For the past 18 months, we have continued to see business interruption coverage claims made by businesses affected by the COVID-19 pandemic. As the world begins to open up again, new claims for business interruption are slowing down and decisions on litigated claims are being released. Novel claims are being advanced in other COVID-related litigation as well.
This paper will provide an update on some relevant case law, litigation trends coming out of the U.S. on COVID-19 coverage matters and the class action landscape in Canada.
1. Property Damage
The major hurdle for policyholders seeking business interruption coverage continues to be the “property damage” issue. Most policies will only cover direct physical loss or damage.
The B.C. Court of Appeal held in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2015 BCCA 347, that “physical loss” and “damage” denotes an alteration in the appearance, shape, colour or other material dimension of the property insured. The property insured is usually the business property and premises. If a business was forced to close because of government mandate or a lack of customers and employees due to self-isolation practices, it is unlikely that the Policyholder will be able to establish a “direct physical loss or damage” to the property insured. This had been the traditional view of the meaning of “property damage” when we began seeing business interruption cases starting in March 2020.
Then, in late March 2020, there was an indication from the Ontario Superior Court of Justice that Courts may begin to expand the definition of physical loss and damage. In MDS Inc. v. Factory Mutual Insurance Co., 2020 ONSC 1924, the Court held that resulting physical damage to property can include loss of use. The business interruption claim arose from the shutdown of a nuclear reactor. MDS claimed the loss of use of the reactor was “resulting property damage”, and therefore that the claim fell into an exception to the policy’s corrosion exclusion.
The facts of the MDS case are complicated, but the trial decision created a chance that there would be coverage for business interruption caused by loss of use of physical property. The trial judge found that the term “physical damage” was ambiguous. The trial judge did not rely on any case law other than a small claims court decision from Nova Scotia and two American cases in coming to this conclusion. Not surprisingly, the decision was appealed and the Ontario Court of Appeal released its decision in September 2021. The Ontario Court of Appeal overturned the lower Court’s decision that resulting physical damage could include loss of use.
The Court of Appeal concludes that the term “physical damage” is clear and could not apply to the economic losses caused by the inability to use the reactor. The Court of Appeal emphasized the proper interpretation of standard form contracts of insurance:
- Standard form contracts should be interpreted consistently;
- Where the language of the disputed clause is ambiguous, effect should be given to the clear language of the policy read in the context of the policy as a whole;
- It is unnecessary to consider extrinsic evidence in order to interpret the terms of a policy, however, the policy is examined in light of surrounding circumstances;
- Words are given their ordinary meaning, not the meaning they might be given by people well versed in insurance law;
- Where wording is ambiguous, the rules of contract construction may be used to resolve the ambiguity.
The surrounding circumstances include anything which would have affected the way in which the language of the policy would have been understood by a reasonable person at the time the parties made the agreement. The surrounding circumstances include the identity and sophistication of the parties, the jurisdictions in which the contract is in effect and the commercial context of the policy.
A key issue in the MDS appeal was whether meaning of “physical damage” was ambiguous. A contractual provision is ambiguous if it is reasonably capable of more than one meaning. When resolving ambiguity, the goal is to reach a sensible commercial result that reflects the intentions of the parties at the time the agreement was entered into. Extrinsic evidence may be admitted to resolve the ambiguity.
The trial judge had concluded that a broad definition of “resulting physical damage” was appropriate and would include the impairment or function or use of tangible property. The analysis was in the context of an exception to an exclusion and the Court referred mainly to cases involving the interpretation of exceptions to exclusions. The Court of Appeal noted that Canadian authorities, including those that involved interpretation of all-risk policies, have long held that physical damage does not include loss of use or pure economic loss, unless specifically provided for. The Court of Appeal also reviewed relevant appellate decision from the United States and United Kingdom, which similarly concluded that physical damage exceptions to exclusions do not include loss of use.
The Ontario Court of Appeal held that the plain meaning of “physical damage” does not include economic loss. Where loss of use is included as part of “resulting physical damage”, that must be made clear in the policy wording. The shut down of the reactor was not resulting physical damage.
The MDS appeal strengthens insurers’ position that claims for business interruption due to lockdown and the pandemic are not claims for “property damage” because there is no physical damage to the property insured.
