On March 27, 2020, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”). The nearly $2 trillion relief package is the boldest action to date in response to the COVID-19 pandemic and is the single largest relief bill in U.S. history. The CARES Act includes (a) direct financial assistance to Americans; (b) aid to small businesses and employees; (c) efforts to stabilize the economy and keep people employed; and (d) additional support for health care professionals, patients, and hospitals. More specifically, the CARES Act provides $349 billion in small business loans and $500 billion in loans for distressed companies, which may be available to U.S. affiliates of Irish companies.

This memorandum will focus on the $349 billion allocated for Paycheck Protection Program loans (“PPP Loans”), administered by U.S. Small Business Administration (“SBA”). Private SBA-approved financial institutions (and not the SBA itself) will administer PPP Loans, so it is crucial for U.S. affiliates of Irish companies to reach out as soon as possible to their U.S. banker or an SBA-approved lender (we can provide a list of such lenders upon request).

Are U.S. affiliates of Irish companies eligible for a PPP Loan?

The CARES Act seems to allow U.S. affiliates of Irish companies to apply for a PPP Loan, and we are waiting in final SBA regulations to confirm this fact. The statute states that an eligible borrower (a) be “created or organized in the United States or under the laws of the United States;” (b) “have significant operations . . . in the United States;” or (c) have “a majority of its employees based in the United States.” Whereas the requirement in clause (a) may be determined objectively (and may apply to most U.S. affiliates of Irish parents), the requirements in clauses (b) and (c) have ambiguity for interpretation. Our guidance right now, pending issuance of relevant regulations, is that U.S. affiliates of Irish companies should prepare to obtain a PPP Loan; given the perceived demand for these loans, there is risk that the funding could run out before finalization of each detail of the program.

Are there other eligibility requirements?

U.S. affiliates of Irish parent companies must have been in operation on February 15, 2020 and have 500 or fewer employees to be eligible for a PPP Loan. The 500-employee limit is subject to certain exceptions based on industry: (a) businesses with a North American Industrial

Classification System code begins with “72” (accommodations and/or food services/restaurants; (b) for any business concern acting as a franchise; and (c) for any business concern that receives financial assistance from a company licensed under §301 of the Small Business Investment Act of 1958.

Existing SBA regulations contain rules that provide for the aggregation of the number of employees, for purpose of determining the 500-employee limit, where businesses are affiliates (under common control, controlling or controlled by) of one another. Our understanding of how the CARES Act intends for these rules to be applied (pending final regulations) is that employees outside the U.S. will not be counted for purposes of the 500-employee limit.

How much can be borrowed?

The maximum PPP loan size is the lesser of (a) $10 million; or (b) 250% of the average monthly “payroll costs” (discussed below), measured over the 12 month period ending on December 31, 2019 (although the CARES Act specifies a different time period, the PPP Loan application states that the relevant payroll measurement period is calendar year 2019). If the U.S. affiliate could be classified as a seasonal business, it may use the period February 15, 2019 – June 30, 2019 or March 1, 2019 – June 30, 2019 to calculate the average payroll.

For PPP Loan purposes, “payroll costs” include salaries, commissions, tips, certain employee benefits (including health insurance and retirement benefits), state and local taxes and certain types of compensation to sole proprietors or independent contractors. Payroll costs specifically exclude compensation of an individual employee in excess of an annual salary of $100,000 (but only to the amount of such overage), employees outside the U.S., FICA and income tax withholdings.

What are PPP Loan terms?

The U.S. Treasury Department has stated the PPP Loan terms will be the same for every borrower. More specifically:

• Loan payments deferred for six (6) months;
• Initial 0.5% interest rate (capped at 4%);
• Loan is due two (2) years from inception;
• No prepayment penalties or fees;
• No collateral required; and
• No personal guarantee required.

What can a PPP Loan be used for?

PPP Loans may only be used for (a) payroll costs (as discussed above); (b) group healthcare benefits, insurance premiums; (c) interest (but not principal) on mortgages or other debt incurred prior to February 15, 2020; (d) rent on any lease in force prior to February 15, 2020; and (e) utility payments (electricity, gas, water, transportation, telephone or internet access which began prior to February 15, 2020). U.S. affiliates of Irish parent companies may not use PPP Loan proceeds to pay dividends to a parent entity, make other capital distributions or make loans to non-US entities.

Are PPP Loans forgivable?

 PPP Loans can be forgiven, in whole or part, in a number of circumstances; the expectation is that a majority of PPP Loans will be forgiven. As a threshold matter, the amount of a PPP Loan that may be forgiven is equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on (a) payroll costs (as discussed above); (b) interest payment on any mortgage incurred prior to February 15, 2020; (c) payment of rent on any lease in force prior to February 15, 2020; and (d) payment on any utility for which service began before February 15, 2020. The amount forgiven may not exceed the principal of the PPP Loan.

However, the amount forgiven will be reduced based on failure to maintain the average number of full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower. The amount forgiven will also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter. Reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent that reductions are reversed by June 30, 2020. It is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

Forgiven amounts will not constitute cancellation of indebtedness income for U.S. federal tax purposes.

What will potential borrowers have to provide as part of the PPP Loan process?

As part of the loan origination process, potential borrowers will have to affirm that (a) current economic uncertainty makes the loan necessary to support its ongoing operations; (b) the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and (c) it has not and will not receive another loan under the PPP Loan program or other CARES-related program.

Applicants will have to provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.

Are there other issues around PPP Loans?

 Potential borrowers should carefully review existing loan terms and other existing financing arrangements to ensure that obtaining a PPP Loan does not breach the terms of such arrangements.

