What Businesses Need to Know about Piercing the Veil

If you are one of the fortunate business owners to have survived the pandemic and the historic economic downturn that it created, you are probably just happy to have come this far. Often business owners will tell me that they were too busy just trying to keep the business running to worry about corporate record keeping and follow corporate formalities.  However, ignoring corporate formalities can have serious negative consequences, including the potential that you will be sued personally. In the legal world, this is called “piercing the corporate veil” and is a method whereby the courts will look through the shield of the corporate or limited liability company entity and hold the owner personally liable.

Owners must take steps to show that the business exists separately from them. Below are some concrete actions you can take to protect yourself:

  1. Undertaking necessary formalities. Corporations must follow the strict formalities set forth in the laws of their states regarding governance, election of officers and directors and other matters.  While limited liability companies generally are not subject to the same requirements that apply to corporations, they still must adhere to the state laws.
  2. Recordkeeping. A corporation should adopt by-laws, issue stock to the owners, maintain a stock ledger, and hold annual meetings to appoint directors and elect officers.  Limited liability companies should have an operating agreement that addresses the governance and operation of the entity, for example, whether the company is run by its members or by one or more “managers” and establishing procedures for admission of new members and/or sale or transfer of membership interests.
  3. File Annual Reports. File all annual filings required by the state of incorporation or formation in a timely manner and pay the necessary filing fees.
  4. Document your business actions. Any major business decisions or meetings of the owners, directors, officers or managers should be memorialized in writing in either as meeting minutes or written consents (for actions taken without a meeting).  
  5. Don’t comingle business and personal assets. Keep business assets separate from the assets of the owner(s).  The business should have its own checking and other bank accounts and credit card that are separate from the owners to ensure proper record-keeping. Even if you operate the business out of a home office, effort should be made to keep business and personal assets physically separate as well.
  6. Adequate business capitalization. Ensure that the business is sufficiently funded (capitalized) to own its furniture, equipment and other tangible assets and to maintain its operations.  If a loan from the owner is necessary to fund the organization, such loan must be in writing and signed by the business entity.  The business should also maintain adequate property and casualty insurance coverage for its tangible property and commercial liability insurance for its operations not only because it is prudent to do but also to demonstrate that the entity has made adequate provision for payment of potential liabilities. 
  7. The corporate or LLC status should be clearly stated. A customer should be able to distinguish you from your company.  Some ways to do this are: make sure contracts and invoices to clients are in the company’s name; create business cards that display the name of the company, and make purchases and pay invoices via a business checking account or credit card.

If the pandemic has provided you with extra time in your busy schedule, now is a great time to conduct an audit to ensure that you (the business owner) are following company formalities to shield you from personal liability. 

If you have questions regarding how to protect you from personal liability from your business, please contact Mariel Giletto, corporate shareholder at Flaster Greenberg, at mariel.giletto@flastergreenberg.com or (856) 382.2206.

Digital, Digital Break Down: How to Make Sure You’re *NSYNC with IRS Changes for Reporting Virtual Payment Transactions

You may have seen recent headlines warning that the IRS is tracking certain transactions paid using digital payment services such as Paypal, Cash App, Zelle, and Venmo.  Even worse, you may have wondered whether a new law could make these commonplace virtual transactions taxable.  With so many people relying on digital payment platforms these days to pay for services, request rent from tenants, or pay for dinner at restaurants, you might think “It’s Gonna Be Me” who has to pay additional taxes when reading these headlines.  Say “Bye, Bye, Bye” to those concerns- you can still receive payment for winning the family March Madness bracket (or, perhaps, reimburse a friend for a bottle of “Pop”) without concerning yourself with these new rules.

However, if you run a small business that accepts payment through one or more of the aforementioned digital payment platforms, you should keep reading.  You may have heard of the American Rescue Plan Act of 2021 (“ARPA”), which provided emergency grants, lending, and investment to small businesses suffering as a result of the COVID-19 pandemic.  One small provision of the American Rescue Plan that quietly went into effect on January 1, 2022, requires businesses to report transactions received from those digital services totaling $600 or more per year. 

You may ask yourself- weren’t all transactions required to be reported as income on your tax return anyway?  The short answer to this question is, yes, they were.  However, the previous threshold for these platforms to issue 1099-Ks to users were when the user’s annual transactions exceeded $20,000 or 200 total transactions.  Thus, this new rule under ARPA allows the IRS to crack down on reporting, honing in on the likes of smaller side hustles, Etsy shops, and Airbnb operators that have increased as a result of the pandemic.

What does this mean for your small business?  In the short term, it means you may receive requests for additional information from any digital payment platform you use to ensure they have everything needed to issue a 1099-K, such as your social security number or tax ID.  Additionally, some of these platforms have indicated that they will alter their payment process so that small business owners can differentiate between business and personal payments.  In the long run, beginning when filing 2022 tax returns next year, you should expect to receive a 1099-K from these platforms to reflect the revenue reported on your behalf to the IRS.

Again, all income received should be reported as income to the IRS on annual tax returns as required by Section 61 of the Internal Revenue Code.  This new rule created by ARPA not only heightens reporting requirements to ensure compliance, but will also allow the IRS to collect data to be used for a number of purposes, including “new examination and collection approaches.”  While it might be “Tearin’ Up [Your] Heart” to do so, it’s time for small business owners to face the music and embrace these new reporting requirements.

