As businesses are closing due to physical distancing recommendations and orders, the number of claims being made against insurance policies for business interruptions is rapidly expanding. While there are various policies out there, and different circumstances and facts that are at play in each case, there are some consistent issues emerging making the likelihood of coverage being afforded highly unlikely. Consequently, insureds are seeking relief through two avenues: litigation and legislative changes. On the litigation front, individual cases against insurers are already being filed in Canada and the United States, and notably, a national class action against several prominent insurers was recently filed in Saskatchewan. On the legislative front, governments in Canada have yet to introduce legislation that specially addresses business interruption coverage in the context of the COVID-19 pandemic, however, legislation has been introduced in several U.S. states and is even being contemplated at the federal level.
We anticipate that coverage suits will begin popping up in virtually all Canadian judications as denials grow. These will be in the form of both claims by individual business owners against their particular insurer, but will also include class actions, and one such class action has already been filed. On April 3, 2020, a national class action was filed in the Saskatchewan Court of Queen’s Bench on behalf of Canadian business owners who allege they are being denied business interruption insurance during the COVID-19 pandemic by several prominent insurance companies who underwrite in Canada. The case is JKT Holdings Ltd. v. Aviva Canada Inc. et. al. In this case, the plaintiff, a restaurant operator in Regina, Saskatchewan, has brought a proposed class on behalf of “all residents of Canada who have claims against the defendants regarding the Business of Insurance for business interruption insurance claims.” The case is framed in negligent misrepresentation, breach of contract, breach of the federal Competition Act and unjust enrichment. The case is yet to be certified by the court as a class action.
While policies and facts may differ, there are some consistent trends and issues that are likely to arise in many claims seeking coverage for business interruption arising from the COVID-19 pandemic.
The main types of policy at issue are “All Risk” business property policies, which include business interruption endorsements. “All Risk” coverage is meant to cover fortuitous loss, however it does not encompass every conceivable type of loss, and is usually tied to direct physical loss, damage and/or destruction of insured property. Further, these policies usually exclude certain enumerated perils.
The first hurdle that an Insured is likely to face is whether there is physical loss, damage and/or destruction of insured property. The insured property is usually the business property and premises. The British Columbia Court of Appeal in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2015 BCCA 347, held rather definitively that “physical loss” denotes an alteration in the appearance, shape, colour or other material dimension of the insured property. Closure of an insured’s premises for the purpose of social distancing is unlikely to meet this requirement. However, we expect that insureds will advance the argument that the loss of use of the premises amounts to physical damage or loss.
In a recent decision from the Ontario Superior Court of Justice, released on March 30, 2020, called MDS Inc. v. Factory Mutual Insurance Co., 2020 ONSC 1924, the Court opened up the possibility that loss of use without actual physical damage was sufficient to amount to resulting physical damage. We caution that this case may not be of as much assistance to insureds as it may first appear. The Court’s comments on the physical loss issue were obiter dicta, as the final decision did not turn on the issue, and the facts are very different than the COVID-19 claims being advanced, including that the claim was made as a result of a water leak in a nuclear reactor, and therefore arguably involved physical damage. Additionally, the weight of the jurisprudence suggests that loss of use without a physical component will not be considered direct physical loss, damage and/or destruction. Further, and in any event, many policies contain exclusions for loss of use and loss of occupancy.
Another issue that arises is where an Insured makes a claim on the basis that someone entered their business premises with COVID-19, arguably contaminating the property. While there is some American jurisprudence that could be construed to support that this type of contamination constitutes direct physical loss, damage and/or destruction, the Canadian case law suggests that more is required than the mere presence of contamination, and further that where the loss can be described as “simply a case of functional inutility”, there is no physical loss, damage and/or destruction. Further, given that the COVID-19 virus only survives on surfaces for a short period of time, and can be easily cleaned off, any closure of the business due to the presence of COVID-19 would be very short lived. If the business premises were to remain closed after that, then this would be a closure simply to comply with social distancing recommendations, for which there is likely no coverage.
In addition to Insureds making claims under the main insuring provision of the policies, many policies also include extensions to coverage such as coverage for business interruption when it is due to orders made by Civil Authorities or when it is due to property damage at another property, such as a neighbouring property or the property of one of its suppliers or the property of one of its receivers. Generally, these extensions are also tied to physical loss, damage and/or destruction, and therefore are likely not applicable. However, some policies include more specific extensions, such as extensions for business interruption that occurs due to a pandemic or other disease or illness. Coverage under these extensions may or may not apply, and are often limited in scope.
Finally, in addition to the loss of use or occupancy exclusion mentioned above, these policies often have exclusions for microorganisms, which may or may not include viruses, as well as exclusions for contamination. In some instances, polices may contain a more specific “virus” exclusion that expressly excludes coverage for loss arising from a virus, and presumably COVID-19 would fall within any reasonable definition of “virus”. The applicability of these exclusions will likely be dependent on the wording used, and the particular facts of a case, but are hurdles that an insured will have to overcome.
To prepare for the inevitable litigation that will come out of denied claims for business interruption as a result of COVID-19, including class action, we recommend that insurers obtain legal advice as soon as possible and retain counsel in anticipation.
Thus far, the provincial and federal governments in Canada have not introduced specific legislation, and we are not aware of any discussion that they intend to do so, that would restrict the manner in which insurers in Canada deal with business interruption claims arising out of the COVID-19 pandemic. The same is not true in the United States, where several state legislatures have introduced Bills which, if passed, would require business interruption insurers to indemnify certain policyholders for business interruption due to COVID-19 regardless of the wording of the policy. This wave of legislation began with New Jersey on March 16, 2020, and similar legislation has subsequently been introduced by the state legislatures in Ohio, Massachusetts, New York, Louisiana, Pennsylvania, and South Carolina. As of yet, none of this legislation has been formally enacted into law. At the federal level in the United States, recent media reports suggest that the U.S. House of Representatives is considering a “pandemic risk insurance program” that would establish a federal backstop for pandemic insurance industry losses. A draft Bill has not yet been made public.
Should you have any questions or require further information, please feel free to contact our COVID Coverage Team: