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Unbridled Capital

Season 2 Episode 6: Business Interruption Insurance

Podcast

05.19.2020

Also Listen On:

After franchisees solve for their P3 stimulus funding, the next big shoe to drop is Business Interruption Insurance. Insurers won’t want to pay, and franchisees need to collect. In a COVID-19 world, how does this issue get resolved? The answer greatly impacts the profitability of the franchise community.

Rick is joined by Allan Kanner, a Harvard-trained lawyer, and expert in the fields of complex litigation and consumer fraud, to discuss this issue and more.

Transcript:

Welcome to The Restaurant Boiler Room, season two, episode six. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in The Boiler Room, we infuse a recent webinar conversation with Allan Canter who specializes as an attorney in business interruption insurance, the next shoe to drop post-COVID-19. The Restaurant Boiler Room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www.unbridledcapital.com. Now, let's enter The Boiler Room.

Well, thank you guys for thank you guys for joining. Thanks for the initial thing here. We'll get going in two or three minutes. Before we get started, I'll just say a couple of things. Thank you guys. Those of you who attended the last webinar that we did, it was two weeks ago. If you didn't make it and you're on this call, on this webinar, drop me an email. I was just rapping on about what I think is going to happen, what's the current M&A market look like from both the franchise M&A and real estate M&A perspective and what I think it will happen in the next three, six, nine, and 12 months. And so it was pretty well attended. Folks liked it. If you want a copy of it, all you got to do is holler. You can go to our website, which is www.unbridledcapital.com.

Up on the top, right there, there's going to be a yellow box or a yellow button. You can hit that button and you can subscribe or join our database. I do webinars now every two weeks. It's a lot of work, but I love it though. I do podcasts, videos, obviously our main business is M&A work. So we help franchisees and franchisers sell and finance their businesses and to that extent, we can get to know you and put you on our database so that you can see some of the deal flow that we do. That's cool too. And also once you're on the database, you can reach out to questions and ask questions of us anytime. We have two upcoming webinars after today and I'll mention those real quickly. I'm pretty excited about both of them. On Tuesday, may the 19th at two o'clock Eastern time, we're going to have Monroe Moxness Berg, MMB.

It's a law firm out of Minneapolis that does almost exclusively M&A franchise matters as the practice goes. Dennis Monroe is a stalwart in the industry that you know and so he's been around and writes articles all over the place. So Tim Ring of MMB is going to come on with me and talk about the legal attacks and the accounting and compliance features of the PPP forgiveness program, which I know is going to be important to everybody, right? You're going to want to know how to get the money that you've borrowed forgiven as expeditiously as possible with as little interference with the government or banks. So the police stay tuned for that expect. That's going to be great. And on Tuesday, June the 2nd at 2:00 PM Eastern time, I've got John Hamburger of the Franchise Times.

And so John's the president of the Franchise Times. John's again, been in the business a long time. We're honored to have him come aboard, and he's going to be talking with me about the lending market and what that looks like as of June 2nd and then what it's supposed to look like we think in our opinion over the next six to nine to 12 months. You can't get many lenders, some of your lenders are listening to this, but you can't get lenders to give a lot of advice because of compliance reasons. So John and I become the defacto of lenders because we talked to lenders all the time so that ought to be a good presentation. Today I'm honored to be here with Alan, and let me tell you just a little bit, we all pay for insurance, right?

I pay for insurance. You pay for insurance. We pay for insurance for our cars, our health, we pay for insurance in case we have a lighting strike in our house or a flood in our front porch or whether we get a heart attack, our businesses as well. And just like most of you who are franchisees have business insurance, I do too and I have a rider on my insurance that has business interruption. And the whole idea with insurance is you pay for it faithfully year after year so when a tragedy or a problem happens, you can approach your insurer and produce a claim. And I've been denied my claim, I went to travelers insurance and I asked them and they said, "Well, viruses aren't covered." And of course, I thought to myself, well, this isn't a virus. This is a government shutdown.

But through this process, I just got to know Alan, Alan was referred to me through a pizza hut franchisee who's a very good friend of mine, a well-connected awesome guy. And he told me, he said, "Listen, you've got to talk with Alan. He's the best in the business at commercial litigation and business interruption." And so I said okay, so here we are with Alan and he's Harvard trained, he's done all kinds of crazy assignments and work with Katrina and Three Mile Island and Superstorm Sandy and all these catastrophes and all these things where businesses were interrupted so he's got great experience here. You know me, I like to talk but in this particular narrow area of the world, I don't know a whole lot. So I'm going to do mostly listening once I introduce Alan and let him talk.

As you see over to the right, if you want to ask any questions along the way, please feel free to hammer them out and we'll we'll keep an eye on them and make sure they get answered either during the webinar or afterwards. And then last thing I just say, man, I don't make any money for doing this. This is a service that I'm providing to you, the franchisee, that's all this is. Certainly. I hope you look at me and say, this guy's an expert. So when it's time to sell or finance my company, you come to Rick in Unbridled Capital, but there's nothing in this for me, except for really a pure heart to help you all like myself to explain and understand if there is for you personally, a way to recover funds as part of this coronavirus issue. And the last thing I'll say is, I'm really happy that Alan has agreed to everyone who's on the call I guess, to do a policy review for free for them.

