It is difficult to overstate the destruction and disruption caused in recent weeks by the COVID-19 outbreak.  Federal and state governments have attempted to mitigate the social and economic damage by passing massive stimulus packages and issuing “shelter in place” orders. Despite these efforts, the spread of COVID-19 continues. Faced with ongoing losses and uncertainty over when the crisis will pass, many commercial insurance policyholders are examining their policies to determine whether they are covered for COVID‑related losses.

In this overview of potentially relevant insurance coverages, the following topics are addressed:

• Coverage-types that may insure against COVID-related losses;
• Potential obstacles to coverage;
• Best practices to follow in preparation for a potential claim.

Policies that May Provide Coverage for COVID-related Expenses

Policyholders should have all of their policies carefully reviewed to evaluate for potential coverage.  The following are common sources of possible coverage for losses, but this is by no means an exclusive list.

Business Interruption

Business Interruption insurance is primarily intended to protect policyholders against interruptions of, and disruptions to their business operations, and it is typically purchased as part of a commercial property insurance policy. Payouts are made for lost business income or extra expenses incurred, depending on the language of the policy. Importantly, coverage is typically triggered when the policyholder experiences “direct loss of or damage to” an insured property by a covered cause of loss. As discussed below, it is an open question whether the “physical loss” generally necessary to trigger coverage is caused by COVID-19 or the SARS-CoV2 virus.

A subset of this policy type, Contingent Business Interruption insurance covers losses arising from damage to a business’s customers or suppliers, such as input shortages and transportation delays. This type of policy is triggered by damage to facilities of those third-parties, rather than the policyholder’s. And depending on the situation facing a policyholder, this type of policy may offer another means to recoup losses stemming from COVID-19 or the SARS-CoV2 virus.

Civil Authority

Civil Authority Insurance, another potential source of coverage, protects policyholders from losses that occur when a “civil authority” prohibits access to the policyholder’s property. Given the many “shelter in place,” “stay at home,” and similar orders currently in force across the country, this type of coverage is likely to be implicated. The wording of Civil Authority Insurance does vary, for example, as to whether there is a “physical loss” requirement and which type of civil order is necessary to trigger the policy, making it important for policyholders to review the specific language of their policy carefully.

All-Risk Insurance

As its name implies, All-Risk Insurance offers some of the broadest coverage available to policyholders. This type of insurance automatically covers any risk that the policy does not explicitly exclude. Accordingly, policyholders considering making a claim should review their policy for any of the potentially applicable exclusions discussed below, or other language that could limit their coverage. Another caveat – like the other policies discussed here, many All-Risk policies are only triggered by “physical loss or damage,” so policyholders should again consider whether that initial threshold is met.

Potential Obstacles to Coverage

“Direct Physical Loss or Damage” Requirement

As mentioned above, many of the policies that may extend insurance to COVID-related losses are triggered by “physical loss or damage.” This requirement leads to the question of whether COVID-19 or the SARS-CoV2 virus, even where its presence can be shown, causes physical damages or loss to property. Although COVID-19 has wrought enormous economic destruction, this is due largely to people’s reaction to infection and the risk of contracting the disease themselves, rather than to the virus damaging properties in the way a fire or hurricane would. Courts have interpreted the term “physical loss or damage” in somewhat analogous circumstances, such as those related to bacterial outbreaks and other forms of invisible contamination. Dealing with varying factual situations, courts have reached different conclusions as to whether there is coverage for losses caused by these types of conditions, which does little to definitively settle questions of policy interpretation. In light of this unsettled case law and likelihood of there being material differences in the operative policy language, the determination of whether a policy provides coverage will depend on the particular circumstances faced by each policyholder and the language in the policy itself.

Exclusions for Pollution or Contamination

Some policies contain exclusions for losses caused by pollution or contamination. Again, the issue of whether these exclusions will preclude recovery for COVID-related losses hinges on the precise language of the policy at is issue, and, like the “physical loss” requirement, this question has not been decisively settled. The presence of bacteria, for example, has not been uniformly categorized by courts as either coming within, or falling outside of exclusions for contamination. In light of the fact that “decontaminating” a property where COVID-19 is present may be as simple as wiping down affected surfaces with soap and water, it is unclear that courts will treat the existence of COVID-19 on a premises as rising to the level “contamination” or “pollution” necessary to trigger these exclusions. Any determinations of whether these exclusions apply will depend in large part upon the particulars of the coverage language at issue, state-specific court rulings, and the unique factual circumstances faced by the policyholder.