Companies that obtain a PPP Loan may not be able to use some of the tax benefits in the CARES Act, such as a payroll tax deferral.

Potential borrowers should speak to their U.S. banker as soon as possible because we’re hearing from banks that, given the expected demand for these loans, they are prioritizing their existing customers.

 What’s next?

 The CARES Act allocates $500 billion to the U.S. Treasury Department for loans and other financial supports for distressed companies who may not be eligible for a PPP Loan. We are waiting on specific guidance and regulations from the U.S. Treasury Department as to the process and procedures that will be used in connection with deployment of this $500 billion allocation. We will provide an update once such guidance is published.

Please contact Michael E. Burke at mike.burke@agg.com or +1.202.677.4046 if you have any questions on PPP Loans, the CARES Act or other related matters.

My wonderful colleague, Rebecca Kolb, has written a terrific client alert, below, on whether, and how, business interruption insurance in the U.S. could cover COVID-19-related losses. Irish and NI companies with US operations certainly have a lot on their plates right now, but this alert is essential reading:

Everyone is facing an unknown future with COVID-19. One question for clients is whether the impact of business interruption from the virus can be covered by their insurance policies. Having some of the loss covered by insurance could actually be the difference in a business making it through this uncertain time or facing bankruptcy. But whether coverage exists is not an easy question and requires a close examination of the coverages a business has. And, even if there is coverage, some requirements for invoking that coverage may require rapid action. Notice requirements may be be within thirty days (or less) of the interrupting event—a fairly short window when balancing other considerations that come with managing a response to a pandemic.

What is business interruption coverage and when does it generally apply?

Business interruption coverage will generally cover lost revenue and unavoidable continued business costs and is usually under the commercial property coverage part of a policy. It provides for coverage when there is “direct physical loss of or damage to” insured property. Government efforts to contain COVID-19 may also invoke a “civil authority” provision in a business interruption policy, which may apply when a government restricts or prohibits access to the insured property based on physical loss or damage.

The policy language is typically along the lines of:

This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.

Thus, the requirements are: (1) physical loss or damage, (2) to insured property, (3) caused by a covered peril, (4) resulting in quantifiable business interruption loss, (5) during the period of time it takes to restore the damaged property.

Can COVID-19 be physical loss or damage?

Whether exposure or potential exposure to COVID-19 at a property falls within the requirement of physical loss or damage is likely to be a hotly contested issue. Already, one business out of New Orleans has sued its insurance provider to have a court rule on whether closures from the pandemic could qualify. Some courts have already determined that physical loss can occur without structural or tangible changes to a property, such as through contamination. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418 WHW, 2014 WL 6675934, at *4 (D.N.J. Nov. 25, 2014) (ammonia contamination that rendered the premises unsafe constituted direct physical loss under business interruption coverage); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997) (asbestos contamination was direct physical loss under “all-risk policy”). And other courts have indicated that the threat of harm which renders property unsafe could be enough to trigger coverage. See, e.g., Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477, 493, 509 S.E.2d 1, 17 (1998) (the threat of rocks and boulders “crashing down at any time” on a property after a landslide would qualify as direct physical loss); Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 39, 437 P.2d 52, 55 (1968) (the saturation of the ground around a property rendered the premises unsafe and would qualify as direct physical loss).

When could “civil authority” coverage apply?

Generally, “civil authority” coverage applies when there is a forced closure by a civil authority. This typically happens through a government order barring access to the insured property based on physical loss or damage. In addition to the considerations regarding physical loss, there are questions of whether the government guidance in a particular area rises to a forced closure.

If the government has not ordered the closure of a particular business, and merely discourages the population from visiting that business, it may not be enough to invoke civil authority coverage, though that still depends on the policy language. This has already led to substantial commentary from, for example, the United Kingdom’s hospitality trade organization, UKHosptiliaty, given the British government’s decision to only strongly advise its citizens to avoid restaurants, rather than order that they be shut down.

What about other bars to business interruption coverage?

There are several potentially applicable standard exclusions that could separately bar coverage for a COVID-19 business interruption, some specifically adopted by the industry to address pandemic concerns after the last SARS outbreak. For example, the Insurance Services Offices, Inc., or “ISO,” is a company that creates template forms that insurance companies often use for their policies. In 2006, the ISO forms for business interruption coverage added an exclusion to specifically bar coverage for virus pandemics. But some states seem to be looking at legislation that would negate the exclusion. New Jersey, for example, has proposed legislation that would require business interruption coverage for COVID-19 even if there is a specific exclusion in the policy for influenza pandemics.

Are there other potential policies or coverages that could apply?

Depending on the type of business, there could be several other types of insurance that could apply in the wake of this pandemic. Under a commercial property policy, there could also be dependent property/contingent liability coverage. This coverage may apply if a supplier or another business has a business interruption from physical loss that impacts the insured business.

Other potential policies that may apply are:

• Event Cancellation policies (which are available to companies in the event business)
• Loss of Attraction coverage (which can apply for destruction of an “attraction” nearby the insured property)
• Supply Chain policies (which are similar to dependent property/contingent liability coverage but may not require physical loss from the supplier business)
• Commercial General Liability policies (which may apply to loss suffered from bodily harm)
• Director & Officers policies (which may apply in the event of a lawsuit based on company actions in response to COVID-19.

Conclusion

Insurance policies exist to mitigate the effects of unanticipated economic harms. COVID-19 certainly qualifies. But clients should carefully review existing policies to take advantage of any existing coverage and, equally as important, to give proper notice to their insurers of potential claims.