Now if you decide to take him up on that and his expertise, and he comes back to you and says, this is something that you have a claim here. Your policy is legitimate or there's a reasonable doubt here and I'm willing to take it. He's going to pro those fees and success fees. I'm not sure exactly how his fees work, but the point is you now have someone who's very experienced, well recommended, very well-trained who's here to not only provide information for you, but also to give your policy a look if you're interested in doing so. And I thought that's pretty cool and that's pretty valuable. So thank you to Alan. And I'm going to share the screen now if that's okay and see if we can just get rocking and rolling. Alan, can you see the screen okay?

Yeah. Fine.

Yeah. All right. Rock and roll. So you know me, Rick Ormsby on Unbridled Capital, and I'll just kick it off to Alan. You mind doing a quick introduction of yourself Alan?

Sure. I've been at this 40 years. I do environmental commercial litigation, I do insurance coverage, first party insurance. I handled first party cases after Three Mile Island, I handled first party cases after Katrina, I superstorm Sandy and learned a lot obviously about first party cases where there wasn't a disaster, but there's some big differences that you learn in how to handle a post disaster situation.

You're a New Orleans bound, right? That's where you call home, correct?

Yes, it is. But we practice all over the country.

Sure. I'll jump in and maybe say a thing or two or ask a question.

If you don't need more information about me, you can call my mother. She'll give you the whole thing.

Yeah. If a mother or sister will say all the bad stuff though.

Exactly.

Oh, too funny. We're going to talk about the issue at hand, right? Alan's going to address that first. And then the major question to people who are on this call is, why does it matter to you? What do you stand to gain by listening to this other than just another darn webinar that people are just talking heads. So we hope to pump value into this conversation. The third is, Alan's going to talk a little bit about the insurance counter-argument, right? How they're going to push back and try to prevent a claim from occurring. And then he's going to go into a little bit of the technicalities of policy details and definitions, and then give you maybe a landscape view of what you can do from here.

I want to be quick to say that it is probable, that many of you don't have a legitimate claim, right? It is probable. But the point of this webinar is to educate you and to get this issue in front of you so that you can get a reliable and professional opinion to see whether you do have a claim, because otherwise what's going to happen? You're going to call your insurance broker and what are they going to say 100 times out of 100? It ain't covered, right? That's what they're going to say. They're all going to say that. And so that's the point of today, but I want to be clear that not everyone's going to have a claim. I don't want to pretend like neither myself nor Alan feel that's the case. Alan, the floor is yours my friend. Go for it.

As I suggested earlier, there's a big difference in the way insurance companies handle claims after a mass disaster versus business as usual. A lot of people have good experiences. Maybe their CFO filed the claim a few years ago after something was damaged and they got paid and they tend to trust the insurance in the street. I can tell you that in virtually all of these disasters, the insurance industry changes, here more than I've ever seen before simply because of the potential level of exposure that you're talking about. This kind of switch in business as usual was well documented after Superstorm Sandy, Congress had a committee look at the issue. So it's not a normal situation. Virtually everybody I know has gotten their claims denied. Denial of a claim doesn't mean anything, or they haven't looked or the claim was denied. Often you can go back to the insurer, they have a continuing duty to investigate.

We sent some letters to people, at least one case about a million dollars of coverage suddenly came out that they agreed to. I think there's more that's owed there but at least you turn a denial around and got it reinvestigated. Generally if you do get denied, your next recourse is to go to court and file a declaratory judgment action to get your interpretation of the policy covered. We're also hearing in the media about all these class actions being filed and multi-district litigation and whatnot. Generally for the policy holder, that's bad news. Class actions are not going to resolve your problem. My favor modus operandi in these cases is to just work directly with the insurer, try to get my guy or gal, everything they're entitled to at the front end quickly discretely and move on.

Class actions will create a huge bottleneck on the legal system I think which may end up delaying a lot of people's claims. In addition, when somebody files a class action, they may not do it wisely in the sense that they may help the insurer say, well, there was a class action so my duty to investigate went away and suddenly your bad faith claim gets ruined. I don't encourage people to file for bad faith or punitive damages, in general, get your money back and get back to business. But it is a stick that you have to get a fair settlement is the fact that they're at risk for that. Hate to have that go away. I've seen many policies have a valid claim even after people have looked at it. In your space, I have seen a lot of franchisees.

I've got a bunch of clients. A lot of them have extended restaurant endorsement coverage and there's a little provision in there about food poisoning, and food poisoning is defined in part as a communicable disease. That gives you a hook for coverage. Now most of those policies do not come with a virus, exclusion, some do. But what's the law going to say, you paid extra money for communicable disease coverage including viruses. That language about virus exclusion may get kicked out by the courts. Also virus exclusions they aren't really good and I think are going to fall for various reasons that I'm happy to get into and not everybody will be able to collect. That's just the realities, but the truth is everybody's fighting for their businesses right now, everybody I know try to get PPP money and many of them were successful. That's helpful. This could potentially be helpful as well.