If you have any questions regarding tax compliance for your small business, please consider contacting any member of Flaster Greenberg’s Business & Corporate Department.

After Ida, A Look At Sandy’s Flood Insurance Lessons

This article originally ran in Law360 on October 1, 2021. All rights reserved.

Hurricane Ida once again exposed our nation’s severe vulnerability to natural disasters. One-hundred-year storms are now pummeling us on what seems to be an annual basis. The breadth of Ida’s impact was unique, however, leaving a swath of destruction from the Gulf Coast to the East Coast.

While floods are the nation’s most common natural disaster, less than 1 in 10 Americans are adequately insured against flooding, according to a study conducted by ValuePenguin.com in 2019. That same study revealed that although 91% of homeowners have homeowners insurance, only 7% have flood insurance.

But, those are just broad averages. The residents of those states most prone to flooding are much better protected. For example, as might be expected, homeowners in Louisiana and Florida are insured for floods at far greater rates than the average — 44% and 36%, respectively.

Unfortunately, that means that homeowners in other states are insured at rates much lower than the average. For example, homeowners in Pennsylvania and New York — two of the states hit hardest by Ida — are insured only at the rate of 1.7% and 4.6%, respectively.

The National Flood Insurance Program

Damage resulting from floods is typically excluded under standard property insurance issued to home and business owners. Those seeking insurance must purchase a separate flood insurance policy. Flood insurance is available through the National Flood Insurance Program, or NFIP, administered by the Federal Emergency Management Agency, and from many private insurers.

Congress created the NFIP in 1968. It makes federally backed flood insurance available in communities that agree to adopt and enforce floodplain management ordinances.

For the most part, flood insurance policies under the NFIP are issued by private insurers through the Write Your Own, or WYO, program, started in 1983. As of September 2020, 60 insurance companies participated in the WYO program. Those private insurers issue flood insurance policies and adjust flood claims on behalf of the federal government. In 2019, 88% of NFIP policies were issued through the WYO program.

Flood Insurance Claims Are Undervalued

Unfortunately, even those with flood insurance may still be up the proverbial creek without a paddle. FEMA publishes statistics that reveal systematic underpayments of flood insurance claims.

Using Superstorm Sandy as an example, nearly 144,400 policyholders filed flood insurance claims. When numerous problems, including fraud, were uncovered in connection with the adjustment of those claims, FEMA offered those policyholders an opportunity to have their claims re-reviewed.

Over 19,000 Sandy claimants took advantage of that opportunity. As of January 2018, 17,854 of those re-reviewed claims were resolved with the policyholder agreeing to accept the amount as adjusted by the insurer. Of those resolved claims, nearly 85% of the claimants received additional payments totaling $258,648,226 — or nearly $14,500 for each underpaid Sandy claimant.

Take a moment to reflect on those statistics. FEMA’s own internal re-review process revealed initial underadjustments in 85% of the flood insurance claims that were submitted in the aftermath of Superstorm Sandy. Based on that large sample, if every one of the 144,000 Sandy claimants had sought a re-review, the underpayments could have approached $2 billion.

But the evidence of underadjustments does not end there. If a Sandy claimant was not satisfied with the FEMA re-review, they were entitled to a third-party neutral review by, for example, a retired judge. Approximately 2,500 Sandy claimants requested a third-party neutral review. As of Dec. 14, 2017, 2,082 third-party neutral reviews had been completed.

In nearly 11.5% of those cases, additional payments were deemed due and owing. Total additional payments of $44,603,756 were paid in connection with those third-party neutral reviews or approximately $187,000 for each underadjusted claim.

But, there is still more. Sandy claimants that remained dissatisfied with the FEMA processes, including the re-review and third-party neutral review, were able to pursue litigation. Nearly 2,000 Sandy-related flood insurance cases were filed against NFIP insurers in the federal district courts of New York and New Jersey. As of February 2018, 1,631 have been settled, with checks issued totaling $164,320,515, or approximately $100,000 per claimant.

Lessons Learned

Those that have suffered, or may in the future suffer, a flood loss can learn several valuable lessons from the experience gained in connection with Superstorm Sandy, Ida and other recent natural disasters. Those lessons can be employed both before and after the next storm.

Before the Storm

Every homeowner, renter, business owner, nonprofit and public entity should reevaluate its need for flood insurance. Flood risks that were not apparent just a few years ago are all too real in today’s climate. You can determine if you are located in a high-risk flood zone by looking up your address on the FEMA Flood Map Service Center.

Even if your home or entity is not located in a high-risk zone, the purchase of flood insurance should be considered. No property has zero risk of flooding. Indeed, 25% of all flood insurance claims are made in low-to-moderate flood risk areas.

After the Storm

If loss is sustained by those who have not purchased stand-alone flood insurance, all is not lost. Often flooding is accompanied by other causes of loss that may be covered under more commonly purchased property insurance policies that otherwise exclude flood losses. All available insurance should be examined for potential coverage.

For example, much of the damage caused by Ida in the Northeast was by reason of wind as opposed to flood. Wind damage is typically covered under standard form property insurance policies, including homeowners policies.

By way of further example, after Hurricane Katrina, many businesses argued that flooding was not the cause of their losses. Rather, those businesses contended that their losses were caused by the failure of a negligently constructed levy system. While that argument was ultimately rejected in 2007 by the U.S. Court of Appeals for the Fifth Circuit in In re: Katrina Canal Breaches Litigation after extensive proceedings, it reveals how some creative thinking may uncover coverage where none was perceived initially.

