questions are enough to keep law professors rich in final exam questions and law review articles for the rest of their careers, legal counsel should be performing a risk audit NOW of any business for which they are responsible to provide advice and guidance during these unnerving times. Below is a lengthy, but certainly not exhaustive, list of areas that should be carefully probed. By now, you should have established a COVID – 19 team with other counsel, inside and out, as well as your other risk management service providers, key clients, and cross-functional clients. The failure to do so can raise serious ethical and fiduciary issues for any enterprise. Every entity’s board should be fully informed about these risks and the steps that are being taken.

The first and perhaps most difficult question is to assess the legal ramifications of the crazy quilt of local, state, and federal orders, advisories, and guidance that have been issued over the last week, and which continue to change, it seems, by the hour. The delay by the Federal government and continuing lack of uniform guidance creates tremendous complexity – posing problems that “could cross a Rabbi’s eyes.” There are three broad questions to consider: 1) which, if any, of these notices have the force of law; 2) which, if any, of these notices have the potential to establish a new standard of care that a prudent and reasonable business must meet; and, 3) to the extent an entity is already subject to an order or other set of regulations that may be inconsistent with any of these governmental notifications, which apply? With these questions as the key backdrop, the following areas need to be assessed and audited now:

Employment:

Have you taken the precautions that the CDC has recommended in order to provide a safe workplace? What if those recommendations differ from your industry’s standard or regulations that cover your industry? Will your failure to take such steps potentially lead to liability with your own workers and/or third parties who come in contact with your business operation?

There should be a similar set of questions addressed with respect to guidance on group gatherings, social distancing, and the like. Have you verified whether your business is “essential” or “non-essential”?

If you choose to continue to pay your work force if they are unable to work, will you create an implied labor contract if you have “at will” employees? If you are unionized, what does your collective bargaining agreement say, if anything, about this type of circumstance? For example, apparently the NBA’s player contracts specifically mention pandemics as a force majeure condition.

Litigation:

Are the courts “closed” where you have pending cases? Are they still accepting filings or have deadlines been extended or suspended? Many courts are still “open” for filings. If your business is now closed, is someone checking the mail for new lawsuits to make sure you avoid any potential default judgments since this situation may go on for several months?

Insurance:

Do you have any insurance that might respond to this situation? Some policies provide for business interruption damages – particularly property insurance. However, they usually require some kind of physical damage to trigger such “BI” coverage – but, depending on the applicable law, the presence of the virus in the workplace could provide such “damage.” Some companies buy special coverage which does not require physical damage. Some companies purchase “contingent business interruption” coverage in the event a critical customer or vendor is unable to perform, causing interruption to a company’s business. Some policies also provide crisis management coverage, which usually does not require physical damage.

Contract Liability:

You should be looking through every key contract you have (with vendors, customers, etc.) and reading the force majeure language. The specific language is the key as some provisions are broader than others. In the event you feel you have a legitimate basis to declare a condition of force majeure, you may need to put the other party on formal, written notice that you are exercising this provision. (To note, you should relook at your standard provisions anew given this situation.)

In the event you choose to excuse a party that owes you an obligation to perform, make sure to put the terms and conditions of such a “waiver” in writing (covering the length of any granted extension, conditions where it can be revoked, and the like).

If you cannot continue to conduct business or meet a specific contract obligation, can you make a reasonable common law argument if your contract does not provide necessary terms to excuse performance under traditional commercial impracticability or impossibility grounds? If so, put the other party on written notice ASAP.

Do you have the ability to mitigate your damages or the damages of the other party? If so, take reasonable steps to advise your client to do so and again, put the other party on written notice of same.

Regulatory Matters:

Are you subject to any orders or regulations which are inconsistent with, or with which you cannot comply because of, the extant governmental notices? If so, you need to determine which law applies. For example, if you are an industry governed largely by federal law, there could be a preemption argument to the extent the regulation is inconsistent with the state or local order. In addition, it’s important to make sure you check in with the regulating entity about the status of your compliance requirements at this time. For example, the Federal Railroad Administration put out an emergency order a few days ago offering to grant railroads exemptions and regulatory waivers.

Public Communications:

Counsel, and crisis management professionals, should be involved in drafting and reviewing all company communications to the public, to your employees, and to third parties for several reasons. First, these communications could create legal liability if they are not carefully drafted. Second, the tone and approach to these communications can impact your company’s public reputation, which can be very harmful in the future in defending litigation or possible post-hoc investigations of the actions your company has taken.

Governmental Assistance:

Make sure you are constantly up to date on different government announcements and programs that are being formulated instantaneously each day. For example, the Department of the Treasury announced that the due date for filing federal income tax returns and payment of federal income taxes will be postponed until July 15, 2020. Similarly, it appears a number of programs will be established at both the state and federal level to assist companies and employees. Make sure you have a team together that is following these developments so that you are in position to apply immediately for these programs and can satisfy them to mitigate losses to you or your employees.

Bankruptcy:

In the event you cannot continue in business or expect to not be able to meet your financial obligations, you may need to more pro-actively explore the pros and cons of this option. Of course, the bankruptcy courts will be in the same fix as everyone, so it will be worth checking to see how those courts are operating.

While lengthy, this is certainly not an exhaustive list of questions and issues. Many law firms and insurance brokers are putting out advisories and offering webinars to assist clients. You should be teaming internally and externally and spending the time and resources now to issue-spot and take ameliorative action. The resources and costs devoted now as this crisis unfolds will pale in comparison to what your company may lose by failing to continuously assess and respond to developments as they occur without a full audit. The best way to start is to identify your key enterprise risks, and start with those issues, contracts, etc. You know your company’s risk profile better than anyone and this is where you can add incalculable value. If you are not sure where to look for help, please contact the 10-Q and we can try to point you in the right direction. 

This article was updated on April 8, 2020, to reflect the issuance of Notice 2020-18 by the Department of the Treasury, which extended both the filing due date for federal income tax returns and the payment deadline for federal income taxes to July 15, 2020.

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