One of the great things about business interruption insurance is that you've got coverage in what's called the period of restoration. You're entitled to all the income you would have had but for the covered incidents, that's what business interruption generally protects. There are different definitions of business interruption in your policy. And some people will get extended coverage or expanded coverage or the restaurant endorsement coverage will find that they've got even longer period of restoration. I've seen a number of policies, 365 days of coverage. For that period of restoration, you're also entitled to extra expense money. The extra expense money is going to help you get back to normal. Since we don't know what the new normal is really going to look like, that money I think becomes all the more important to people. Some people also have what's called contingent business interruption. That's going to help with supply chains.

I heard today that some of the meat processors are now having issues with their facilities so there may be supply chain problems that follow on the closure problem. As we try to get into a period of recovery in this country and restoration as they say in the insurance industry. And rule number one, I just want to say one last thing about this, it's the policy, you got to read the policy. And a lot of times the policies are just a puzzle. You get a definition of covered cause losses then you get another part 300 declarations away that says, oh, covered cause of losses also includes a communicable disease. And so it really is a lot of CSI as you go through these policies and I enjoy doing that.

It's fun because I think they write these policies this way to discourage people from making claims. There's a lot of policies out there. According to industry statistics, potentially hundreds of billions of dollars are at stake with whether businesses without the buyer's exclusion. But with business interruption, if all of those people recover it, the numbers should be in the billions. I'm not trying to give anybody legal advice here today, I'm trying to give you the lay of the land, but when the time comes, you've got to look at the policy, you've got to have a experienced professional read the policy for you, not your CFO, not your broker, not your accountant, not the lawyer often who does your regular business work because this is a once in a lifetime situation and we've been able to find a lot of relief for people who haven't had it and in other cases we moved on and we're putting cases in suit as we go.

What I find interesting is to give the analogy Alan of maybe the PPP loan process, right? So what I got out of this slide when we first started talking about it was, everyone started to hear this idea about class action lawsuits coming out and it would be as if the franchisees on the phone were waiting to submit their PPP money together as one big group to Wells-Fargo, whatever bank it would be, to get their loan approved right together as a group. Well, no one did that. Everyone was aware that there's only so much money to be had and time was of the essence and so a lot of our clients pivoted to different types of banks, community banks, regional banks, to get their PPP money quickly because I knew it was going to run out and they knew that they could get the money quickly and efficiently and get it in a different way.

And maybe that's a silly sort of analogy to what you're describing. If you sit around waiting for a class action lawsuit to happen, they're likely to do what happened when I was buying internet stocks in 2001 and they went to zero, right? You just sat there and a group of 5,000 shareholders and ended up with a penny at the end of it as opposed to going in more proactively before, and not part of the class action lawsuit potentially in trying to fight for your own particular individual case. I sound like an attorney. I'm not obviously.

The truth is one class actions are group discounts of the highest order. Sometimes people do only get pennies on the dollar, sometimes I win a class action for police officers all over the country for bullet proof vests. We got them 100 cents on the dollar. But the thing is the business person wants to make their own decision. And I've talked to a lot of guys, they said, "Look, you can give me 60 cents on the dollar in 30 days, that's what I want to do. And you don't really want a lawyer you've never met making a decision about whether to settle at 10 cents on the dollar or drag it out for 20 years to get a hope that 50/50 shot it, 100 cents on the dollar. One of the things about having personalized representation is it gives you the ability to take your asset and monetize it in the best way possible.

And I think why does is it matter to you because it's money and money matters right now?.I don't mean to be crass about it but the industry is going through a rough time. Most of the closure orders really, lots of businesses were hammered but none worse than restaurants, at least without drive-throughs. Many people I find have bought extended restaurant protection and coverage. I think that that means that as a class, the restaurant tours are going to do better than other segments of society. So if you've had a bad experience with a policy because you also have a deep car dealership, you're going to have a different type of policy if you did anything above the bare minimum, it's called restaurant endorsement. Sometimes one policy is called reputation protection. If you've looked at the deck sheet and say, well, it's not a reputation problem. I got nothing there.

So I would say as a class in America of all the businesses that I've seen, restaurants and some hotels, they have a hospitality endorsement that's similar to that. What they usually give you is communicable disease coverage. Now for example, I just looked at a policy yesterday from New York. There is a virus exclusion but it specifically says does not apply to any coverages under food contamination which we talked about earlier is communicable disease. The amounts can be substantial under the policy. There are some policies. I have a fellow who's got a law firm, 500,000 a month in revenues for these advertising guys. All he had was 40,000 in extra expense, no business interruption coverage. All right, it's your choice but we have cases where people have been able, because of the levels of coverage under the policies, often in the tens of millions, hundreds of millions, I have a couple of medical facilities that are in the billions.