When multiple causes of loss are at issue, however, anti-concurrent causation, or ACC, clauses are often implicated. ACC clauses typically provide that when a loss is caused by a combination of covered and excluded causes, the resulting loss will not be covered.

A typical ACC clause states: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

Insurers often take the position in denying coverage that ACC clauses remove coverage for wind damage if a flood happens at about the same time, which will likely be a serious issue in property damage claims resulting from Hurricane Ida.

Policyholders that suffer a loss after purchasing flood insurance should anticipate and be prepared for FEMA, NFIP insurers and private flood insurers to initially undervalue their claims. While that shouldn’t be the case, the experience after Sandy proves once again that insurers have a strong financial incentive to undervalue claims.

The experience after Sandy reveals further that an insurer’s initial adjustment should never be accepted without a critical review. Policyholders should remain vigilant in the face of an initial undervaluation of their flood insurance claim. Any avenue for further review and reconsideration should be pursued.

The most common issues of dispute in the adjustment flood insurance claims concern the scope of necessary repairs, the actual costs of those repairs and whether the claimed damage was preexisting.

While it shouldn’t be the case, often maximizing insurance recoveries can only be accomplished with the threat of, or the commencement of, litigation. Certainly, that was the lesson learned from Sandy, where successful litigants received an additional $100,000 on average.

Lee Epstein is a shareholder and chair of Flaster Greenberg’s Insurance Counseling and Recovery Department. He represents corporate and individual policyholders in recovering insurance in response to an array of hazards and catastrophic property and business interruption losses. He advises market leaders in the airline, chemical, construction, financial services, food, HVAC&R, packaging, retail and satellite television industries. Lee is currently litigating insurance coverage disputes throughout the state and federal courts of the United States. He can be reached at 215.279.9380 or lee.epstein@flastergreenberg.com.

Matthew Goldstein is a shareholder and member of Flaster Greenberg’s Insurance Counseling and Recovery and Litigation Departments, focusing his practice on complex commercial and corporate litigation in both state and federal courts. Matthew specializes in securing insurance recoveries for corporate and individual policyholders and representing clients in business disputes and financial litigation. He can be reached at 215.279.9392 or matthew.goldstein@flastergreenberg.com.

The State of Remote Online Notarization

As a result of the COVID-19 pandemic, many states implemented temporary measures allowing public notaries to perform notarial acts virtually.  Over a year and a half after the initial states of emergency were instituted, some states have allowed these temporary measures to lapse, while others have codified them into law.  Here is how New Jersey, New York, Pennsylvania and Florida have addressed the usage of remote online notarization (“RON”) as these emergency permissions have expired:

New Jersey:  On July 22, 2021, New Jersey governor Phil Murphy signed A-4250/S-2508 into law, permanently allowing RON.  The new law permits the use of “communication technology” to perform notarial acts.  Communication technology is defined as an electronic device or process that “(a) allows a notarial officer and a remotely located individual to communicate with each other simultaneously by sight and sound; and (b) when necessary and consistent with other applicable law, facilitates communication with a remotely located individual who has a vision, hearing, or speech impairment.”  The notary public’s obligations are fulfilled when using such communication technology, subject to the following: (1) the remotely located individual (A) signs the document and a declaration under penalty of perjury during the course of an audio-visual session, and (B) sends that document and declaration to the notary by no later than three days after the signing, and (2) the notary records the audio-visual session of the individual signing the document and declaration and, after receiving the record and declaration, executes the “certificate of notarial act” as otherwise required by the statute.  This law goes into effect on October 20, 2021.

Pennsylvania: Pennsylvania enacted a permanent RON statute effective October 29, 2020 that has remained intact since.  We provided an overview of this law in our prior Legal Alert, Remote Online Notarization: One Year Later.

Florida: Florida presciently implemented a RON statute that became effective on January 1, 2020 and is codified at Fl. Stat. 117.295.  Florida has not implemented any additional statutes addressing RON since then.  Notably, Florida notaries must complete an additional registration to be permitted to conduct RON services.  The registration process is explained in Section 1N-7001 of Florida’s Administrative Code, and involves paying a $10 fee, and submission of an application to the Florida Department of State.  We provided an overview of this law in our prior Legal Alert, Remote Online Notarization: One Year Later.

New York:  Former New York Governor Andrew Cuomo enacted temporary RON authorization in March 2020 which expired on June 24, 2021.  To date, the New York legislature has declined to codify these temporary RON measures and, as a result, the previous notarization rules established in Article 6 of the Consolidated Law Service of New York govern.  

Before you virtually notarize any document, make sure you are in compliance with your state’s virtual notary rules.  If you or your business need legal advice, please consider contacting any member of Flaster Greenberg’s Business & Corporate Department.

Déjà Vu All Over Again: Hurricanes Katrina and Ida and the Long and Winding Road to Insurance Recovery

By: Lee Epstein, Chair, Flaster Greenberg’s Insurance Counseling and Recovery Department

Hurricane Ida made landfall yesterday, exactly sixteen years to the day that Hurricane Katrina landed. Back then, I had just completed a trial in a small Parish next door to New Orleans. Fortunately, my flight home took off safely on Friday afternoon before Katrina hit the following Monday, August 29, 2005. I was spared the devastation suffered by so many along the Gulf Coast. But so many that I befriended lost so much.