The MDS appeal also serves as a reminder that appeals involving the interpretation of “standard form contracts”, including insurance policies, are decided using the “correctness” standard of review. Typically the interpretation of contracts attracts a deferential standard of appellate review. In those cases, the Court of Appeal reviews the trial decision for palpable and overriding errors. However, given that appeals involving standard form contracts provide precedential value and there is typically no meaningful factual matrix surrounding those contracts, the interpretation is characterized as a question of law and a correctness review is used, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37. Normally, the parties do not negotiate the terms of the policy, and factors such as the purpose of the contract, the relationship between the parties and the market in which it operates are all the same for all parties to a particular standard form contract, which “underscores the need for standard form contracts to be interpreted consistently”, Ledcor, at para. 31.
2. US Case Law
In the U.S., the regulation of insurance is handled at the state level. Insurance disputes are generally the domain of state courts and state law. The U.S. Supreme Court rarely decides insurance issues and when it does, those decisions do not bind state courts. Statutory and common law respecting insurance issues varies significantly between the states.
There have been some attempts to bring class action suits or multidistrict suits in the U.S. However, those have mainly been unsuccessful. The U.S. Judicial Panel on Multidistrict Litigation, the body which manages multidistrict litigation, has opined that the existence of multiple defendants would diminish the chance of common discovery and that the policy forms at issue and the facts of how the pandemic impacted a particular industry, business or policyholder in a particular place could vary and as such, multidistrict suits were mostly not appropriate, particularly in claims where the proposed litigation was spread over numerous jurisdictions.
As a result of these issues, there are thousands of individual COVID-19 coverage lawsuits being brought across the U.S. A professor at the University of Pennsylvania Law School has developed a COVID Coverage Litigation Tracker, which most recently indicates over 2,000 COVID-related coverage cases have been filed across the U.S. Insurers in several hundred of these cases have brought motions to dismiss, at both the state and the federal level. The majority of these motions have been successful.
Many of the early U.S. COVID coverage cases were brought by small and mid-sized businesses and most were dismissed in the early stages, often on the basis of virus exclusions. However, some courts have found that policyholders’ allegations of “physical loss of or damage to property” were sufficient to survive early dispositive motions and those cases have proceeded to the discovery process. In some of those cases, policyholders have brought successful summary judgment applications, with the courts holding that losses resulting from physical authority orders or from the presence of the virus on the property are covered under the relevant policy wording
For instances, in SWB Yankees LLC v. CNA Fin. Corp., an August 4, 2021 decision from the Pennsylvania State Court, the judge rejected the insurers’ arguments that the plaintiff failed to allege “direct physical loss or damage” sufficient to trigger coverage for its COVID-19 business interruption losses. Based on the plaintiff’s pleadings that its covered property was rendered “unsafe” and “unfit for its intended use” due to the “continuous presence of the coronavirus” on the covered premises, the court found that the plaintiff had adequately alleged “physical loss or damage” to its property for purposes of business interruption coverage. The court also found that principles of insurance contract construction supported this conclusion, as the policy had 30 exclusions, including those based on “contaminants,” “pollutants,” “fungi,” and “microbes,” but failed to include an exclusion for losses caused by a “virus,” suggesting that the insurers, “as the sole drafters of the policy,” did not intend to similarly exclude virus-related damages from coverage.
In Ross Stores, inc. v. Zurich Am. Ins. Co. (July 13, 2021), a California Superior Court judge denied a motion to dismiss the plaintiffs’ claims for business interruption coverage. The insurers had argued that the presence of coronavirus is not “property damage” and cannot constitute “direct physical loss”. However, the policy at issue did not contain the word “direct” in the insuring agreement, but rather covered “all risks of physical loss or damage”, which the Court considered broader than “direct physical loss”. The Court concluded that policy included coverage for loss of physical use of the plaintiff’s stores and physical premises, particularly where the coronavirus was present in the plaintiffs’ stores, even though the stores themselves were not damaged.
In Scheicher & Stebbings Hotels, LLC v. Starr Surplus Lines Ins. Co., (June 2021), a New Hampshire Superior Court judge granted the policyholders’ motion for partial summary judgment, rejecting the insurers’ arguments that “direct physical loss” requires “distinct and demonstrable” changes to property that must be readily perceptible by one of the five senses. The Court held that any requirement under the policies of “loss or damage” or “direct physical loss of or damage to property” is met where the property is contaminated by the coronavirus.
In P.F. Chang’s China Bistro Inc. v. Certain Underwriters at Lloyd’s of London, (February 4, 2021), a California Superior Court denied the insurer’s motion for judgment on the pleadings. Lloyd’s argued that the coronavirus does not cause “direct physical loss of or damage to property”. The Court held that a broad interpretation of “any physical loss of … property” included the inability to access or use all or a portion of the physical premises. The Court held that the plaintiff’s allegations – the actual or potential presence of the coronavirus in the air surrounding their restaurants, the necessity to implement social distance and other modified physical behaviors, and the need to mitigate the threat or actual presence of the virus on their property – were sufficient to satisfy the policy’s requirement of “physical loss of or damage to” property.