So there can be a lot of money out there. Then it's your client, you want to manage it, you go through a court, it could take you two to three years. And that's what I would typically tell a client. But now you've got this overlay of class actions. A lot of times we use the declaratory judgment action that I mentioned earlier to get the other side detention judge rules, yeah, of course you can't read it like that or you should read it the way Mr. Cantor says to read it. And once you get some good law like that, they've got to go back to the table. They will go back to the table. Right now I think what a lot of the insurance industry is doing is spending their time telling almost everybody no and lobbying Congress to try to get a bail out on some of this money.

That's not all bad news for you as a policy holder, obviously it's bad news you're getting stonewalled, but they realize they have to pay, they just want to get some federal dollars on that. And possibly even without the restaurant endorsement, if you have terrorism coverage, they may try to funnel some of it through terrorism. These are all proposals that are up in the air right now. And I don't know where it comes out but I tend to think that more of a global solution would come in, maybe the restaurants with the endorsement. They've been pretty high profile, they've had a chance to meet with the President so that may be the first part of this. So there's a lot going on politically to other things to think about which state you're in. And by the way, if you own an LLC, and I think the fellow next week can corroborate this, you can file wherever the members of the LLC live. You got to think about where you're going to file your case both in terms of the speed of getting it resolved.

Alan, how do you think about that? Shed a little bit of light on the States for us without maybe being too political. A lot of people on this call have restaurants and operations in 10 or 12, 15 States as an example, you know what I mean? So maybe that's an idea to expand upon.

I think Florida has good law. I think New York has good law. Pennsylvania has very good law and they recently had a Supreme Court decision. It wasn't precisely an insurance case, it was about the governor's power to do the lockdown, but the way they discussed it was very, very favorable for coverage in Pennsylvania. California has good law. The other variable in that, I'm mentioning a couple of States but on the other hand, New Jersey has very good law also, but New Jersey legislature, New York legislature, Florida legislature, Louisiana legislature, Illinois legislature, are in the process of trying to pass laws that will basically make the virus exclusion not apply to those States could be dynamic. After that you've got the state insurance commissioners who we rarely know who they are except they come around for political contribution, but the insurance commissioners are out there.

They're seeing an opportunity. I know in New York, California to find out why people aren't getting paid. So they're going to start having market conduct exams which is going to raise the pressure in certain places. So you got to look at this nationally. In addition to the insurance commissioners, the state's attorneys, generals are starting to issue opinions, legal opinions. They're not binding what they're supposed to influence courts about how these policies should be construed. And the last word out of the White House was that the President has William Barr. There was a famous press conference where he talked about business interruption to offer a legal opinion about coverage in these cases, which I think would create a lot of momentum and credibility and maybe move things along, but still not change the basic idea that trying to work it out one-on-one with the insurance company, they know these risks are moving as well.

They don't necessarily want to end up in litigation if at all possible, but all of these become leverage to getting a deal done sooner rather than later. And you've got to be in that loop I think to really see how it plays out and the best circumstances for you. The insurance industry has pushed back vigorously in aftermath disasters, I forgot to mention 9/11. A lot of people in transportation and hospitality because there was a slowdown in travel. I had argued that they had coverage because of the physical damage to the Twin Towers. The courts didn't like that argument and they were fairly successful and they've come out of the box here of no physical damage and virus exclusion. A couple of things, some policies say direct physical loss. That's what they're relying upon in 9/11 and the physical damage issue.

But some policies say loss of use as well or loss of use. In other words if there's contamination or suspect contamination in your building and you can't use it, or if a government authority basically says you can't use it, there isn't access to it that some courts have said, that's the same as physical damage for purposes of coverage and that's really all you need. In a number of States, that is not a major hurdle. It is not an insignificant one, but depending on the law in that jurisdiction, I can give you a pretty good idea of what your odds are. Virus exclusion. Question is what is the virus exclusion? It came out after SARS in 2004. Before that they were using something for fungi and microbes. The court said we're not broad enough. By the way, I still have some policies today from people including my own.

For my business it says, we don't cover fungi, wet rock, dry rock, microbes. I feel pretty confident the courts are not going to enforce that as a virus exclusion. With respect to the virus exclusion that came in after SARS, a lot of what the industry was saying is that they were not excluding pandemics and associated civil authority losses. So there is some industry related information that could help tear down the virus exclusion, though right now if I had to pick the best cases, I would still prefer a case with no virus exclusion, but the industry works with something called ISO, the insurance people, and they do some standardized form. And when those forms get filed with the States, there was information provided about the meaning of those forms and that often gets used in litigation as well. I usually buy a policy holder to say, you didn't intend to go this far and there's stuff that's outside of your contract that the courts have recognized, and one of them is reasonable expectation test.