Exclusions for Viruses, Pathogenic Organisms, and disease

In the wake of the SARS outbreak in 2003, insurers began limiting their coverage of losses related to the spread of diseases, and by 2006 an exclusion for “Loss Due To Virus Or Bacteria” became standard in ISO policies. Unsurprisingly, policies that have this, or a similar, exclusions may not cover losses due to COVID-19. Despite coverage being potentially precluded, policyholders should still carefully determine an exclusion’s scope. Insurers use differing language within exclusions for diseases; some apply only to certain enumerated diseases, others exclude losses caused by bacteria, viruses, pathogenic organisms, or some combination of all three. A determination that COVID-19 is encompassed should rest upon specific policy language, not simply the exclusion’s title. Again, policyholders are best served by reviewing their policies to determine whether some version of this particular exclusion is in their policy and whether it applies to their losses.

Recommendations for Policyholders

Policyholders thinking of filing a claim with their insurer for losses related to COVID-19 should consider taking a number of steps as a matter of best practice.

• Review the policy
  • Determine what notice conditions are required to comply with the terms of the policy.
• Document any losses related to COVID-19. These could include:
  • Lost business income;
  • Increased employee-sick leave or overtime;
  • Expenses of decontaminating facilities;
  • Price hikes for product inputs;
  • Increased transportation costs;
  • Consultant fees; etc.
• Retain information that will lend context to COVID-related claims, such as:
  • Which employees test positive for or been exposed to COVID-19
  • Were any changes made to corporate policies because of the risk of disease or governmental orders;
  • How has pandemic affected customer and supplier relationships;
  • Have business projections or future plans been changed due to COVID-19.
• Finally, make commercially reasonable efforts to mitigate the damage caused by COVID-19; these efforts should be documented as well.

Conclusion

While COVID-19 raises novel issues, many principles remain fixed. The language of the policy at issue, in conjunction with the facts, will be determinative of whether policyholders may recoup or minimize their losses from COVID-19. Business Interruption, Civil Authority, and All-Risk insurance policies are the most likely to provide coverage, although obstacles like exclusions for viruses and the requirement of “physical loss” may impede recovery. In these unsettled times, it is important to recall that as the COVID-19  spreads and it becomes necessary for policyholders to assess whether they are insured, immediate steps can be taken to preserve possible claims and maximize potential recovery.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) authorizes $349 billion in forgivable Section 7(a) Small Business Administration (“SBA”) loans under the Paycheck Protection Program, to be issued by qualified SBA lenders, as described further in our client alert. Prior to the passage of the CARES Act, Disaster Declarations also made available separate small business loans through the SBA Economic Injury Disaster Loan Program (“EIDL”). To be eligible for an SBA loan under either of these programs, an applicant must be considered “small” and fit within applicable employee or revenue thresholds. However, the SBA reviews not only the applicant but also the applicant’s affiliates to fit within the applicable threshold altogether, including affiliated entities that are non-profit and foreign. Therefore, businesses that are affiliated with other entities may no longer be eligible for an SBA loan under either program due to the aggregated employee count or revenue. Also, EIDL applicants must abide by additional size guidelines thereunder.

Overall, the SBA affiliation rules are broader than typical affiliation rules. In general, SBA affiliation exists when one business controls or has the power to control another business, or is based on common control; for example, private equity or VC-backed companies may be ineligible for SBA loans because of the affiliation rules, even though the portfolio companies are generally unrelated. Control may arise through ownership, management, or other relationships or interactions between the parties. Furthermore, control may be affirmative or negative, such as a minority owner who has the ability to prevent a quorum or block action. However, the SBA determines affiliation by reviewing the “totality of the circumstances” on a case-by-case basis even where no single factor alone is sufficient to constitute affiliation; therefore, it is important to consider all the facts for each entity. A complete affiliation analysis is important because the SBA loan application process requires the applicant to certify, under penalty of perjury, that the applicant is in fact eligible for the program, including under the affiliation rules.

Standards for which affiliation may exist for a Section 7(a) loan under 13 CFR § 121.301(f):

• Majority Ownership – Control exists by ownership of more than 50% of the voting equity.
  • Convertible notes, options, warrants, etc. are generally deemed exercised.
• Minority Ownership – Control is defined in the negative, through the right to “block action” by the board of directors or shareholders due to rights in articles of incorporation or agreements among shareholders.
  • VC and PE investors may be considered affiliates under this test.

• Management –
  • A CEO or president serves in the same capacity for multiple companies.
  • A single individual or entity controls the board of directors of multiple entities.
  • Control may exist through a management agreement.
• Substantially Identical Business or Economic Interests –
  • Close relatives, if the relatives have substantially identical business interests (e.g. same or similar industry in same geographic area)
  • Common investments, with shared resources, equipment, locations, employees, or financial support
  • Economic dependence, in which a concern derives more than 85% of receipts over prior 3 years from another concern, with exceptions
• Newly Organized Concern – Concern is in business for less than two years and is an affiliate of another entity if the newly organized concern was formed by the officers, directors, 20% owners, or other managers of a prior concern with direct monetary benefits flowing from the new concern to the original concern.