Again, these cases where the insurers’ motions to dismiss are unsuccessful or where the policyholders obtain summary judgment appear to be the minority of the over 700 such decisions issued to date. In cases involving policies which contain a virus exclusion, approximately 90% of the claims are being dismissed summarily. In claims involving policies without a virus exclusion, 70% of the claims are being dismissed summarily. To date, certain jurisdictions, including Ohio, Missouri and California, have been more favourable to policyholders in these cases, highlighting the implications of differing legislation and common law across the states. There are various state and federal level appeals pending, which may provide some additional guidance.
The first appeal level ruling came from the Eighth Circuit of the Federal Court in July 2021. In Oral Surgeons P.c. v. Cincinnati Insurance Company, the federal appellate case found no coverage for losses suffered as a result of suspension of non-emergency procedures by an oral and maxillofacial surgery practice in Iowa. The Eighth Circuit held that the lost business income and certain extra expense sustained from the COVID-19 pandemic and the related government-imposed restrictions did not constitute direct “accidental physical loss or accidental physical damage” under the plaintiff’s policy. Reviewing the issues de novo and applying Iowa law, the Court affirmed the district court’s ruling granting the insurer’s motion to dismiss..
The plaintiff contended that the COVID-19 pandemic and the related government-imposed restrictions on performing non-emergency dental procedures constituted a “direct ‘loss’ to property” because it was unable to fully use its offices. The Eighth Circuit confirmed that the policy required direct “physical loss” or “physical damage” to trigger business interruption and extra expense coverage and said “there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.”
This appeal ruling is more in line with what we expect Canadian Courts will find when the substantive issues are before our Courts.
3. Canadian Class Actions
At this time last year, the first few Canadian COVID-related class action suits were being filed. There are now dozens of suits filed across the county.
While there are claims filed in essentially every jurisdiction across Canada, the action on these claims is so far concentrated in Ontario and Quebec. In Ontario, the various COVID-19 coverage class actions are being case managed by one judge. To date, various of those actions have been certified, include three actions against Aviva and one against 14 other insurers. Aviva has been named in three class actions, one brought by a windows company, one by a branch of the Royal Canadian Legion and one by a denturist. It appears that Aviva may have broader coverage available under its policy, or at least wording that allows for stronger arguments in favour of coverage. The plaintiffs allege that the Aviva policy wording specifically offers coverage for business income loss caused by restricted access to property because of government orders related to an outbreak of a contagious disease, as well as coverage for negative publicity. Aviva denies these coverages are meant to respond to an international pandemic. The claims against Aviva were carved out of the larger “omnibus” action based on this different wording. This was done to allow the more focused claims aimed only at Aviva to proceed faster.
The certifications in Ontario have so far proceeded largely by consent. The Ontario case management judge has referred to the certification stage for these claims as “plain vanilla certification”, with the difficult coverage issues to be argued on their merits at a later date.
By contract, Quebec deals with substantive issues on a more up-front basis with its class action process. The Superior Court of Quebec issued a trilogy of decisions in September 2021 in proposed COVID-19 business interruption claims. The three claims were brought by dentists against the insurers, arising from income losses sustained by the dentists when the governments suspended workplace activities. In the first case, Centre de santé dentaire Gendron Delisle inc. c. La Personnelle, assurances générales inc. 2021 QCCS 3463 , the application to authorize the class action contained an allegation of the need to rectify the damages due to contamination, the Judge noted that there were no allegations that the offices or equipment were in fact contaminated or needed to be closed as a result of COVID-19, as opposed to as a result of government order.
The (translated) insuring agreement provided “Unless otherwise provided, this insurance covers all the risk of loss or material damage directly caused to an insured good”. The business interruption coverage provided:
[Translation] Subject to the conditions, limitations and exclusions of the policy, this insurance guarantees the insured against operating losses actually suffered during the indemnity period, due to a covered loss having affected the insured property located in the premises.
In order to authorize a class action in Quebec, the Court must be satisfied that the applicant meets the criteria set out in article 575 of the Code of Civil Procedure:
- The court authorizes the class action and appoints the class member it designates as representative plaintiff if it is of the opinion that
(1) the claims of the members of the class raise identical, similar or related issues of law or fact;
(2) the facts alleged appear to justify the conclusions sought;
(3) the composition of the class makes it difficult or impracticable to apply the rules for mandates to take part in judicial proceedings on behalf of others or for consolidation of proceedings; and
(4) the class member appointed as representative plaintiff is in a position to properly represent the class members.