Over the succeeding years, I’ve had many opportunities to revisit New Orleans and the surrounding area. I witnessed the recovery, reclamation and rebuilding of that vital community. It was slow and it was hard but it happened.

Beyond the personal toll exacted by Hurricane Ida, the property and business losses are projected to be among the greatest caused by a natural disaster. As the recovery efforts begin in earnest, this checklist is offered to assist those who are planning to submit an insurance claim for the property or business interruption loss suffered.

As Ida continues to ruble northward, the heartache is real and will continue. We’ve been down this road. It’s long, winding and exhausting. But we’ve made it through before and we will do so again.

For more information, please contact Lee Epstein, Chair of the Insurance Counseling and Recovery Department at Flaster Greenberg PC.

The Uniform Personal Data Protection Act Is Here

In July 2021, the Uniform Law Commission (“ULC”) voted to approve the Uniform Personal Data Protection Act (“UPDPA”). The UPDPA is a model data privacy bill designed to provide a template for states to introduce to their own legislatures, and ultimately, adopt as binding law. 


The UPDPA would govern how business entities collect, control, and process the personal and sensitive personal data of individuals. This model bill has been in the works since 2019 and includes the input of advisors, observers, the Future of Privacy Forum, and other stakeholders. This is significant because the ULC has set forth other model laws, such as the Uniform Commercial Code, which have largely been adopted across the states. 

Interestingly, the model bill is much narrower than some of the recent state privacy laws that have been passed, such as the California Privacy Rights Act and Virginia’s Consumer Data Protection Act. Namely, the model bill would provide individuals with fewer, and more limited, rights including the right to copy and correct personal data. The bill does not include the right of individuals to delete their data or the right to request the transmission of their personal data to another entity.  The bill also does not provide for a private cause of action under the UPDPA itself, but would not affect a given state’s preexisting consumer protection law if that law authorizes a private right of action. If passed, the law would, consequently, be enforced by a state’s Attorney General. 


The UPDPA would apply to the activities of a controller or processor that conducts business in the state or produces products or provides services purposefully directed to residents of this state and: 

(1) during a calendar year maintains personal data about more than [50,000] data subjects who are residents of this state, excluding data subjects whose data is collected or maintained solely to complete a payment transaction; 

(2) earns more than [50] percent of its gross annual revenue during a calendar year from maintaining personal data from data subjects as a controller or processor; 

(3) is a processor acting on behalf of a controller the processor knows or has reason to know satisfies paragraph (1) or (2); or 

(4) maintains personal data, unless it processes the personal data solely using compatible data practices. 

The UPDPA defines “personal data” as a record that identifies or describes a data subject by a direct identifier or is pseudonymized data. The term does not include deidentified data. The bill also defines “sensitive data” as a category of data separate and apart from mere “personal data.” “Sensitive data” includes such information as geolocation in real time, diagnosis or treatment for a disease or health condition, and genetic sequencing information, among other categories of data. 

The law would not apply to state agencies or political subdivisions of the state, or to publicly available information. There are other carve-outs, as well. 

Notably, the model bill also contains several different levels of “data practices,” broken down into three subcategories: (1) a compatible data practice; (2) an incompatible data practice; and (3) a prohibited data practice. Each subcategory of data practice comes with a specific mandate about the level of consent required—or not required—to process certain data. For example, a controller or processor may engage in a compatible data practice without the data subject’s consent with the expectation that a compatible data practice is consistent with the “ordinary expectations of data subjects or is likely to benefit data subjects substantially.” Section 7 of the model bill goes on to list a series of factors that apply to determine whether processing is a compatible data practice, and consists of such considerations as the data subject’s relationship to the controller and the extent to which the practice advances the economic, health, or other interests of the data subject. An incompatible data practice, by contrast, allows data subjects to withhold consent to the practice (an “opt-out” right) for personal data and cannot be used to process sensitive data without affirmative express consent in a signed record for each practice (an “opt-in” right). Lastly, a prohibited data practice is one in which a controller may not engage. Data practices that are likely to subject the data subject to specific and significant financial, physical, or reputational harm, for instance, are considered “prohibited data practices.” 

The model bill has built in a balancing test meant to gauge the amount of benefit or harm conferred upon a data subject by a controller’s given data practice, and then limits that practice accordingly. 

What’s Next

After final amendments, the UPDPA will be ready to be introduced to state legislatures by January 2022. This means that versions of this bill can, and likely will be, adopted by several states over the next couple of years—and perhaps, eventually, lead to some degree of uniformity among the states’ privacy laws. 

Krishna A. Jani, CIPP/US, is a member of Flaster Greenberg’s Litigation Department focusing her practice on complex commercial litigation. She is also a member of the firm’s cybersecurity and data privacy law practice groups. She can be reached at 215.279.9907 or krishna.jani@flastergreenberg.com.

COVID Insurance Rulings Are Misinterpreting ‘Physical Loss’

A version of this article originally ran on Law360 on July 23, 2021. All rights reserved.

All-risks property insurance policies typically insure against direct physical loss of or damage to covered property.

If asked, pre-pandemic, whether a policyholder’s loss of use of property — in the absence of any structural alteration or destruction — constitutes insured direct physical loss of or damage to property, the answer would have been a qualified yes. Such an understanding was supported by the historical purpose of all-risks insurance, the ordinary meaning of the operative policy language and pre-pandemic case law.