Exceptions to affiliation coverage:

• Concern has received investment from an investment company licensed under the Small Business Investment Act
• Business concerns owned by Indian Tribes, Community Development Corporations
• SBA-approved pool of concerns for a joint program of R&D for defense production
• SBA-approved mentor-protégé agreement
• Member shareholders of a small agricultural cooperative

If you have any questions regarding whether entities are considered affiliates under the SBA regulations, please let us know. The relevant SBA affiliate regulations may be accessed here.

Note: The information in this update is current as of March 31, 2020. We will continue to monitor the CARE ACT and the PPP Loan program and appropriate guidance from the SBA as it is issued.

What type of Borrower qualifies for a PPP Loan?

Borrowers eligible for the PPP Loans include all small businesses with fewer than 500 full or part-time employees, nonprofits (501(c)(3)), Independent Contractors, Self-Employed persons, sole proprietorships, veterans’ organizations (501(c)(19)) and tribal business concerns. Businesses with more than 500 employees operating primarily in the hospitality industry (e.g., restaurants and hotels, ) are also eligible, as long as there are 500 or fewer employees at any single location. The borrower must have been in operation on or before February 15, 2020.  The attribution rules in 13 CFR 121.103 and 121.301 apply to most borrowers and may require a lender to aggregate the employees of an applicant with its affiliates for purposes of determining whether the 500-employee limit has been met.

Who can Lend Under the PPP Loan Program?

All current SBA 7(a) lenders can “opt-in” to the PPP and will be granted delegated authority by the SBA to make and approve the PPP Loans. The specific opt-in process and the SBA required loan forms are still pending. Lenders not currently engaged in SBA 7(a) lending may also participate in providing PPP Loans, provided the lenders are FDIC-insured (banks), FCUA-insured (credit unions) or institutions of the Farm Credit Systems chartered under the Farm Credit Act of 1971. The Secretary of Treasury will issue further guidance for terms of participation of these additional lenders.

What are the terms of a PPP Loan?

The maximum PPP Loan amount is $10 million, but may not exceed 2.5 times the borrower’s average monthly payroll amount over the 12 months prior to origination of the PPP Loan. Payroll costs include compensation to employees and independent contractors, benefits, and payroll taxes. There are certain exclusions to the payroll amount that must be carefully considered. For example, the amount of an employee’s salary in excess of $100,000 is not included in payroll costs. There are slightly different formulas for seasonal businesses and businesses that have not been in business for at least a year. Borrowers who just closed on a regular SBA 7(a) loan on or after January 31, 2020, may refinance the full amount of that loan, up to $10 million.

The maximum interest rate of a PPP Loan is 4%, and there are no prepayment penalties. Borrowers may defer payments on PPP Loans for a six-month period commencing on the origination date. SBA loan fees are waived.  The proceeds must be used for payroll costs, health insurance, rent, utilities and/or mortgage interest obligations. There is no requirement for collateral or personal guarantees under the PPP Loans, and borrowers will not be required to show that they cannot obtain financing elsewhere. The borrower will be required to attest that the uncertainty related to the COVID-19 virus has made the PPP Loan request necessary to support the ongoing operations of the business.

When is the PPP Loan Forgiven?

The PPP Loan is forgiven at the end of the 8-week period after the borrower takes out the PPP Loan. Lenders will verify covered expenses and the proper amount of forgiveness. The principal amount of a loan may be forgiven in an amount equal to payroll costs, interest on mortgage obligations incurred before February 15, 2020, rent payments for leases in force before February 15, 2020, and utility payments for service which began before February 15, 2020 during the 8-week period following the origination of the loan.

How much of the PPP Loan will be forgiven?

The purpose of the PPP Loans are to help small businesses retain employees at their current base pay. If the borrower keeps all of its full-time employees and maintains compensation levels for employees earning less than $100,000, the entirety of the PPP Loan would be forgivable (provided the borrower also incurs eligible rent, mortgage interest or utility expenses during the 8 week period.) If the borrower lays off employees, the forgiveness will be reduced by the percent decrease in the number of employees. If the borrower’s total payroll expenses for workers making less than $100,000 annual salary decreases by more than 25%, PPP Loan forgiveness will be reduced by the same proportion. If the borrower has already laid off some employees or reduced compensation, the borrower can still be forgiven for the full amount of its payroll cost if the borrower rehires the employees and reverses decreases to compensation by June 30, 2020. The SBA has 60 days to make a forgiveness determination and the SBA has 90 days after that determination to make payment to the lender.

Who funds the PPP Loan?

The lender funds the PPP Loan. The lender may sell the PPP Loan to the SBA based upon an estimated forgiveness amount, and the SBA would purchase the expected forgiveness amount within 15 days. However, the PPP Loan will carry a 0% risk-weighting, negating the impact on risk-based capital ratios if the lender holds the PPP Loan on its balance sheet (though liquidity and leverage ratios would be impacted by retaining the PPP Loan).

Can a Potential Borrower Start Providing Underwriting Documents?

The guidelines have not yet been published on the forms and specific underwriting documentation, but one of the most important considerations is that the borrower will need to establish an average monthly payroll over the last 12 months. We expect the SBA to issue guidance advising on how loan applicants may demonstrate their average payroll costs for purposes of determining maximum loan eligibility, but early indications are that borrowers should provide W-2s, 1099s, and evidence of state payroll tax payments. The borrower can begin gathering documents now; in addition to payroll information, they will want to ensure that their financial records allow them to quickly identify payments made for payroll and benefits, rent, mortgage interest, and utilities.

What issues should potential Lenders consider in implementing this program for its Borrowers?

1.  Can my operations process a large influx of applications?
2.  Do we have to create and implement new procedures to develop, originate and service PPP Loans?
3.  Do we have the bandwidth to handle customer service questions and concerns regarding the PPP Loans?
4.  Do we have safeguards in place to mitigate fraud risk for this new program?
5.  Will we accept applications from non-traditional borrowers, such as independent contractors or sole-proprietors, who will be eligible for small PPP Loans?

Should you wish to discuss any of the topics addressed above or other questions your organization may have as a result of the current environment, please feel free to contact our team.

NOTE: The information in this Alert is current as of March 30, 2020, 12:00 pm Central Time. This is a rapidly-evolving situation and circumstances and guidance may change.

Which employers does it cover?

The Response Act applies to employers with fewer than 500 employees, measured at the time the employee’s leave is taken.  This includes:

• all full-time and part-time employees within the United States;
• employees currently on leave;
• temporary employees jointly employed by multiple employers;
• laborers supplied by a temporary agency; and
• corporations with separate establishments or divisions (the “covered employers”).

Workers who are independent contractors under the Fair Labor Standards Act (the “FLSA”) are not considered employees for purposes of the 500-employee threshold.

Where a corporation has an ownership interest in another corporation, the two corporations are considered separate employers unless they are joint employers under the FLSA with respect to certain employees.  If the two entities are found to be joint employers, all of their common employees must be counted.

In addition, two or more businesses are considered separate employers unless they meet the integrated employer test under the Family and Medical Leave Act (the “FMLA”).  Separate entities or corporations may be parts of a single employer for FMLA purposes if they meet the integrated employer test which considers common management, interrelation between operations, centralized control of labor relations, and the degree of common ownership or financial control.

Employers with fewer than 50 employees may apply for an exemption from the Response Act if complying with its requirements would jeopardize the viability of the business as a going concern.  Additional information regarding how to apply for that exemption should be available soon, but the DOL has made clear that any such submissions should not be directed to them.

Emergency Paid Sick Leave

The Response Act requires covered employers to provide two weeks of emergency paid sick leave to eligible full-time employees for up to two weeks (80 hours) and part-time employees for the typical number of hours that they work in a typical two-week period. Employers should utilize the higher of the employee’s regular rate or the applicable minimum wage.

The employer must provide for two weeks of paid sick leave at an employee’s regular rate, up to $511 per day and $5,110 total if the employee is unable to work or telework and is:

• subject to a Federal, State, or local quarantine or isolation order related to coronavirus;
• advised by a health care provider to self-quarantine related to coronavirus; or
• experiencing coronavirus symptoms and is seeking a medical diagnosis.

The employer must provide for two weeks of paid sick leave at two-thirds an employee’s regular rate, up to $200 per day or $2,000 total if the employee is unable to work or telework and is:

• caring for an individual subject to an order described in (a) above or self-quarantine as described in (b) above;
• caring for a child whose school or place of care is closed, or child care provider is unavailable for reasons related to coronavirus. “Child” is defined as under 18 years of age and biological, foster, adopted, a stepchild, a child of a domestic partner, a legal ward, or a child of a person standing in loco parentis, for which the employee has assumed parental status and obligations, as well as an adult (i.e., 18 years of age or older), who (1) has a mental or physical disability, and (2) is incapable of self-care because of that disability; or
• experiencing any other substantially-similar condition specified by the U.S. Department of Health and Human Services. However, this is not currently a qualifying reason to request leave because the Secretary of Health and Human Services has not yet identified any conditions substantially similar to coronavirus.

Emergency Family and Medical Leave Expansion

The emergency FMLA leave may be used if an employee is unable to work or telework due to a need to care for a child, as defined above, whose school or place of care is closed, or child care provider is unavailable, for reasons related to coronavirus. Unlike most provisions of the FMLA, which apply only to employers with fifty or more employees, the emergency FMLA under the Response Act applies to all covered employers with fewer than 500 employees. Employees who have been employed with an employer for more than thirty days as of the date of the request may be eligible for up to twelve weeks of partially paid emergency FMLA leave. The emergency FMLA leave is another form of FMLA leave and an employee is entitled to a total of twelve weeks of FMLA leave during the employer’s FMLA year; therefore, any amount of emergency FMLA leave will reduce the amount of FMLA leave an employee can take for other reasons during the applicable FMLA year. The first ten days of the emergency FMLA leave are unpaid and the remaining time is to be paid at two-thirds of the higher of the employee’s regular rate or the applicable minimum wage for up to $200 daily and $10,000 total.