The applicant must demonstrate that it has an arguable case; the Court will dismiss frivolous cases at the certification stage. In Quebec, the authorization stage acts as a filtering process. The Court reviewed the policy wording and confirmed that the business interruption coverage depended on damage to the insured goods (in this case, dental equipment). The business interruption had to be as a result of direct damage to an insured good for there to be coverage under the policy. The application did not contain allegations addressing the requirement that the business interruption result from damage to insured goods and the Superior Court concluded that the evidence before it did not establish an arguable case.
The Court also dismissed a proposed class action against Intact as part of the trilogy of cases. In the third case, Centre dentaire Boulevard Galeries d’Anjou inc. c. L’Unique assurances générales inc., 2021 QCCS 3461, the Court allowed the application for authorization to bring the class action against the defendant insurer. The third case arises out of the same government orders closing dental clinics, however, the policy wording was significantly different from the two other claims. The relevant business interruption coverage provided:
- NATURE AND SCOPE OF INSURANCE
This insurance covers the loss of business income actually sustained and directly resulting from the necessary reduction or interruption of the Insured’s activities caused by an insured peril that has affected the insured property described in the Declarations
The Court noted that the policy did not include the concept of “direct damage” and agreed that the policy wording was broad. The Court concluded there was a distinction between a loss affecting goods and a loss causing physical damage to goods, leading to a possible interpretation of the policy that property damage was not required to find coverage. The Court concluded the policy contained ambiguities which required a more detailed analysis, showing that the applicant had an arguable case. As such, the Court authorized the application to bring the class action.
There are various class actions filed against insurers for business interruption in B.C. as well. The majority of the defendants in those claims are also defendants in the Ontario omnibus action. The various plaintiff groups are cooperating and have agreed to proceed in Ontario first, with the agreement of those overlapping defendants. As a result, the B.C. class actions, while in case management, are relatively dormant at this stage.
4. Other Potential Litigation Trends
As the pandemic continues and the response to the pandemic evolves, new types of claims are emerging as well.
In Canada, beyond the coverage class actions, class actions for wrongful death in long-term care homes, actions against the government for alleged unsanitary living conditions in penitentiaries and class actions for breach of contract by frustrated consumers have also been filed. One example of the latter category is a claim brought in Quebec against the ski hill Mont Tremblant. The class action was launched after the ski hill closed in mid-March 2020, seeking the partial reimbursement of season’s pass prices. The Quebec Court of Justice refused to grant class authorization, finding that the contract at issue did not include any guarantee of access to the ski hill.
The Supreme Court of Newfoundland and Labrador refused to certify a proposed class action for Charter damages against the provincial government arising out of COVID-19 travel restrictions. The proposed representative plaintiffs were an Ontario couple who own and operate a seasonal business in Newfoundland. The provincial government banned travel to Newfoundland and Labrador, preventing the plaintiffs from travelling to operate their business. The Court held that the claim did not disclose a viable cause of action for Charter damages.
In Ontario, a lawyer has filed a class action suit against the Canadian and Ontario governments, political leaders, the Bill and Melinda Gates Foundation, the World Health Organization and the Pope, making claims that the defendants allowed for the bringing in of COVID restrictions and shutdowns “without lawful authority and due process”; essentially claiming there was no justification for the declaration of a pandemic.
We are beginning to see human rights complaints filed in response to mask mandates as well, typically brought on the basis of discrimination based on disability, and typically involving complainants rooted in COVID conspiracy theories.
The U.S. has seen thousands of employment suits filed over COVID-19 related issues, including lawsuits over vaccine mandates and discrimination claims. In September 2021, employees of St. Elizabeth Healthcare in Kentucky filed a lawsuit against the hospital alleging that the employees have been coerced into being vaccinated with an “unapproved” vaccine. All other similar suits that have been brought to date have failed. So far, the healthcare industry appears to be the most affected by COVID-19 employment litigation. Despite their limited chance of success, as vaccine mandates become more commonplace in Canada, we expect to see these types of suits here as well.
As the pandemic continues and develops, so too do the types of litigation and litigation strategy employed in all types of COVID-related litigation. In Canada, it appears likely that the claims for business interruption coverage will ultimately fail, although depending on the policy wording in question, the cases from the U.S. have demonstrated that there are arguments available for policyholders to make. The key remains, as with any coverage claim, the policy wording.