Tue, Jun 2, 2020

What You Need to Know About COVID-19 Business Loss Class Action Settlements

There have been dozens of class action lawsuits arising from the COVID-19 pandemic, resulting from civic orders requiring most businesses to close or scale back business operations. This economic disruption caused many closed businesses to look to their commercial insurance policies for coverage for their business losses. In such class action lawsuits, the insurance companies are the named defendants.

When business loss class actions against insurance companies are settled and administered, there are several key matters to consider: 1) what types of business losses are typically compensated? 2) What business loss documentation is required, and 3) what are the administrative best practices?

There are three common types of business interruption losses compensated in class action settlements.

  • Lost profits
  • Additional (not normal) expenses
  • Diminution of real estate value

How are business losses typically documented in a class action settlement administration?

A settlement administrator needs to base its evaluation of business loss claims on documents that are ordinarily maintained during normal business operations, such as:

  • Tax returns
  • Financial statements
  • Payroll records
  • Cash receipts/disbursement journals
  • Invoices supporting any extraordinary expenses

Conversely, best practices dictate administrators should not base analysis and decisions on documents created outside of normal business operations, such as documents created specifically for the class action claims process.

How are business loss claims most fairly and efficiently administered?

Consistency is key to administrative efficiency, fairness to claimants, and critical to being able to explain the administrator’s decision-making process to the court. Business loss payments in class action settlements are often much larger than other types of class action payments. Therefore, claimants pay much more attention to the outcome of the claims administrator’s decision, while counsel and the Court tends to pay much more attention to each business loss claim. For these reasons, the claims process is subjected to heightened level of scrutiny. The settlement administrator’s job is to develop a claim review process that is fair and consistently applied to all business loss claimants.

The first step is to categorize businesses such as retail, wholesale, and manufacturing businesses. Each of these types of business categories have similar ways of operating, similar tax reporting, and similar calculation of profits. These similarities facilitate consistency in business loss evaluations. Moreover, separating business loss claimants into these three business categories fosters greater efficiency in the administrator’s business loss evaluation process.

How do you fairly calculate lost profits?

There is a damages period defined in every business loss class action settlement, which is the time period during which a business suffered disruption. The administrator’s role is to compare a businesses' damages period business results/lost profits to a businesses' prior business results/lost profits during comparable periods of time.

Hypothetically, if a civic order closed a business from March through May 2020, but in June the business re-opened and picked up right where it left off at the end of February, we would look at this business’ records maintained in the ordinary course of business for March through May in 2018 and 2019. These are the “prior results” we would compare to the damages period in 2020. Which prior results we use depends on the type of business and length of time the business was interrupted.

Settlement agreements also need to allow for the possibility that a business experienced a factual change in circumstances between the damages period and the prior results. For instance, if a business had expanded its square footage between the damages period and the prior results, that additional expense wouldn’t be captured solely by comparing the damages period to prior results. As long as a business has documentation to support such a factual change, that added expense would be taken into account when calculating lost profits.

Lost revenue and lost profits are not the same. Administrators evaluate lost profits, not lost revenues. This is because some normal business expenses will continue to be incurred even when the business is closed, while other expenses won't be incurred at all or may be reduced during the business disruption. For instance, lease payment obligations may continue the same during the closure, while payroll expenses might be lessened or removed.

Business losses should include compensation for extraordinary expenses.

A compensable extraordinary expense is an abnormal business expense caused by the event that is the subject of the class action lawsuit. A COVID-19 example of an extraordinary expense might be the cost of the sanitizing company that a business hires to sanitize its business every night for three months.

As the COVID-19 pandemic continues to disrupt businesses, and as civil orders continue to place restrictions on business operations and continue to force business closures, we are likely to see additional class action lawsuits filed by businesses against their commercial insurance companies. Therefore, be certain your administrator’s experience demonstrates a knowledge of how to evaluate lost profits and a demonstrates a familiarity with business loss documentation. Kroll Settlement Administration has the requisite background and experience having administered class action settlements involving hundreds of business loss claims.

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