Does the coronavirus equate to "physical" property damage for business interruption claims? | Insurance Business Canada
Business interruption insurance is arguably the most hotly debated topic in insurance right now. Business owners across Canada are all asking the same question – will my insurance policy cover forced business closure as a result of the coronavirus pandemic? More often than not, the answer is ‘no’.
According to the Insurance Bureau of Canada (IBC), most commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19. All policy wording is slightly different, but there are a few common themes, one of which is the physical damage trigger. The IBC explained: “Most [business insurance] policies require that the insured premises sustained physical damage (for example, from fire, heat, flooding or firefighting efforts) that was covered under their property policy, which caused an interruption that resulted in a loss of business income.”
Business owners across Canada have a tough task ahead of them if they want to make successful business interruption insurance claims resulting from the coronavirus pandemic. They have to be able to prove that their loss fits within the indemnity agreement and that it satisfies the often rather vague description of property damage. This is very difficult because most businesses, although forced to close due to COVID-19, have not suffered what would traditionally be seen as physical property damage.
Some business owners in Canada feel let down by this system. On April 06, Merchant Law Group filed a national class action lawsuit against some of Canada’s largest insurance companies for their alleged refusal to pay coronavirus-related business interruption claims. Insurers named in the suit included: Aviva Canada, Co-Operators Insurance, Desjardins, Economical Insurance, Federated Insurance, Intact, Lloyd’s, Northbridge, Royal & Sun Alliance, SGI Canada, TD General Insurance, Wawanesa Mutual Insurance, and Wynward Insurance Group.
In a summary on the Regina, SK-based law firm’s website, the heavyweight insurers are accused of “shirking their obligations” and “refusing to honour business interruption coverage.” Tony Merchant, principal of Merchant Law Group, told CBC News: “The insurance companies are trying to wiggle out of paying based on that this is not anticipated. It’s a pandemic. It’s so terrible. [But] the reality is they had to know this kind of thing was going to happen because it has happened before.” Merchant also called out insurers for claiming the pandemic is a “force majeure,” which is an unforeseeable circumstance that nullifies a contractual obligation. He said “pandemics are not unforeseen,” pointing to recent health crises like SARS, and the avian flu to make his point.
Whether the coronavirus pandemic was foreseeable or not, that doesn’t change how business interruption insurance coverage traditionally works, which is that there needs to be some evidence of tangible property damage. A decision handed down in March by the Ontario Superior Court of Justice in MDS Inc. v. Factory Mutual Insurance Company [2020 ONSC 1924], sparked a glimmer of hope in some circles about the possibility of coverage for business interruption arising from COVID-19.
A key debate in MDS Inc. v. Factory Mutual Insurance Company revolved around the definition of “physical damage” in the context of an all-risks property insurance policy. The insurer argued that the loss of use of a premises does not equate to “physical” property damage – an argument being used in the context of COVID-19 – but the court ruled in favour of MDS, stating that “[t]here is no definitive decision defining the meaning of resulting physical damage in all-risks policies in Canada.” The judge ruled in favour of a “broad” interpretation that treats loss of the function or use of building as “physical damage.”
This ruling led some commentators to suggest the Ontario court’s decision has grounds amid the coronavirus pandemic, but leading law firm Canadian Cassels Brock & Blackwell LLP has cautioned otherwise. Laurie LaPalme, partner in the Insurance and Reinsurance Group at Cassels, and Arthur Hamilton, partner in the Litigation Group at Cassels, recently penned an insights blog where they stated: “A careful read of the MDS Inc. decision indicates that those commentaries, to the extent they attempt to draw a parallel between the MDS Inc. decision and the current COVID-19 pandemic, have overstated the court’s ruling.
“The facts giving rise to the MDS Inc. decision occurred more than a decade ago, when an unanticipated leak of heavy water caused a shutdown of a nuclear reactor at Chalk River, Ontario. MDS Inc. is not a case that resulted from or in any way addresses the COVID-19 pandemic or its impacts. The determinations of the trial judge are fact-specific, and result from the court’s analysis of nine separate experts’ reports and the evaluation of the work and opinion of an additional court-appointed expert. The specific language of the worldwide All-Risks policy on which MDS Inc. relied, which the court determined contained ambiguities, is central to the various determinations the court reached.”
What’s clear is that all policies are different and are open to interpretation given the unique factual context of each business interruption claim. Even if a judge did rule in favour of a claimant seeking “physical” property damage-related business interruption losses as a result of COVID-19, there are other coverage exclusions that may apply. For example, there’s the 30-day vacancy/shut down exclusion and also the fungi exclusion – both of which could kick in (policy wording dependent) to deny coverage.
Therefore, Tony Merchant’s claim that insurers are calling COVID-19 a “force majeure” is debatable. Sadie Bauman, talent nurturer and coach at iC3, commented: “I suspect the insurer’s refusal to pay the claim is simply due to the fact that it is just not an insured loss. To me, a force majeure means you’re violating your contract and not fulfilling your end of the bargain. It typically kicks in when there’s an impossibility for you to fulfil that contract. Where’s the force majeure coming from in the context of COVID-19? Is it the company saying: ‘I don’t have the money to pay your claim? I’m unable to support the claim.’ Or are they saying the loss doesn’t fit within the insurance agreement because there was no physical property damage? I think the insurance companies have got a good valid denial with this one […] and even if a judge rules that it fits within property damage, there are other exclusions that might kick in.”