What did you reasonably expect? That the virus exclusion would handle civil shutdown of your business? Probably not. So that may be another way of getting the same and just depending on the marketplace. I wanted to mention TRIA fund. That's the terrorism fund. It's over 100 billion. Actually, there'll be a line where you've contributed to it on your policy for a number of years there. So it's gotten grown up to be like 100 billion. Some people in industry are saying, "Well, why don't we call it all this terrorism situation and we can pull that 100 billion and get that into the system?" The argument the insurance industry is making is, we are really responsible way of distributing another traunch of money because the people who work with us are the people who are risk adverse and there's no moral hazard type stuff. I don't know where they're going to go but you need to keep an eye on that because it may affect your coverage.

That's good. Yeah. I heard it depends on what's in your policy. I heard it depends on what's in your state and what the statutes have been in the state, and what's already been adjudicated in your stay. Just a quick question as I just think about this, how many insurance providers are we typically talking about? There's a couple of hundred people on this call. Are there going to be a couple hundred different types of insurance policies? Are you typically seeing six or seven major providers and a lot of the language consistent across the same providers in different industries or I'm a Taco Bell franchisee who has travelers insurance in New Jersey, am I likely to have similar language in my policy down in Louisiana? Maybe just some thoughts on that.

Yes. I've actually seen scores of insurance companies. They're out there but Lloyd's, they have a restaurant endorsement that is very similar to Allianz's the restaurant endorsement which is very similar to anywhere in the country as a practical matter. Some States have little variations on what the language has to say but I would guess that every restaurant tour or franchisee that I'm representing has a restaurant exclusion language in their policy. That's probably the only thing the broker knows. He's like, oh, you're in the restaurant business? Here's an endorsement for you. But it could provide a lot of help. That's not to say you're not entitled to coverage. If you don't have a virus exclusion and you have business income, you're probably okay. And then the question is how to maximize it. Part of the art of insurance is making sure that you put the money in the right place. So is this going to be egress loss? Is this going to be civil authority loss?

And so you can maximize recovery based on how you articulate the damages and which category they fit in as well. But in general, I would think everybody on this call if they're all franchisees and restaurants, they would have probably been offered that by at least an agent who wants to make the extra commission off of it. So it's out there. The industry is denying that they have to pay under that provision. We have one insurer who's agreeing to pay and we're just fighting about what the limits are, a million or 10 million and that's a big fight. But still they're just digging in, I don't know, either hoping that people get desperate and want to take less, I don't know. In Louisiana, you're supposed to adjust the claim within 30 days. By adjust the claim, you have to look at the coverage, you have to look at the facts and the responsibilities on the adjuster who works with the insurance company to get that done in a timely fashion. I don't see people making those deadlines around the country.

Yeah. Appreciate this. Any advice on policy details and definitions? Obviously these aren't words that I hear about a lot civil authority and law ordinances and extra expense coverages. You do this all the time, but what do some of these things mean?

Okay. The first thing is it's really true, appearances can be deceiving. The amount of coverage you have is more than the sum of the sentences on a deck page. By the way, I always tell people, if you're going to send me your policy, send me every policy you have associated with your business. I have one client who's going to get paid. They sent me their general liability and their property policies. I said, "Well, you have anything else?" He said, "Oh, I have some pollution coverage." I said, "Well, send it on." $15 million because they defined pollution is including a virus in that policy, but who would have thought it, right. You see the word virus exclusion and you just give up. Usually if your broker or you go to an insurance company, they will give you a quote, they'll take it out of context. It's very annoying on these denial letters.

They'll give you the language of the virus exclusion and of the physical damage, the two things we talked about earlier. But you have to read the policy as a whole and there are other things like the restaurant endorsement that arguably qualifies what the virus exclusion applies to and what physical damage means. Because think about it, if you have food poisoning, they call communicable diseases covered under abroad coverage for food contamination. Well, most people would look at food contamination and say, okay, that's not my problem here. The government shut me down so I probably don't have insurance. But if you dig into it, you see the food contamination is multiple definitions. One of which has always been in my experience, a communicable disease coverage. It's not actual communicable disease, it's usually the actual or threat of communicable disease. And that's what we were dealing with here in this country is the threat of, and that's why everybody was shut down.

But guess what? Once you accept that, then the policy no longer is about just physical damage because then you've got the threat language so these policies have to be read as a whole. Most everybody here has looked at the declarations page because that tells you what you have to pay for your premium and it should list everything in your policy. And then you have coverages. Some people have standalone business interruption policies. There are some standalone restaurant coverage policies, but generally you have either property or commercial general liability either or both of which could have business interruption added to the coverages, that's what we mean by coverage is. Exclusions are things that are not covered. So you generally start from the proposition with respect to business income loss. It's all risk, everything is covered except what is specifically excluded that what courts tell you is the coverage has to be liberally interpreted.

Any ambiguity has to be construed in favor of coverage. Exclusions are narrowly interpreted. So when it says virus exclusion, it has to be narrowly interpreted. Arguably there's an ambiguity with the fact that you would have communicable disease coverage and then there's something called endorsements and that's extra coverage and that's where you'll typically see things like the restaurant industry endorsements. Oddly, the insurers sometimes mix exclusions in with the endorsements and make the policy worse. You have to read every page of the policy. You're constantly going back and forth. Definitions are changed. I have one case where the language of the policy says actual but not suspected contamination. But it seems pretty straight forward. And the client got a letter saying, did you do any testing that you can show that there was actual contamination there, right?

Anybody who was thinking to do that, they were just cleaning. But sure enough, if you go deeper in the policy, there is a section that says definitions and the definition of contamination is actual or suspected. And so suddenly the definition trumps the scary language upfront and there's a pathway to coverage there. Deductibles limits, sub limits. These are important. Usually only one deductible applies, oh, by the way if you have a business interruption loss and you get PPP money or any kind of FEMA or grant emerges down the road, that is not considered business income, it's not an offset that benefits the insurance industry. So if you feel like, oh, I got PPP, that's going to come out of the insurance recovery. Don't believe that. You can get your loss of income. Generally PPP is not being treated as income but as a government grant program. We had a lot of those issues after Katrina and in Superstorm Sandy.

Now it is possible that a judge could go the other way on that but I haven't seen it yet and I would not pursue a policy claim simply because you think the PPP might be an offset. Deductibles, there's usually a deductible. You got a $10 million policy. There may be a 50 to 500,000 deductible. However, the rule is generally that they only get to give you one deductible. So if you get you're pulling civil authority coverage for five million, ingress egress for five million, only one deductible will apply, usually the highest. Limit, sub limits of coverage, as they'll say, it's a $10 million policy but I'll give you a million for communicable disease. Okay. Does that mean that's all you get? What if you got five million in civil authority? I would argue you get the six. Now, what if you've got additional monies?

So you're working within the limits and sub limits of the policy and there's a lot of ambiguity as to how much they're entitled to. Even after they can see coverage there's still fights about that. Business interruption is this loss of income, contingent business interruption or things like you lost suppliers, arguably lost customers because they were staying at home under government order, extra expense coverage is what it takes to get you through the period of restoration back up and running. Civil authority is the type of coverage. In other words, the government shuts you down. That seems to have happened to a lot of us, right? But sometimes they say civil authority that arises out of a covered cause of loss and they say, well, the covered cause of loss requires direct physical damage and you didn't suffer any, you were just shut down. But usually civil authority says if that loss occurs within your area, you would have coverage so long as you could get coverage for that under your policy.

So there are ways to invoke civil authority coverage. I don't know how these are going to play out and where we're going to be, but it looks for example, that based on some new studies which have not been peer reviewed, they're saying a lot more people had coronavirus than the number they're putting on the TV screen. That a lot of people have but they don't have symptoms and so the numbers are much greater, but the people with symptoms can also be passing it. So it's possible that if a court said, you have to come up with some evidence, statistically the odds are probably most facilities did have somebody with the coronavirus, whether they actually spread anything or not is unclear. But if that would count as damage in that jurisdiction, you could go in. Law and ordinance is a lot like civil authority. A lot of local governments have entered ordinances, not to operate in many cases before the state acted.

Same thing you get the coverage. Notice a lot of those local authorities did say because of the risk of physical damage is one of the reasons we're doing this. Ingress egress means people can't get to you. So for example, if you're on a block and one of the buildings collapses and they shut the block off for a couple of weeks while they make the situation safe, ingress egress is there. Extended time is very important because it basically will take your business interruption coverage, give you more time and extra expense. A lot of people for business interruption may have 30 to 90 days. Extended time sometimes gives you a year or more of coverage so that's really good.

Just a clarification there and then we'll cruise onto the next slide. So you're saying that in a lot of these business interruption cases, there might be a cap or a policy limit on the number of days between 30 or 90 days. So for example, if coronavirus impacted my business for a period of six months, my policy may only say that I can claim it for 30 days?

Yes. But there may be other ways to get more coverage under the policy depending on some of the other terms, but it will say that's the cap on, is in the category of business interruption. I would say 95% of the people who have bought the restaurant endorsement have also bought extended business income, at least that's what I'm seeing. So I think that's helpful to people.

Yeah, that's great. We've got about maybe five more minutes. I don't know, I must be a meathead but I can't see any of the questions come in until I stopped sharing the screen. So maybe if you want to maybe take a few more minutes and summarize here and then I'll try to come off of the presentation and see if anyone's asked any questions.

So what do you do from here? If somebody has told you you don't have coverage, you may want to re-examine it, have somebody who's got experience and expertise in the field look at it. As Rick said, I'm happy to read, me or one of my partners will read everybody's policy on a free and confidential basis and tell you what we think. You have nothing to lose with that and I think you may be pointed to some things that you hadn't seen earlier. Best result is you've got the right endorsements, the right coverage and there's an interest in settlement or negotiations with the other side. Mistake I think a lot of people make in the insurance sector is that they are reactive. They wait to see what the insurer either says about coverage and then says about what their loss is.

I say you should negotiate proactively like you would in every other aspect of your business life. And that means you come in, you've got an outline as to why legally there's coverage and you have the most robust set of covered losses possible. And you say, here, this is my proof of loss. Let's go. And then they have an obligation, a good faith obligation to go through that very carefully. And so if you negotiate proactively, I think you usually end up at a better spot than if you wait for their loan number and then you start reacting. Be prepared to move quickly, get your recovery and move on. In many cases, they'll agree that you're entitled to some smaller amounts like one million and other times you may have to litigate next nine million, you get the full 10 that you think you're entitled to. Again, it depends on your specific policy language, your specific insurer's language, your state, your statutes, and what's going on in your state and what has gone on in your state before.

Play offense, not defense, review your policy with an expert and likelihood of success, hard to tell without looking at the policy. How long will this take? Usually within 30 days, you can find out if they want to negotiate and then you try to get on a fast track for declaratory judgment if able. I see a lot of opportunity out there. I've talked to so many people who haven't even thought to look at their policies or people who didn't bother to look at their policies just because the broker said there wasn't coverage. It's a waste I think.

Wow. Well, we got 10 questions here Alan. I don't even know where to start here. Here's one, are you familiar with the PA case that recently came out with regards to business interruption?

Yeah. Pennsylvania had a good decision from the Supreme Court. As I said earlier, that was more about the governor's authority, but the way they talked about the incident as not being really a virus issue at all but being a national emergency to save lives is very potent for people with Pennsylvania properties.

Very cool.

I have a couple of those.

Yeah, right. Don't you have some connection with the University of Pennsylvania somehow? I think I've heard that's a nice place. If we do end up suing our insurance company then we risk them dropping us from coverage and or them jacking up our rates going forward to compensate for the loss or the client. Comment on that.

Most State insurance commissioners have laws. They can't retaliate. So that's absolutely going to mess them up. I've really never had anybody come back. And then they have to do their rates based on actuarial numbers, not the fact that they don't like you.

Sure. There's a number of these so maybe give them 30 second answer if you can. What about ordinance and law coverage? If we own buffets, which we do, and the government makes our business model illegal by decree or law, can we make use of ordinance and law coverage?

I don't know all the facts, but yes. So long as most law and ordinance coverages have exclusions. If they tell you to tear down an old decrepit building, that's not covered, but as I understood the hypothetical, possibly yes.

How about this one? Can you offer an opinion of things may be different for those businesses that are within a host venue like a mall, college campus, et cetera, where the host venue is closed therefore eliminating access to the business. Is this splitting hairs? And then this gentleman says, my policy covers loss of access to our locations but it has virus exclusions.

Okay. So I've reviewed policies and we have clients who both own the mall and then people who are in the mall. And I didn't know this before but apparently some landlords require in a mall setting like that or maybe a food court setting in a university require you to have interruption insurance. I didn't know that but a lot of people said, oh, it's in my lease. I have to have it. Virus exclusion is going to be hard. It's going to be tough but as I said earlier, I want to know the whole package because if you do have the restaurant endorsement or the enhanced restaurant coverage or what are those names that they use for it, there may be a very good reason to argue that the virus exclusion doesn't trump that. Why would they sell you enhanced coverage if in fact it wasn't enhanced? And the courts will be grappling with that. I would say it's ambiguity and it's got to be construed in favor of coverage. I'd say a few more things.

Yeah. Okay. Here's one, let's see. Will we see insurance policy changes once we get past the virus? Should we see a second round of the virus that will protect our business?

Yes. I think that industry, not this year because of the optics, but next year we'll go into state insurance commissioners and come up with a pandemic exclusion and try to get it put on to policies. That's the track record. Whenever there's a loss, they figure out ways to get out of it.

So the answer would be no then, right? Insurance companies are going to try to take that and make that a clear exclusion in a policy so that if there ever was pandemic or return of a pandemic, they don't have to pay a thing, right?

Yes. But if we go through a period now where they open everything up again and then there's a second wave like in November, I think there's a good argument that that's a second occurrence under your policy so then you could recover twice consistent with the overall aggregate limits of the policy. But yeah, I think that we're entering the phase of restoration. So I would think a new outburst, a new set of closures or return to very restricted openings like 25% of your tables can be filled. That could be called a second occurrence.

Tell us again what a restaurant endorsement means for someone like businessman who may not fully understand what a restaurant endorsement is? Like myself prior to talking with you honestly.

Yeah. You got a PDF of your policy and a lot of restaurants, I've been saying restaurant endorsements but honestly there are lots of different names. Generally it's restaurant enhancement or restaurant endorsement or abandoned restaurant coverage, labels like that depending on the company as you mentioned earlier. One was called reputational and it doesn't really matter what the title is, it's the words that matter, which is why, don't just look at your deck page, you can ask the broker for a PDF of your whole policy. And if you got nothing better to do, you can flip through all 300 pages of it and see if this enhanced restaurant coverage is there as well as some extended time limits, which seems to be the norm in your industry. But if not, I'll look at it.