The DOL recommends that the emergency paid sick leave and the emergency FMLA leave be used together; the emergency paid sick leave can be used for the first ten days (up to 80 hours) to cover the otherwise unpaid time under the emergency FMLA leave, and then the emergency FMLA is used for the additional ten weeks, for a total of up to $200 daily and $12,000 altogether. An employee may elect to substitute any accrued vacation leave, personal leave, or medical or sick leave for the first unpaid ten days of emergency FMLA leave, but they may not be required to do so.

The DOL’s current employer guidance regarding the Response Act can be accessed here and the DOL’s FAQ regarding the Response Act can be accessed here.

Employer Payroll Tax Credits for Emergency Paid Sick and Family and Medical Leave

To help covered employers comply and maintain adequate cash flow to pay their employees, the Response Act also provides a refundable tax credit equal to 100% of qualified emergency paid sick leave and emergency FMLA leave wages paid by an employer up to the appropriate per diem and aggregate payment caps listed above, plus the cost of the employer’s health insurance premiums during leave. The credit can be used to offset all federal income tax withholding from all employees, including those still working, and both the employer and employee portions of Social Security and Medicare taxes for all employees. Employers may opt out of the applicable refundable credit. The Internal Revenue Service may also provide additional guidance regarding information and procedures that must be followed to retain the credit.

Required Response Act Poster

Each covered employer, including those with fewer than fifty employees who may qualify for an exemption, must post a notice of the Response Act requirements in a conspicuous place in each of its premises. An employer may satisfy this requirement by e-mailing or direct mailing this notice to employees, including to all new hires, or posting this notice on an employee information internal or external website. The required poster may be accessed here, but please check back for any required updates. For further clarification, the DOL’s FAQ regarding the poster can be accessed here.

Required Documentation for Leave

If employees take emergency paid sick leave or emergency FMLA leave pursuant to the Response Act, employers must require employees to provide appropriate documentation to support the reason for leave. Therefore, employers should consider creating a Request for Leave form under the Response Act, to help evaluate whether employees fit within the required criteria and to allow the employer to claim the applicable tax credit. Within the form, employers should request true and correct copies of any relevant orders, documentation from health care providers or schools and daycares, and other documents to determine whether the employees qualify for the requested leave. Please contact us to request assistance in drafting a Request for Leave form.

Other Important Considerations

The Response Act states that an employee affected by coronavirus has the right to use paid emergency sick leave before using existing vacation or paid time-off benefits; therefore, an employer cannot require an employee to use vacation or paid time-off benefits prior to receiving benefits under the Response Act.

Employers may not discharge, discipline, or otherwise discriminate against any employee for taking leave under the Response Act or for filing a complaint or instituting a proceeding under or related to the Response Act for failure to comply.

U.S. Environmental Protection Agency

The EPA has announced that it will exercise enforcement discretion for certain types of noncompliance resulting from the COVID-19 pandemic retroactive to March 13.

The EPA asks that entities make every effort to comply with environmental obligations, but if compliance is not reasonably practicable, the entities should take the following steps:

1. Act to minimize the effects and duration of any noncompliance;
2. Identify the specific nature and dates of noncompliance;
3. Identify how COVID-19 was related to the noncompliance, how this was handled by the regulated party, including the party’s best efforts to comply and steps taken to come into compliance;
4. Return to compliance as soon as possible; and
5. Document all of the above.

While the EPA is not requiring parties to notify the EPA of its intent to take advantage of this policy subject to the significant exceptions below, the documentation described above must be provided to the EPA, a state or a tribe upon request.  That said, the EPA’s policy does not give facilities a free pass – with respect to those situations that do not require a facility to disclose the issue, the EPA has stated that it “will consider the circumstances, including the COVID-19 pandemic, when determining whether enforcement response is appropriate.”  As a result, facilities should ensure that any incident of noncompliance meets the parameters of the EPA’s policy.  Minnesota companies also need to be aware that most facilities in Minnesota are directly regulated by the MPCA, which is requiring regulated entities to make a request for flexible treatment, as described below.

The EPA’s policy applies to routine compliance monitoring and reporting; settlement agreement and consent decree reporting obligations and milestones; facility operations (including failure of air emission control or wastewater or water treatment systems or other equipment; delays in timely transfer of hazardous waste generated at a facility; or change in concentrated animal feeding operation (CAFO) status).  Public water systems and critical infrastructure are also addressed.

If the noncompliance will cause an acute risk or imminent threat to human health or the environment, facilities should contact the implementing authority for the relevant program, which could be an EPA region, state, or tribe.  Similarly, if COVID-19 issues could cause the facility to exceed enforceable limitations on air emissions, water discharges, or land disposal, or other unauthorized releases, facilities are to contact the implementing authority as quickly as possible.  The responsibility to respond to accidental releases or spills is not changed by this policy.

