Many businesses take out insurance to cover losses that can arise due to fire or theft, including damage to equipment or property. However, it is equally important to consider the potential for extended periods of income loss if a business is forced to close temporarily. For example, if there is a fire, a business will suffer immediate losses such as inventory and property damage, but there may also be a period where no income is generated while the physical structure is rebuilt.
This is where business interruption insurance can provide peace of mind. However, with the current health crisis causing interruptions for most businesses in Ontario and across the country, many business owners are wondering if these policies will cover the unique circumstances we currently find ourselves in. The answer is not a simple yes or no, unfortunately. There are many factors that must be considered, including the specific policy language and the overwhelming number of potential claims owing to COVID-19.
What is Business Interruption Insurance?
A business may suffer a loss of income if forced to close due to extenuating circumstances such as flood or fire, which will then impact their ability to earn income for that period. To protect themselves during such an event, businesses will purchase coverage for an interruption in income and profit owing to circumstances beyond their control. Policies can be specific, including coverage for particular circumstances like a fire, or they can be more broad using general language to cover a range of situations.
Can it be Applied to COVID-19?
Typically, business interruption insurance is used to cover losses relating to specific physical damage to a business’s property. Further, a more specifically-worded policy will not likely include a pandemic as a potential cause for loss of income. The applicability to the current circumstances will largely depend on the language in the policy itself and the ability of the insured company to attribute specific losses to the pandemic closure. However, even if the policy can be interpreted to cover closures related to the coronavirus, insurance companies may still deny the claim for other reasons.
Many Companies Already Facing Denials
A recent article points out the fact that many businesses in Canada have already filed claims with their insurers to cover losses of income during the COVID-19 closure. In many cases, these claims have been denied, with the insurance companies citing “force majeure” as the reason for denial.
As discussed in a recent blog, “force majeure” clauses are included in a contract to protect the parties from liability if they become unable to fulfill their obligations due to circumstances beyond their control. In this case, several insurers are saying that the sheer volume of existing and potential claims means that insurance companies will be unable to extend coverage to businesses for the losses suffered due to mandated closures.
In British Columbia, some insured businesses have already banded together to file a class-action lawsuit against a group of some of Canada’s largest insurance companies to force coverage for business interruption claims. While the insurance companies are claiming that the fallout from COVID-19 could not have been anticipated, lawyers are saying that there was precedent for these circumstances set by previous widespread illnesses such as SARS and MERS. Therefore, insurers should not be able to claim that extended business interruptions created by a pandemic were unforeseen.
The class action is claiming coverage for the following:
- Loss of revenue caused by a decrease or elimination of customers after social distancing advisories
- Loss of revenue caused by federal, provincial and municipal orders that restrict operation or entirely close businesses
- Loss of revenue caused by “the costs of addressing physical damage to business premises due to the presence, release, discharge or contamination of COVID-19 at the business premises…”
The article highlights the damages a successful action could lead to, given the enormity of the losses being felt by a variety of industries. For example, Canada’s restaurant industry accounts for $60 billion each year, and claims by restaurants alone could total $10 billion.
It remains to be seen how Canada’s courts will interpret business interruption policies and their application to COVID-19 losses, but we will continue to monitor the situation on behalf of our clients and provide updates as they occur.
If you are involved in insurance litigation resulting from the effects of COVID-19 on your business or expect to be, the exceptionally skilled corporate litigation lawyers at Milosevic Fiske LLP in Toronto can help. Over the years, our team of lawyers has successfully fought for our clients’ rights and our impressive track record speaks for itself. Please contact us by calling 416-916-1387 or connect online for a consultation.