Coronavirus: PPP UPDATE; GLIMMERS OF HOPE FOR “BUSINESS INTERRUPTION” COVERAGE?
More Fun with PPP. The scramble by cooperatives and condominiums for a definitive decision about eligibility for Paycheck Protection Program loans has generated further confusion. The list of Frequently Asked Questions published by the SBA on April 24th included this one:
“35. Question: Are agricultural and other forms of cooperatives eligible to receive PPP loans?
“Answer: As long as other PPP eligibility requirements are met, small agricultural cooperatives and other cooperatives may receive PPP loans.” [Emphasis added.]
Armed with that response, more cooperatives and condominiums crowded to the plate. However, later in the week a reputable sister law firm published a conversation with an SBA representative holding an impressive title, in which the representative stated that the above answer was “a bit confusing,” and repeating the portion of the SBA regulations providing that applicants for an SBA loan had to be an “agricultural cooperative or for-profit business entity.” Based on that, the law firm recommended that all co-ops and condos who have received loans return them by May 7th (the “safe harbor” date for the return of improperly taken loans under current SBA rules).
Are cooperatives “for-profit business entities”? New York State cooperatives are organized under the Business Corporation Law, like typical business concerns. They raise money to pay for operating expenses. A cooperative lacking commercial tenants has only one source of funds, its shareholders, so it charges them for their share of costs (let’s call it a “continuous capital call”). A cooperative with commercial space, though, needs less capital from its shareholders to survive, so it charges what the market will bear and makes up the deficiency by seeking less from its shareholders.
Above a certain point, shareholders are disqualified from taking deductions for mortgage interest and real estate taxes paid by the building on shareholders’ individual returns. The same Section 216 of the Internal Revenue Code that sets the threshold for special shareholder tax deductions, though, also declares that a cooperative corporation cannot make any distributions to shareholders “except out of earnings and profits.” [Emphasis added.] So the more money that a cooperative received from commercial tenants, the less its shareholders have to contribute to maintain their homes. And if commercial income exceeds operating expenses, the difference can be distributed to shareholders as – profit, without violating any tax laws or requiring any change in its organizational structure. We leave it to the reader to decide whether cooperatives are organized and operated as “for-profit” entities, regardless of whether most of them actually make a profit.
No “Double-Dipping” for PPP Loan Recipients. The IRS has announced that anyone who receives forgiveness on a PPP loan cannot also deduct for income tax purposes the expenses that the forgiven portion of the PPP loan was used to pay. It says something about the creativity[?] of “for-profit business entities” that the IRS feels the need to publish that rule.
Pennsylvania Supreme Court Defines Coronavirus as “Natural Disaster.” Does This Support Claims of “Damage” for Businesses Forced to Close due to Lockdowns?
In Friends of Danny DeVito et al. v. Tom Wolf, Governor et al., the plaintiffs – various types of businesses affected by the Pa. Governor’s Executive Order shutting down “non-life-sustaining” businesses due to COVID-19 — argued that the Governor lacked the legal authority to issue such a broad order. They asserted that a broad lockdown was excessive because their individual businesses could be operated with appropriate safeguards in place. The defendant State argued that in a public health emergency, the Governor had the authority to issue broad orders to protect the public at large, and that the Order was the only reasonable way to stop the spread of the disease.
As detailed in an article by attorney Donald Ottaunick in the Insurance Journal on May 1, 2020, the Pennsylvania Supreme Court ruled that the Governor had the authority to protect the public from “damage, injury and loss of life and property resulting from disasters,” and that power included the ability to order the shutdown of certain business and other operations. More important, the Court stated that COVID-19 qualified as a “natural disaster” that would justify the actions taken by the Governor.
In Pennsylvania, a natural disaster includes events which create “substantial damage to property, hardship, suffering or possible loss of life.” Because the Coronavirus can spread so quickly and unpredictably, any business might lie within a potential disaster area. Accordingly, the Pennsylvania Executive Order, like other states’ orders, is a declaration that business property [throughout the state] is deemed to be “damaged” by a “natural disaster” (coronavirus) and hence unsafe and subject to closure.
“Insurance companies are denying coverage for business income losses under standard property insurance policies based in part on the policy requirement that the loss must be caused by ‘direct physical damage to insured property’ and that the coronavirus does not cause such damage,” states Mr. Ottaunick. “Based on DeVito, if a pandemic is indistinguishable from other natural disasters where coverage for losses would be expected, insurance companies may have a difficult time maintaining a denial of coverage on that basis alone.”
New York law also allows the governor to issue Executive Orders in the event of a “disaster.” A “disaster” is “the occurrence or imminent threat of wide spread or severe damage, injury, or loss of life or property resulting from any natural or man-made causes…” Could New York’s definition of a “disaster” be applied in the same manner so that businesses could be construed to have suffered a “loss” or been “damaged” by the pandemic so as to qualify for business interruption coverage under their policies?
Why Policy Holders Should File Business Interruption Claims.
There are multiple pending lawsuits seeking to clarify the question of whether businesses may claim business interruption coverage. Among other arguments, they assert that 1) coverage is available because the closure was mandated by “civil authority”; 2) there is a meaningful distinction between a “direct physical loss of property” and “damage to property”; and that 3) certain “all-risk” policies cover losses from the pandemic because the language of the policies does not expressly exclude such coverage. The decision by Pennsylvania’s highest Court supports arguments that COVID-19 related closures are the result of “civil authority”, and that the loss of use of a property for its intended purpose might trigger coverage.
The bottom line is that policy holders should not be discouraged from filing a claim and that they should do so using the broadest possible language to describe the nature of their claim. A simple claim letter stating that the insured is seeking any and all possible coverage under their policy for losses sustained by the COVID-19 pandemic is a prudent step. Receiving a denial of claim is not the end of the story since policy holders then have the ability to appeal that determination. Until these issues are resolved by the courts, policy holders should not assume that they have no coverage for their losses.