The policy explicitly excludes criminal violations, conditions of probation in criminal sentences or activities under Superfund or Resource Conservation and Recovery Act (RCRA) Corrective Action enforcement instruments.  Imports are also expressly excluded from the policy.  The EPA also specifically notes that it expects to focus on ensuring compliance with requirements (such as the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)) with respect to  pesticide products that claim to address COVID-19 impacts.

The EPA will provide seven days’ notice of its intent to terminate this policy.

Authorized states, such as Minnesota, and tribes, are able to take a different approach.  Minnesota’s policy is discussed below – other states may have declined to provide regulatory flexibility at this time or developed their own policies.

Detailed information on the EPA’s policy is available here:  https://www.epa.gov/enforcement/enforcement-policy-guidance-publications

Minnesota Pollution Control Agency

The MPCA is responsible for enforcing most environmental laws and permit conditions applicable to facilities in the state (with the exception of those subject to tribal jurisdiction) pursuant to delegated authority.

The MPCA’s policy recognizes that some regulated entities may be impacted from a reduced workforce necessary to maintain normal operations at certain facilities.  While the MPCA reminds the regulated community that while permittees and operators are expected to meet all terms and conditions of their permits, the MPCA is accepting requests for regulatory flexibility for unavoidable noncompliance situations directly due to impacts from COVID-19.  Specifically, the MPCA intends to assist entities by providing alternative approaches to maintaining compliance, such as extending reporting deadlines, extensions of operator certifications and other forms of regulatory relief.

While the EPA’s policy does not require regulated entities to notify the EPA of intent to use the policy, the MPCA is requiring regulated parties to reach out.

Requests for regulatory flexibility should be sent to [email protected] and should include specific information similar to that sought by the EPA, including:

1. The name of the entity requesting relief along with an applicable permit number;
2. Identification of a contact individual and phone number;
3. Identification of the specific statute, rule and/or permit condition at issue;
4. A discussion of why relief is necessary, including actions the requesting party has taken before making the request, and how the need for relief is connected to the COVID-19 pandemic;
5. Identification of specific measures that will be taken to mitigate or otherwise minimize any potential environmental impacts from the noncompliance, in bullet-point format; and
6. Designation of the time period the request is intended to cover, as well as the rationale for that time period.

The regulated party is required to maintain all records relating to the noncompliance as well as any alternative compliance methods authorized.

The MPCA has indicated that it may, if warranted, grant sector-wide relief from some requirements in the future.

Detailed information on the MPCA’s policy is available here: https://www.pca.state.mn.us/covid-19/covid-19-and-regulatory-flexibility

UPDATE:  The Wisconsin Department of Natural Resources has announced a COVID-19 compliance policy similar to that in place in Minnesota for regulated entities operating in Wisconsin.  Details here:  https://dnr.wi.gov/emergency/COVID19Compliance.html

The COVID-19 pandemic has led to dramatic fluctuations in the stock market and the value of closely held businesses.  Although we all hope that the massive dips in values are temporary, these challenges present unique opportunities for individuals who would be subject to federal or state estate taxes.  Lower values allow more assets to be moved out of your estate while using less of your available gift and estate tax exemption amounts.

Estate planning strategies to consider implementing during this time:

• Make gifts to Irrevocable Trusts using depressed values of assets.  These Irrevocable Trusts can be Spousal Lifetime Access Trusts (SLATs) that allow your spouse to control and have access to the assets in the trust.
• For those who already have created SLATs and used their full gift tax exemption, sell assets for current FMV to the trust in return for a promissory note using current low applicable federal rates (AFR).  If using closely held business interests, discounts may also be available.
• Create and fund Grantor Retained Annuity Trusts (GRATs).  GRATs are ideal estate planning vehicles at times of low interest rates and for assets that are likely to appreciate significantly over time.  These trusts rely on the appreciation on the assets beating the growth the IRS presumes (based on current AFR).
• If you currently have grantor trusts in place, consider swapping assets that have a currently depressed value for assets inside the trust that are more stable.  This allows the recovery in the currently depressed assets to occur outside of your estate.
• Consider a Roth conversion for IRA assets, particularly in light of the changes to inherited retirement assets after the passage of the SECURE Act.

For more information or help making changes to your estate plan, please feel free to contact a member of Winthrop & Weinstine’s Trust and Estates team.

Governor Evers’ Safer at Home order took effect in Wisconsin at 8:00AM  on Wednesday, March 25, and will remain in effect until 8:00AM on April 24.  Every person is ordered to remain at home, though exception is made for the following permitted reasons:

• Essential Activities
• Essential Government Functions
• Essential Business and Operations
• Minimum Basic Operations
• Essential Travel
• Special Situations

As defined in the order, financial institutions and services—including banks, credit unions and other depository or lending institutions—are considered Essential Businesses and Operations.