Yet, in a spate of cases, decided in response to claims of business interruption insurance for COVID-19 losses, courts have held that the loss of use of property, standing alone, does not constitute insured physical loss of or damage to property. Those courts reason that the alteration or destruction of covered property is a necessary predicate to satisfying the physical loss of or damage to property requirement.

On July 2, the U.S. Court of Appeals for the Eighth Circuit in Oral Surgeons PC v. The Cincinnati Insurance Co. continued that trend in the first federal court appellate decision on this emerging issue:

The policy here clearly requires direct “physical loss” or “physical damage” to trigger business interruption and extra expense coverage. Accordingly, there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.

As posited in this article, the holdings in Oral Surgeons and the other recent COVID-19 insurance cases trending in favor of insurers fail to comport with the historical purpose of all-risks property insurance, the ordinary meaning of the salient policy language, and the majority of court holdings pre-pandemic.

Indeed, shortly after the Oral Surgeons opinion, on July 13, a Pennsylvania Common Pleas court embraced those very same precepts in Brown’s Gym Inc. v. Cincinnati Insurance Co., while ruling in favor of a policyholder:

Prior to the onset of the COVID-19 pandemic, courts throughout the country adopted the contamination theory in recognizing that the existence of odors, bacteria, and other imperceptible agents such as ammonia, salmonella, lead, e-coli bacteria, and carbon-monoxide, may constitute physical damage or loss to a property if its presence renders the structure uninhabitable or unusable, or essentially destroys its functionality.

Under the contamination theory adopted in Brown’s Gym and scores of other cases, the physical loss or damage requirement for recovering all-risks insurance is satisfied when a foreign agent, including a coronavirus, renders property uninhabitable or unusable, or destroys its functionality.

The Historical Purpose and Function Of All-Risks Property Insurance

The modern-day all-risks property insurance policy evolved out of the standard fire insurance policy developed initially in New York in 1866.The standard fire policy insured “against all direct loss or damage by fire.”The operative phrase made no reference to the term “physical”; property exposed to fire would always undergo a tangible, concrete and observable alteration.

The requirement that loss or damage be physical first appeared in marine cargo and inland marine policies in the 1930s and 1940s. Some have speculated that this requirement was added to clarify the underwriters’ intent that there was no coverage for intangible losses.

Whatever the reason, the “physical loss or damage” language was later incorporated into the all-risks property insurance policy when it was introduced in the 1950s.

As summarized by the New Jersey Superior Court in its 1986 opinion in Ariston Airline & Catering Supply Co. v. Forbes, all-risks insurance is special and designed to provide exceptionally broad coverage:

[A] policy of insurance insuring against “all risks” is to be considered as creating a special type of insurance extending to risks not usually contemplated, and recovery will usually be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding loss from coverage.

Thus, a policyholder is entitled to recover on a policy of all-risks insurance upon establishing a fortuitous loss, unless a specific exclusion applies. As the Seventh Series of the American Law Reports explained: “Under an all-risks policy, while the insured bears the burden of showing that it suffered a loss and that the loss is fortuitous, the insured need not demonstrate the precise cause of damage for the purpose of proving fortuity.”

Conditioning coverage under an all-risks policy on the policyholder also establishing that covered property was altered or destroyed, as some courts have held in response to COVID-19 claims, is contrary to the purpose of all-risks insurance — to provide coverage for fortuitous losses unless a specific exclusion applies — and to the ordinary meaning of the operative policy language.

The Ordinary Meaning of the Operative Policy Language

Interpreting the phrase “direct physical loss of or damage to” in a manner that requires policyholders to plead and prove the actual structural alteration of property is not supported by the ordinary meaning of the operative policy language.

The term “physical” is defined by the Oxford English Dictionary as “[r]elating to things perceived through the senses as opposed to the mind; tangible or concrete.”

Thus, as stated by the Superior Court of New Jersey, Appellate Division in its 2004 decision, Customized Distribution Services v. Zurich Insurance Co., the term “‘physical’ can mean more than material alteration or damage.”

Indeed, according to the Tort, Trial and Insurance Practice Law Journal, “an insured can suffer a physical loss of property through theft, without any actual physical damage to the property.”

“Loss,” in turn, is defined as “[t]he fact or process of losing something or someone” or “[t]he state or feeling of grief when deprived of someone or something of value.”And, “damage” is defined as “[p]hysical harm caused to something in such a way as to impair its value, usefulness, or normal function.”

When its constituent terms are so defined, the phrase “physical loss of or damage to” means the tangible or concrete deprivation of something of value or when the value, usefulness or normal function of something is impaired. The value, usefulness and normal function of property is tangibly impaired whenever an insured is deprived of its use, irrespective of whether the property has been structurally altered or destroyed.

The Pre-Pandemic Case Law

Courts throughout the country have long held that the alteration or destruction of property is not a prerequisite to finding direct physical loss or damage. As succinctly stated by the Minnesota Court of Appeals in its 2001 opinion in General Mills Inc. v. Gold Medal Insurance Co.:

We have previously held that direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that insured property is injured in some way. In Sentinel, we noted that the function of a residential apartment building, to provide safe housing, was seriously impaired or destroyed by the presence of asbestos fibers, although the building itself did not suffer a “tangible injury.”

Shortly thereafter, in 2002, the U.S. Court of Appeals for the Third Circuit in Port Authority of New York and New Jersey v. Affiliated FM Insurance Co. also addressed this issue in the context of a loss caused by asbestos.