So just basically it gives more detail. You have this general policy that could be a policy that could be sold to any business. And if it has a restaurant endorsement, it just has further definition, language and clarifications to the actual restaurant business itself, right?

Yeah. It did add some benefits like employee theft type issues.

Okay.

Think about all of the concerns that a restaurant has. There's usually something in there that addresses it. But for my purposes in this disaster, I just am looking at that one part of it, the food contamination or communicable disease coverage, but it's a bundle of benefits and usually if you're in the business, I'm pretty sure the broker put it in front of you at some point.

Yeah. Okay. A couple of others. I got four others. Let's see if we can get through them here. I want to be respectful of people's time. Please address rent loss, insurance issues due to a government action to close. In this case, a regional cinema company cannot operate and therefore cannot meet its rent obligation.

Is this the cinema company or the mall they're asking?

Your guess as good as mine. I'd say the cinema.

I would guess it's the mall owner who would be concerned and I've seen language that would cover the loss of rent. I have a building with a tenant and I just said in March, okay, don't worry about this month. But under the policy, is it a gift? Were you supposed to ask for it? But yeah, those are good policies mostly and the math is pretty straightforward, but again, you'd have to look at the specific language and there might be some follow-up questions there.

Yeah. Here's an interesting one. Because this pertains to our M&A business. Let's say I want to sell my business and the value here, let's just say my business, easy math, let's say it was worth 10 million and I had it for sale for 10 million and now since this thing, it's worth five million. Can they claim the difference? Is there any a claim there about the value of his business dropping?

When you get it into the realm of huge money, large medical centers, universities and all, they usually have customized policies, and I have seen language in a manuscript policy like that. But the policies that most of the people on this call have would not cover loss of value. But from the M&A point of view, you're selling a business at five million, you got up to another six million in losses from just loss of business income. How do you price that? It's not a sure thing, it's a delayed money. But I've seen a lot of cases where people have sold businesses with great claims that we've gotten to represent them on and there's a windfall for the buyer. So that's going to have to be I think factored into a lot of this. So maybe let's say you've got only three million in probable insurance coverage, do you sell your business for five or eight or seven?

Interesting. Interesting. Yeah. And then the question becomes whether or not the insurance is transferable to the buyer, right? And I'm sure in almost every case it's not. I've seen these stupid policies enough to know that. That's interesting, really interesting. I think we've got time for maybe a couple more. Unbridled doesn't just do work in the restaurant space. Franchising is just in general, whether it be fitness franchising, healthcare, beauty care, car care, whatever it might be. So there's a couple of non restaurant franchising questions. It's Island restaurants but also Forty gyms. I have business interruption with no virus exclusion in my policy. If I come to an agreement with my insurer say next week and I reopen in a month and get hit by a virus again in September, will I be able to get a second payout? I think you have said it is possible, right?

It's possible. I'd have to look at the language of the policy before not offering legal advice but I believe that it is possible. We've looked at gym's. Gym's big policies. I haven't seen a customized thing like in the restaurant industry, but yeah.

Yeah.

The important thing to remember is, very often when you get down to negotiating a policy, they'll say, all right, you've got to give up all your rights. I'll pay you, you want say four million, they're offering you three million. They said, "Look, I'll go to three and a half million but you got to give up the policy, any further coverage of the policy. Generally I advise against that but it's fact-specific but that little push will come in at the end from the other side generally.

I think the last question that we'll just say is, the question is, should I do this ASAP or should I wait for some reason? And I think you've been consistently saying throughout that, do it now, look at your policy now, review your policy now and do it now. A lot of these things have to be adjudicated or have to be submitted within 30 days. So the time seems to be of the essence, don't sit on your hands and wait to be part of a class action lawsuit that may take two or three years to come to a conclusion. I'm very thankful Alan for your time. You're really a charming man and I got some great information here. I put the screen back up here for everyone to see both of our contact information.

Presumably everyone who's on this call has mine, but if for some reason you don't get Alan's contact information, you can always email me and we'll make sure to reach out and get you in touch with Alan. These are just some disclosures. He's an attorney, I'm not but neither of us are giving you legal advice. This is just informational at this point so please take it as such. Thank you for joining. And please again, upcoming webinar, the 19th with MMB, we're going to be talking about PPP loan forgiveness, all the technicalities behind that. And on June the 2nd, we're going to have John Hamburger, Franchise Times to talk about the lending market post COVID 19. Thank you for joining and being a part of this and thank you Alan, for all you've done. I really appreciate it. Much appreciated.

Thank you and best of luck to you and everybody else.

All right. Awesome. Take care.

Thanks so much for entering the boiler room today. You can find our podcast on iTunes, Google play, Stitcher, Tune-in and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, webinars, and a list of our M&A transactions. Please note that neither Rick Ormsby nor Unbridled Capital LLC give legal, financial or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressively disclaim any and all liabilities that may be based on such information, errors they're in or emissions they're from.