Preparing your business for possible coronavirus lawsuits
QUESTION: We are preparing to ramp our rental operations back up, but I keep hearing about new laws and lawsuits being filed against equipment lessors. I am especially concerned about how much exposure to claims related to the coronavirus (COVID-19) I might suffer, what I can do to protect myself legally and how many new types of lawsuits might arise as a result of all this.
Answer: At the risk of sounding glib, the answer to all three questions is a lot. In March, we looked at some of the risks associated with market downturns that have propelled torrents of lawsuits in the past — many of which have since become realities in the current environment, including:
- An overall slowdown in economic activity.
- Resulting slumps in demand.
- A cascade of additional cancellations and contract terminations.
- Increases in slow/late/no-pays.
- Customer/contractor bankruptcies.
- Equipment seizures by bankruptcy trustees.
- Increased chargeback claims from customers.
- Increased equipment theft.
- Direct impacts on employees and employment relationships.
- An associated expansion of lawsuits relating to each of the above.
Commencement of the last item on our prior list, the inevitable expansion of litigation, is now underway. According to MarketWatch, as of mid-May, at least 917 federal and state lawsuits already had been filed just in relation to the coronavirus pandemic.
An impending tsunami of litigation. It would be impossible to cover all of the issues that have become ripe for litigation here, but to summarize the present situation:
Overseas. Internationally, at least nine lawsuits had been filed against China, eight of which were class actions that would represent literally thousands of people and businesses. One suit had even been filed by the Attorney General of Missouri, thus far the only U.S. state to commence legal action against China. A separate but similar case also has been filed against the Chinese Communist Party, rather than China itself, perhaps in an effort to avoid application of the Foreign Sovereign Immunities Act, which makes it difficult, though not impossible, to sue foreign governments.
At home. Within the United States, we now are seeing a wave of new lawsuits. Workers are suing their bosses for exposing them to allegedly unsafe conditions; consumers are alleging they were exposed to contaminated items and/or environments; customers are demanding refunds and/or cancellation rights; and many others. Insurers, some rightfully, are typically claiming that pandemics are not covered, leaving many insureds at best unable to rely on their existing liability, environmental contamination, business interruption and even workers’ compensation policies. At worst, it can leave insureds incapable of defending themselves from what threatens to be a tsunami of uninsured claims.
Class action lawsuits. A number of these claims will undoubtedly come in the form of class action lawsuits. A class action is a case in which a large number — sometimes hundreds or even thousands — of plaintiffs file suit as a single consolidated group or class. These suits are extraordinarily dangerous for equipment operations because they enable plaintiffs’ attorneys to accumulate vast numbers of smaller claims, which might ordinarily be economically unfeasible to pursue, into enormous collective actions seeking perhaps tens of millions of dollars. Among examples of this was the Hertz Damage Waiver suit — Miguel V. Pro., et al. v. Hertz Equipment Rental Corp. — in which more than 746,000 class action plaintiffs sued Hertz for allegedly mishandling its damage waiver. More recently, another large national rental company reportedly settled a multi-million-dollar class action alleging it overcharged for both refueling and transportation. Among other things, the suit alleged that the rental operator had breached its own rental contract, which only allowed it to recover its own costs for refueling and transportation, rather than the higher amounts it had been charging. Critically, in both of these cases, the rental contract could have saved the lessor but did not.
It is a whole new world in terms of legal exposure. As bad as the above cases were, the current state of affairs fundamentally is different and far worse for the equipment and event rental industry primarily because the individual amounts claimed likely will be markedly higher; many involving serious illnesses and/or deaths. Existing insurance policies often will not cover claims and because of the asset-heavy nature of most dealerships and rental operations, plaintiffs’ lawyers are not likely to limit their claims to the amounts, if any, which are covered by insurance, as they often do in other cases. Instead, they are much more likely to pursue equipment seizures to pay judgments.
A looming catastrophe. This is potentially catastrophic for dealers and lessors because dealerships and rental operations are litigation targets. Largely because most equipment dealers and rental operations are asset-laden and housed in a single legal entity — typically, a corporation or limited liability company (LLC) — they make attractive targets for plaintiffs’ lawyers because a judgment against a single entity can yield rights to seize all or virtually all of the entity’s assets. That generally is not the case when assets are held in separate entities and, for example, leased back into a customer-facing dealership or rental operation.
The nature of COVID-19 claims creates its own problems. The current level of concern regarding how COVID-19 can be spread — including through dealings with equipment and event rental company representatives and/or with equipment that might be contaminated — places dealers and lessors in a perilous position. That peril grows, medically and legally, when in-person contact, such as for negotiation, training and/or contract signing, is required, because it opens dealers and lessors to claims that can be difficult or impossible to disprove that someone became infected as a result of using your contaminated equipment.