The Port Authority court held under New York and New Jersey law that “[w]hen the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner.” Three years later, the Third Circuit followed the Port Authority holding in Motorists Mutual Insurance Co. v. Hardinger, a case governed by Pennsylvania law:

We predict that the Pennsylvania Supreme Court would adopt a similar principle as we did in Port Authority. Applying Port Authority’s standard here, we believe there is a genuine issue of fact whether the functionality of the Hardinger’s property was nearly eliminated or destroyed, or whether their property was made useless or uninhabitable.

Most recently, the Brown’s Gym court followed Port Authority, Hardinger and other pre-pandemic holdings in a case involving insurance for COVID-19 business interruption losses:

Under the “reasonable and realistic standard for identifying physical loss or damage” established in Port Authority and Hardinger for cases “where sources unnoticeable to the naked eye” substantially reduce the use of property, an insured may satisfy the “direct physical loss or damage” prerequisite for coverage if the invisible agent renders the property “useless or uninhabitable,” or the property’s functionality is “nearly eliminated or destroyed” by that source. In pre-COVID-19 case law, including the Western Fire Insurance decision cited by Port Authority and Hardinger, the requisite “physical loss or damage” was established when vapors, odors, fumes, and other contaminants from ammonia, carbon-monoxide, arsenic, salmonella, lead, and other nonvisual sources made property uninhabitable or unusable, or nearly destroyed or eliminated its functionality.

Under the contamination theory adopted in Brown’s Gym and other cases, both pre- and post-pandemic, the physical loss or damage requirement for recovering all-risks insurance is satisfied when a foreign agent, such as coronavirus, renders covered property uninhabitable or unusable, or destroys its functionality.

To be sure, there is case law going the other way.

For example, the U.S. Court of Appeals for the Eighth Circuit in the recently decided Oral Surgeons case, relied on two of its pre-pandemic decisions interpreting Minnesota law: Source Food Technology Inc. v. U.S. Fidelity and Guaranty Co. decided in 2006 and Pentair Inc.v. American Guarantee and Liability Insurance Co. in 2005.

Neither the Source Food nor Pentair decisions, however, may be as supportive of the insurers’ current position on insurance for COVID-19 claims as they might appear to be on the surface. Specifically, the courts in both Source Food and Pentair cited the contamination theory with approval.

In distinguishing the prior Minnesota state court holdings in General Mills and Sentinel — where physical contamination, but no structural alteration, of property was alleged and the court found that there was coverage — the Eighth Circuit reasoned that no physical contamination was alleged in either Source Food or Pentair and, for that reason the denials of coverage were upheld in those cases.

As reflected in Source Food and Pentair, and the cases employing the contamination theory such as Brown’s Gym, the physical loss or damage requirement may be satisfied when physical contamination causes the loss of use of property that is not otherwise altered or destroyed.

In all, the conclusion that a policyholder cannot recover business interruption insurance for COVID-19 losses unless it first satisfies the burden of establishing that covered property has been structurally altered, contradicts the purpose of all-risks insurance, the ordinary meaning of the operative policy language and pre-pandemic case law.

Lee Epstein is a shareholder and chair of the insurance counseling and recovery practice group at Flaster Greenberg PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

New York Asbestos Ruling Could Change Insurers’ Approach

A version of this article originally ran on Law360 on July 2, 2021. All rights reserved.

Although many companies that historically used asbestos in their products have gone bankrupt, there are still many that have managed to survive. How? In some — perhaps many — cases, the answer may be due in no small part to insurance.

But insurers looking to reduce their asbestos coverage obligations by demanding that policyholders contribute to defense and settlement costs may be shooting themselves in the foot if their policyholders can’t handle the financial burden.

In Liberty Mutual Insurance Co. v. Jenkins Bros., the New York Supreme Court recently held that Liberty Mutual had to pay 100% of all settlements against its bankrupt and dissolved insured, Jenkins Bros., even though its policies were in force for only part of the asbestos exposure alleged in the relevant underlying asbestos lawsuits.

The court held that Liberty was a real party-in-interest in the asbestos lawsuits because it agreed to defend and indemnify Jenkins Bros. when it issued the relevant liability insurance policies, and it was Liberty that appeared and negotiated asbestos settlements on behalf of its bankrupt and dissolved insured in those lawsuits.

As the real party-in-interest, the court reasoned Liberty could not pay only a pro rata portion of settlements based on the time Liberty’s policies were on the risk, leaving the plaintiffs to swallow the orphan share. And, in any event it, it was estopped from doing so because it was the one that actually negotiated the settlements.

The court, however, did not stop there. Perhaps more importantly and of broader application, the court stated that regardless of whether Liberty was a real party-in-interest in the underlying asbestos lawsuits, the pro rata allocation methodology would never be appropriate when the allocation would result in an orphan share being allocated to a tort victim due to gaps in coverage and a bankrupt defendant.

In such instances the all-sums, or joint and several allocation, methodology would apply, which would also result in Liberty paying 100% of settlements for Jenkins Bros.’ asbestos liability.

Finally, and also noteworthy, the court adopted the 2000 ruling of the New York Appellate Division, First Department in In re: Liquidation of Midland Insurance Co., which held that the trigger of coverage in a long-tail asbestos claim is the inhalation of asbestos fibers, or exposure — not manifestation of the disease or exposure in-residence, e.g., the period between last exposure and manifestation of the disease.

