The Covid-19 pandemic has triggered financial hardship as businesses have reduced operations and suffered financial losses. As a result, some businesses have turned to their insurance policies to determine if they might recover losses accrued during the pandemic. Companies are particularly looking at business interruption coverage in response to government-mandated shutdowns.
Whether insurers will be widely exposed to covering pandemic-related costs remains to be seen, though the issue is being raised before the courts, with much scrutiny focusing on what business interruption insurance actually covers. Since the beginning of the pandemic, more than 1500 business interruption coverage lawsuits have already been filed in the United States. Canada has also seen the beginnings of class actions based on Canadian insurers’ alleged breach of insurance policies by refusing to pay for business interruptions caused by the pandemic.
Is a Global Pandemic an Insurable Event?
Business interruption insurance is commonly triggered when a business is disrupted due to damage to property or the physical premises, or if the operation of the business is suspended by a civil authority. However, the wording of policies varies, and insured claimants will have the burden of proof to establish coverage, with the specific language included and interpretation of a given policy often proving decisive. Policyholders have claimed that their business interruption coverage is part of all-risks property policy which insures against risk except for those expressly excluded. Conversely, the insurance industry has largely been of the view that a global pandemic is an uninsurable event, arguing that Covid-19 does not cause any physical property damage which most business interruption insurance is aimed at covering.
British Court Ruling on Covid-19 Business Losses Could Impact Canadian Courts
On January 15, the Supreme Court of the United Kingdom released a decision in a case originally brought by the Financial Conduct Authority (FCA) to clarify some uncertainty around business interruption coverage for Covid-19 losses. The decision interpreted a range of “non-damage” extensions which meant that physical damage was not required to trigger coverage under the policy.
The decision will be binding in Britain but may be cited by Canadian courts in coverage litigation. Consequently, it can provide some insight into how Canadian courts may deal with pandemic business interruption claims. Significantly the decision did not address policies requiring damage to insured property. That may limit the application of the case as Canadian business interruption policies frequently require losses to stem from physical damage to engage coverage. However, even if the policy wording differs, the Supreme Court has provided some direction in evaluating business interruption clauses engaging disease or government action.
Ontario Court says the Physical Damage Requirement is met by Loss of Use
One Ontario case from 2020 might provide an opening for insureds to claim for loss of business income in the absence of physical damage to property. In MDS Inc. v. Factory Mutual Insurance Company, the Plaintiffs, MDS Inc. purchased radioisotopes from Atomic Energy of Canada Limited’s nuclear reactor which MDS processed for sale. In 2009, a leak of heavy water containing radioactive Tritium caused the shutdown of the reactor for fifteen months, cutting off the Plaintiff’s ability to buy radioisotopes and causing MDS to incur financial losses.
At the time of the shutdown, Factory Mutual Insurance Company had issued a worldwide all-risks policy to MDS which covered property described in the policy against losses from all risks of physical loss or damage except as excluded. MDS submitted a claim for its business loss which the insurer denied, prompting the Plaintiffs to commence an action.
Justice Wilson noted that all-risks policies, which was the type of policy in question, generally protect against fortuitous losses unless those losses are excluded. The policy in question covered loss of profits to MDS flowing from physical damage to a supplier “directly resulting from physical loss or damage of the type insured by this Policy”.
The Court acknowledged that there are conflicting lines of case law on how to interpret the meaning of resulting physical damage and that there is no definitive definition in all-risks policies in Canada. The Court had to determine whether physical damage should be defined narrowly to require actual tangible physical damage (the interpretation favoured by the insurer), or would it include loss of use, as the insureds advocated. The insurer argued that the presence of the leaking heavy water did not cause tangible damage, which was not disputed, though MDS pointed to the fact that it did render the entire reactor unusable.
Looking at the purpose of all-risks coverage, it is intended to protect against fortuitous events, in this case compensating MDS for loss of profits if a fortuitous event interrupted the supply of radioactive isotopes. Justice Wilson proceeded to find that a broad definition of resulting physical damage was appropriate and to interpret the policy to include impairment of use. This interpretation accorded with the purpose of all-risks insurance to provide broad coverage. In the Court’s view, interpreting physical damage in the way the insurer suggested would deprive the insured of a significant aspect of coverage out of line with the commercial purpose of all-risks coverage.
An Opening for Covid-19 Business Interruption Coverage?
The MDS case is significant for the finding that physical damage to property may not always be necessary for a business interruption claim under an all-risks policy, and that impairment of use alone may be sufficient. The potential impact of the decision in the face of Covid-19 and insurers’ denial of claims based on mandated shutdowns and loss of profits is significant. Still, the interpretation of “physical damage” is dependent on the type of policy in question, specific wording, and the unique factual context. So far insurers have had success in arguing their policies are intended to cover physical things, though these cases also show a gap between insurers and clients about what business interruption policies cover.
The lawyers at Milosevic & Associates in Toronto are skilled at providing strategic litigation advice across complex commercial matters including insurance claims. Our team has extensive experience advocating for our clients’ rights. To learn how we can help you call us at 416-916-1387 or contact us online to schedule a consultation.