The cumulative result. If insurance coverage for any of these claims is wholly or partially unavailable, the assets of these dealers and lessors likely will be exposed to being seized and sold off by these plaintiffs and their attorneys to satisfy uninsured judgments.
What, then, are equipment and event rental companies to do? The following is a list of steps to consider taking immediately.
Reorganize your business. Consider moving your assets into one or more protective or special purpose entities and leasing them back into your primary dealership or rental operation. Many claims will not be able to follow your assets if they are moved into a separate entity before suit is filed. This will not make you more popular with your accountant, but it likely will place your assets beyond the reach of many predatory lawsuits.
Make available EPA-registered disinfectants/ sanitizers/cleaners capable of killing the coronavirus with each rental.
Enhance protections and warnings. If you have not already done so, take as many of the following protective actions as possible:
Require employees and customers to wear masks, and to follow social distancing and enhanced hygiene rules while at work and during deliveries and retrievals.
- Set up touchless pickup and return areas.
- Require employees and customers to scrupulously clean all equipment, vehicles and work areas before and after each use/rental.
- Place stickers on all equipment and vehicles admonishing users to thoroughly clean it/them before and after each use, and incorporate cleaning requirements into any instructions you normally provide.
- Make available EPA-registered disinfectants/sanitizers/cleaners capable of killing the coronavirus with each rental. The EPA maintains a list of registered disinfectants for use against SARS-CoV-2 at epa.gov/pesticide-registration/list-n-disinfectants-use-against-sarscov-2. The Occupational Safety and Health Administration (OSHA) also requires employers to protect their workers from exposure to hazardous chemicals used for cleaning and disinfection (See 29 CFR 1910.1200 and Subpart I). According to the Centers for Disease Control and Prevention (CDC), diluted household bleach solutions and/or alcohol solutions containing at least 70 percent alcohol also may be used for disinfecting households. For more information online, go to cdc.gov/coronavirus/2019-ncov/prevent-getting-sick/disinfecting-your-home.html.
- Post signs in and around each rental facility warning employees and customers of the need for strict adherence to the above requirements. A new OSHA COVID-19 poster is available in both English and Spanish. You also should regularly visit OSHA’s coronavirus webpage at osha.gov/SLTC/covid-19 for updates and additional requirements. The American Rental Association (ARA) also has released a guide for reopening your business and is launching a Clean. Safe. Essential. training certificate program as part of RentalU, which includes a kit with point-of-sale items upon successful completion of the program.
- Remember also that there are 28 OSHA-approved state plans operating state-wide occupational safety and health programs. State plans are required to have standards and enforcement programs that are at least as effective as OSHA’s and may have different or more stringent requirements. You can learn whether your state maintains its own state plan and obtain relevant contact information at osha.gov/stateplans.
Use your contracts to limit or eliminate claims. In light of the probability that in the coming months lawsuits are going to have an outsized effect on dealers and rental operations and that determinations regarding whether to file such lawsuits are often based primarily on who is most likely to win, it is your contract documents that often can dictate whether you win or lose in advance. That means it is now more important than ever to:
- Modify your sales, lease, service, purchase, purchase option, damage waiver, financing and other contracts to ensure that, among other things, your customers waive all claims that can legally be waived — including claims arising from alleged contamination; acknowledge receipt of, and agree to comply with, all applicable cleaning and safety instructions; assume all risks, including risks associated with cleaning and/or contamination; and agree to indemnify you for claims arising from such risks.
- Implement an electronic signature regime which allows you, your employees and your customers to execute contracts and related documents remotely.
- Document your customers’ receipt and acceptance of items that are delivered and retrieved on a touch-free basis by using separate delivery and return certificates.
- Consider adding an arbitration clause to your customer contracts. In 2019, the U.S. Supreme Court ruled in Lamps Plus Inc. v. Varela that arbitration clauses can effectively be used by businesses to avoid class action lawsuits by their customers if their contracts call for arbitration. This overruled the lower appeals court’s ruling and reversed what had been the prevailing view that arbitration clauses could not be used in this fashion. Although arbitration provisions suffer from several shortcomings, including the general perception that they actually can make it easier and less expensive for individual customers to pursue large claims, given the potential dangers associated with class actions discussed above, dealers and rental operators should now consider adding arbitration clauses to their contracts in many cases.
As courts reopen around the country, be prepared for a landslide of litigation. If, as many fear, insurance does not provide coverage, the resulting legal liability could yield asset seizures and ultimately, bankruptcy. Dealers and lessors need to take advantage of every legal means available to protect themselves and need to do so quickly