Not all asbestos defendants are global corporations that can be viably reorganized in bankruptcy. The Jenkins Bros. decision sheds light on what might ultimately happen when an asbestos, or other long-tail tort, defendant goes out of business and is eventually dissolved and wound up, or becomes completely defunct.

Consider the situation where a manufacturer is sued hundreds of times per year for injuries allegedly caused by exposure to asbestos in products it made decades ago. The cost to defend these lawsuits is substantial, as is the cost to pay settlements or, in some cases, judgments.

But this manufacturer has insurance coverage under its old occurrence-based general liability policies and the issuing insurers have stepped up — as they should — to provide the manufacturer a full defense and indemnity. In turn, the manufacturer is able to stay in business.

What happens if the insurers grow weary of their coverage obligations and seek to shift a portion of the cost to defend and settle cases to the manufacturer?

For example, assume one of the participating insurers is ordered into liquidation or the insurers wish to capitalize on a perceived advantageous development in the applicable law addressing how to allocate defense and settlement costs when the alleged asbestos exposure occurs partly outside the insurers’ policy periods.

Now our manufacturer must either sue to maintain a full defense and indemnity or negotiate a cost sharing arrangement where it must contribute to some degree. Either scenario will be a material drain on its financial resources.

Focusing on New York law for the moment, insurers and policyholders tend to take a very different view of how to allocate legacy asbestos liabilities when the alleged exposure occurred partly within viable policy periods and partly without.

Insurers typically argue the pro rata allocation method applies to both the duties to defend and indemnify except in a relatively narrow set of circumstances, such as when a policy contains a noncumulation or prior insurance clause. That means the insurers would only have to pay their fractional share of a loss that occurs during their policy periods compared to the entire period of loss, which can be lengthy, and the policyholder must pay for the remainder.

On the other hand, policyholders typically argue the all-sums allocation method applies, which means if an insurer’s policy is triggered, it must fully defend and indemnify the insured for the entire loss until its policy is exhausted, with no contribution from the insured — though contribution may be available from other insurers.

At minimum, an insurer must fully defend asbestos lawsuits even if settlements or judgments can be allocated pro rata among insurers and the policyholder.

Given these differing viewpoints, one can easily see that in practice businesses with legacy asbestos liabilities are put in a tough financial position when their insurers don’t agree to provide full coverage.

The court dockets in New York are replete with expensive, drawn-out fights between insurers and policyholders on these issues. On the other hand, if insurers contribute only a fraction to pay for asbestos liabilities, the business may not be able to afford the remainder.

The court’s ruling in Jenkins Bros. should make insurers think twice before looking to shed some of their asbestos coverage obligations.

If their policyholders go out of business, declare, or are forced into, bankruptcy, or eventually dissolve and wind up, the insurers may be left holding the bag — either as a real party-in-interest because orphan shares can’t be allocated to tort victims, or because the plaintiffs obtain an unsatisfied judgment against the defunct policyholder and sue directly under New York Insurance Law Section 3420.

Even worse, insurers could find themselves defending cases without the benefit and buffer of a viable business as the direct defendant — yikes.

The point is, even if there is a real dispute over how to allocate long-tail losses — and I favor the policyholder position — the Jenkins Bros. ruling should encourage insurers to meaningfully protect their policyholders and find a sustainable path forward — the way insurance is supposed to work.

As a corollary, the Jenkins Bros. decision may impact the mergers and acquisitions space for entities shouldered with legacy asbestos liabilities. Acquiring companies often see asbestos liability as anathema and may steer away from an otherwise strategic acquisition.

In short, they don’t want to be left answering the phone if the target goes belly up due to its asbestos liability — setting aside the actual likelihood and validity of this fear coming true. This sometimes knee-jerk reaction may be ameliorated if the entity that would ultimately be left answering the phone is the target’s old insurance company pursuant to Jenkins Bros.

However one chooses to view Jenkins Bros., it’s an interesting decision that could have far-reaching effects.

John G. Koch is a member of Flaster Greenberg’s Insurance Counseling and Recovery, Litigation and Environmental Practice Groups, focusing his practice on policyholder-side commercial insurance recovery and environmental law. His practice also includes commercial litigation, alternative dispute resolution, transactions counseling, contract indemnity disputes, supply chain disputes, and product recalls. He can be reached by emailing john.koch@flastergreenberg.com or calling 215.279.9916.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Trademark Board Blocks 76ers Joel Embiid’s Attempt to Register “Trust the Process” Trademark for Shoes 

The Trademark Trial and Appeal Board (“TTAB”) affirmed the refusal to register Philadelphia 76ers star Joel Embiid’s trademark application for “Trust the Process” in connection with shoes in a precedential decision on May 26, 2021.  In the decision, the TTAB found that the mark is likely to cause confusion with Marcus Lemonis’ “Trust the Process” registered trademark for clothing.  Lemonis is the host of the CNBC show “The Profit,” and his trademark registration dates back to April 19, 2016. 

Section 2(d) of the Lanham Act prohibits registration of a trademark that is likely to cause confusion with a registered mark when used in connection with the goods or services of the applicant.  In determining whether there is a likelihood of confusion, the TTAB analyzes the thirteen DuPont factors – which assess things such as the similarity of the marks, goods, trade channels, and average purchaser, among other factors.  Here, the TTAB held that since the “Trust the Process” marks are identical in appearance in sound, it outweighs any difference the marks may have in commercial impression with respect to the meaning of the mark in the world of basketball versus the CNBC show “The Profit.”  