At this time, individuals are not required to carry documentation nor acquire special permission to leave their homes, but they must comply with the order on permissible reasons to leave home. In light of this, best practice is to provide employees with a letter confirming their employment at the bank as an Essential Business, in case they are questioned.

If you have any questions about drafting such a letter or other matters related to COVID-19 and your institution or employees, please do not hesitate to reach out to us.

As you are probably aware, yesterday afternoon, March 25, 2020, Minnesota Governor Tim Walz announced Executive Order 20-20 (the “Order”), directing Minnesotans to stay at home. As set forth in the order, beginning at 11:59 pm on Friday, March 27, 2020 through 5:00 pm, Friday, April 10, 2020, all persons currently living within the State of Minnesota are ordered to stay at home or at their place of residence except to engage in activities or work for critical sectors as outlined in the Order.  The 21-page Order lists Financial Services as a critical service, which includes workers at banks. As a result, bank employees will be permitted to leave their homes to come to work.

Banks should consider providing each employee commuting to the office with a letter outlining that they are an employee of an institution deemed essential under the Order. Though not required, we have found this can be valuable for employees if they are questioned about their purpose being outside of their home. Winthrop has starting drafts of these letters and we would be happy to work with you to prepare the necessary letters for the bank’s workforce.  If you have any questions about preparing these letters for your workforce, or other matters related to COVID-19, please contact us.

The below information was updated on April 3, 2020, to include information on the Interim Final Rule and updated application.  A link to our alert regarding the takeaways from Interim Final Rule is available here. This article was originally published under the title “Congress Poised to Pass Massive Loan Program for Small Businesses – What You Need to Know”.

H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) is now law, after the President signed it on March 27, 2020.  Among other stimulus relief, the CARES Act authorizes $349 billion in forgivable Section 7(a) SBA loans under the “Paycheck Protection Program”, which loans would be issued by qualified SBA lenders.  The SBA will be issuing guidance and rules in the coming days or weeks that will permit small businesses to obtain these loans to fund their payroll and other expenses.

This Paycheck Protection Program is separate from and in addition to the SBA’s Economic Injury Disaster Loan Program (“EIDL”) passed in connection with the Families First Coronavirus Response Act, as described in our client alert.  Businesses will be eligible to borrow under both the EIDL program and to refinance their EIDL loans through Paycheck Protection Program Section 7(a) Loans.  This is a huge loan program and a massive subsidy to small businesses.  For context, SBA loans of any type totaled $29 billion in FY2019.

Executive Summary of the Paycheck Protection Program

• $349 billion in authorized Section 7(a) SBA loans, to be issued directly by banks and 100% guaranteed by the SBA.
• Businesses with fewer than 500 full or part time employees will be eligible, with higher employee limits for hotels, restaurants and other industries approved by SBA.
• No personal guaranties or collateral.
• Loan amounts will be 2.5 times avg. monthly payroll costs, up to a $10m cap + the amount of a refinanced EIDL loan.
• Interest will be 1% and payments of principal and interest deferred for 6 months.
• Loans will be forgiven in an amount equal to 8 weeks of payroll, mortgage interest, rent, and utility expenses, with the amount of forgiveness reduced if employee headcount or compensation is decreased.

Program Overview

The Paycheck Protection Program operates as a form of subsidy equal to 2.5 months of payroll costs for small business.  Early indications are that demand for these loans will be very high, because of the financial need in this current economic climate and the favorable terms of the loans.  The Section 7(a) SBA loan program has been used as a framework for issuing loans in the Paycheck Protection Program, but many of the traditional limitations of a Section 7(a) loan have been done away with – for example, lenders will not be required to obtain SBA approval of a credit determination, borrowers will include many companies that would not typically be “small business concerns” eligible for a 7(a) loan, and there are no personal guaranty or collateral requirements.  Lenders will be incentivized to issue loans; the SBA will reimburse processing costs at a rate between 2% and 5% of the principal amount of the loan, with the rate dependent on the size of the principal.

Eligible Borrowers—Borrowers eligible for Paycheck Protection Program loans include all “business concerns” with fewer than 500 employees.   All borrowers will need to have been actively conducting a trade or business on February 15, 2020, and must be able to demonstrate that the borrower had incurred payroll costs or 1099 payment obligations at that time.

Other types of eligible borrowers are as follows:

• Businesses with more than 500 employees operating primarily in industry NAICS Codes starting in 72 (i.e. restaurants, hotels and casinos) are also eligible, as long as not more than 500 employees work at any single location.
• Other industries are subject to employee size standards greater than 500, as determined by the SBA.
• Independent contractors, self-employed persons or sole proprietorships.
• 501(c) nonprofits.
• Veterans’ organizations or Tribal business concerns.

The affiliation rules of 13 CFR 121.301 may, in some circumstances, limit eligibility for these loans to the extent that “affiliates” of a borrower may be aggregated for purposes of determining the number of the business concern’s employees.  Affiliates generally include businesses under common control with a borrower, and control may result from the power to direct management of the borrower, or in the negative, such as an investor who has the right to prevent a borrower from taking action under the terms of borrower’s charter, bylaws, or other agreements among the owners of the borrower.  The affiliation rules will not apply to those businesses with NAICS codes starting with 72 (hotels, restaurants, or casinos), franchises registered with the SBA, or those with existing financing from a Small Business Investment Company (“SBIC”).

Loan Certification—Borrowers will not need to make any special showing of economic necessity to obtain a loan, and the “no credit elsewhere” rules have been waived for these loans.  The form SBA loan application includes a number of represenations, including the following:

• The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
• Acknowledging that funds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments and utility payments; and
• Eligible recipient does not have an outstanding loan or pending application for a loan under this subsection for the same purpose and duplicative amounts.

Eligible Loan Amount—The maximum loan amount under the Payroll Protection Program is equal to 2.5 times the borrower’s average monthly payroll costs, up to a $10m cap.  The average payroll costs will be calculated from the 1 year period preceding loan origination, except that seasonal employers may elect a different testing period. Payroll costs include salary, wages, commission, paid leave, allowance for dismissals, benefits, and state or local taxes.  Payroll costs exclude compensation to any single employee in excess of $100k annually and any payments to persons that are not U.S. residents. An eligible borrower may also increase the amount borrowed under a Paycheck Protection Program loan to pay off an outstanding EIDL (made under Section 7(b)(2) of the Small Business Act) that the borrower wishes to refinance.

Independent contractors will be eligible to borrow 2.5 times monthly average income, not to exceed $100,000 on an annualized basis. The maximum amount an independent contractor could borrow to replace the independent contractor’s income would be $20,833 ($100,000 / 12 to find the monthly average of $8,333.33, multiplied by 2.5).

Uses of Borrowed Funds—While loan eligibility is based solely on payroll costs, funds may be used to pay employee or contractor compensation (even in excess of $100k), plus mortgage interest, rent, utility expenses and payments on indebtedness incurred prior to date of issuance.

Interest and other Payment Terms—Interest will be charged at 1%.  Borrowers may defer payments on these loans for the six (6) month period commencing on the origination date.  SBA loan fees have also been waived.

Forgiveness—The loans would be forgiven in an amount equal to payroll, rent, mortgage interest and utility expenses for the 8 week period commencing at loan origination, up to the entire principal amount of the loan. Seventy-five percent (75%) of a borrower’s expenses eligible for forgiveness must consist of payroll costs, and rent, mortgage interest, and utilities may only constitute 25% of the forgiven amount in the aggregate. The amount of the loan forgiven would be reduced under two circumstances:

• Forgiveness will be reduced at the ratio that (x) the borrower’s average full-time employee headcount during the period from the 8-week period commencing on the date of disbursement of the loan bears to (y) the average number of full-time employees during the period between Feb 15, 2019 – Jun 30, 2019 or, if elected by the borrower, Jan 1, 2020 – Feb 29, 2020.  The average will be based on the number of employees included in each pay period.
• Forgiveness will be reduced on a dollar-for-dollar basis by reductions to compensation in excess of 25% for any employee earning less than $100k annually.

Borrowers who have already reduced employee headcount or compensation after February 15, 2020 will be able to eliminate the effects of any reduction to loan forgiveness eligibility if the number of employees or compensation reductions are returned to February 15 levels on or before June 30, 2020.

To obtain forgiveness, a borrower will need to provide the following documentation:

• Payroll tax filings
• State income, payroll and unemployment insurance filings
• Documentation verifying mortgage, rent, or utility payments, such as cancelled checks payment receipts, transcripts of accounts or other documents

The borrower will also certify that the documentation provided is true and correct and that the proceeds of the loan were used to pay payroll costs, rent, mortgage payments or utilities.

The afternoon of March 25, 2020, Minnesota Governor Tim Walz announced Executive Order 20-20, directing Minnesotans to stay at home. According to the order, “Beginning on Friday, March 27, 2020 at 11:59 pm through Friday, April 10, 2020 at 5:00 pm, all persons currently living within the State of Minnesota are ordered to stay at home or in their place of residence except to engage in the Activities and Critical Sector work set forth” later in the order.

The 21-page order includes the CISA Guidance on the Essential Critical Infrastructure Workforce, as well as a lengthy list of exemptions to the order. Further information, and a link to apply for a special exemption, can be found on the Minnesota Department of Employment and Economic Development (DEED) website:

https://mn.gov/deed/newscenter/covid/business-exemptions/

In addition to the above order, Governor Walz also issued Executive Order 20-18, extending the existing closure of “bars, restaurants and other places of accommodation” until May 1, and Executive Order 20-19 directing schools to use distance learning through May 4.