Embiid also tried to rely on his existing trademark registration for “The Process” in connection with apparel and clothing, which has existed alongside Lemonis’ mark for two years without instances of confusion, to show that the “Trust the Process” mark was also unlikely to create confusion.  The TTAB rejected this argument since the “The Process” mark has only been registered since 2019, is still susceptible to a cancellation proceeding, and there are meaningful differences between “The Process” and “Trust the Process.” 

Does this mean that Joel Embiid can no longer shout “trust the process” in news conferences and in his social media posts?  Not at all.  A trademark only protects the right to use a word or phrase in commerce in connection with specific goods or services.  Here, the issue was whether Joel Embiid could obtain a trademark registration for “Trust the Process” in connection with shoes.  Embiid already has a trademark registration for “The Process” in connection with apparel, and he has numerous pending trademark applications for “The Process” and “Trust the Process” in connection with a variety of goods and services, including phone cases, books, and basketball camps, to name a few. 

The major takeaway here is that no matter how famous or ubiquitous a phrase like “Trust the Process” may become, if you were not the first to use it in commerce for a specific set of goods and services, or if you did not file an intent-to-use trademark application before someone else began using the mark, you will most likely be denied a trademark registration for the mark. 

Questions? Let Eric know.

Eric Clendening

Eric Clendening is a member of Flaster Greenberg’s Intellectual Property and Litigation Departments. He focuses his practice on intellectual property litigation and commercial litigation, including contract disputes, employment litigation, and other commercial disputes. He also advises clients on protecting and enforcing intellectual property rights online, including the resolution of domain name disputes and matters concerning e-commerce, online speech and conduct, and related intellectual property issues involving trademarks and copyrights.Cherry Hill, NJ, USA

Remote Online Notarization: One Year Later

The introduction of virtual notarization (aka remote online notarization, or “RON”) has recently been a hot topic thanks to the barriers created by the COVID-19 pandemic.  Now that it’s been over since the pandemic began, where does virtual notary law stand?  Some states have embraced RON, whereas others are more hesitant to codify RON into law. Set forth below is a quick summary of the respective New Jersey, New York, Pennsylvania and Florida laws surrounding remote online notarization, an essential tool during the pandemic.

New Jersey

New Jersey had entertained permitting RON access in 2019, before the pandemic struck, but has declined to impose permanent virtual notarization laws since then.  As a result of the pandemic, the New Jersey legislature enacted a temporary RON statute on April 14, 2020.  Under New Jersey’s temporary law, a notary public or notarial officer must authenticate the identity of the remotely located individual, which can be established (i) if the remotely located individual is personally known to the notary official, (ii) if a credible witness known to the notary official swears to the identity of the remotely located individual, or (iii) if the remotely located individual provides at least 2 forms of identification.  Additionally, the notary official must be reasonably able to confirm the document before the notary official is the same document that the remotely located individual signed and the notary official must create an audiovisual recording of the notarization, which recording must be retained for a period of at least 10 years.

New York

New York Governor Andrew Cuomo issued an executive order temporarily permitting notarization of documents via “audio-video technology”, provided that:

  • The person seeking the notary official’s services, if not personally known to the notary official, must present valid photo ID to the official during the video conference;
  • The video conference must allow for direct interaction between the person and the notary official (e.g., no pre-recorded videos of the person signing.);
  • The person must affirmatively represent that he or she is physically located in the State of New York;
  • The person must send by fax or electronic transmission a legible copy of the signed document directly to the notary official on the same date it was signed;
  • The notary official may notarize the transmitted copy of the document and transmit the same back to the person; and
  • The notary official may repeat notarization of the original signed document as of the date of execution, provided the notary official receives such original signed document together with the electronically notarized copy within 30 days after the date of execution.

Executive Order No. 202.7.  Originally, this Order lasted only through April 18, 2020, but has been continuously extended as the pandemic has worn on, most recently through April 25, 2021, and will likely continue to be extended.


Beginning on March 25, 2020, RON is permitted temporarily in the Commonwealth, but with the passage of Act 97 in October 2020, it is now permanently codified in Pennsylvania law in 57 Pa.C.S. Section 306.1. Virtual notarization is permissible in Pennsylvania if the electronic signature of the notary official, together with all other information required to be included by other applicable law, is attached to or otherwise associated with the signature or record. Notary officials are required to notify the Pennsylvania Department of State that they will virtually notarize certain documents.  Once the notification is approved by the Pennsylvania Department of State, the notary official must disclose the specific tamper-resistant technology he or she intends to use.


Florida’s RON statute permits a notary official physically located in the state to perform an online notarization regardless of whether the person or witnesses are physically inside the state.  The notary official must record the online notarization session and confirm the identity of the person and any witnesses.  If the person is not located in the state at the time of the online notarization, the notary official must confirm (verbally or in writing), that the person desires the notarial act be performed by a Florida notary public.  Florida’s RON statute has specific safeguards for more vulnerable people, such as the elderly residing in nursing homes, to help ensure the competence of the person executing the document.  An example of such safeguards is the requirement for the notary official to have the person answer at least five questions relating to the person’s identity and historical events records within a limited time frame and with high degree of accuracy. Fl. Stat. 117.295.

Before you virtually notarize any document, make sure you are in compliance with your state’s virtual notary rules.  If you or your business need legal advice, please consider contacting any member of Flaster Greenberg’s Business & Corporate Department.

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