Litigation continues across Canada for businesses that suffered severe monetary losses due to pandemic-related service interruptions. There are numerous class action lawsuits in progress against various insurers which have, to date, refused coverage for losses due to government-mandated business closures.
In June, we wrote about a case that provided some hope for businesses looking to enforce their business interruption coverage, despite a lack of physical damage to the premises. Previously, this coverage was primarily limited to losses suffered by businesses that could not operate due to physical damage, such as a fire or flood.
The Ontario Superior Court considered a novel circumstance (unrelated to the pandemic) and determined that physical damage was unnecessary in some cases to extend business interruption coverage. However, the case was recently appealed, and the Ontario Court of Appeal’s decision may create difficulties for cases involving losses caused by shutdowns during the pandemic.
Lower Court Found “Physical Damage” is Ambiguous Requirement for Business Interruption Coverage
The case in question, MDS v. Factory Mutual Insurance Company, was initially decided by the Ontario Superior Court of Justice in 2020. The case involved a loss of business due to a shutdown of the plaintiff’s supplier of radioisotopes.
MDS contracted with a reactor to purchase radioisotopes, which it, in turn, planned to sell to medical product and service providers worldwide. The reactor experienced a leak of radioactive material. As a result, the reactor was shut down for over a year for repairs, creating losses for MDS in excess of $100 million.
MDS made a claim for business interruption insurance through the defendant insurer, Factory Mutual Insurance Company. The insurer denied the claim on the basis that MDS had not experienced any physical loss of property, as was required by the insurance policy.
The Ontario Superior Court of Justice examined the wording of the policy. It found that the term “physical damage” was unclear as it was undefined in the policy, and there was no guiding definition provided elsewhere. Given this, the court determined that MDS’ all-risk policy should not exclude the losses experienced due to the reactor shutdown.
This decision provided hope for businesses in Canada that had been forced to shut down due to COVID-19 precautions under federal, provincial, and municipal public health orders. If economic loss were a determining factor in business interruption litigation, it would be much easier to enforce insurance coverage across the board in light of the current global circumstances.
However, others worried about what this could mean for the insurance industry. There was a concern that this decision could open a floodgate for billions of dollars in claims for economic losses caused by pandemic-related business closures.
“Physical Damage” Cannot be Expanded to Include Economic Losses: Ontario Court of Appeal
The insurer successfully appealed to the Court of Appeal, which overturned the lower court’s finding with respect to physical damage requirements. The appeal court closely reviewed the wording of the policy, as well as leading jurisprudence from Canada, the United States and the UK. It determined that the conclusion reached by the trial judge could not be supported, stating:
“[A]lthough the leak resulted in the shutdown, the shutdown itself is not resulting physical damage. To read in coverage for “loss of use” distorts the plain language of the Policy and is out of step with the above case law.”
The Court of Appeal found that while the economic loss may be caused by physical damage, it is not itself physical damage. Given that the language of the insurance policy did not specifically include loss of use, the appeal court found that coverage could not be enforced in this case and overturned the lower court’s decision.
A Blow to Covid-19 Business Interruption Coverage in Canada
The MDS trial decision provided comfort to many businesses that suffered business interruptions and closures caused by pandemic-related public health orders. The decision of the Court of Appeal, however, has cast doubt on businesses’ abilities to seek compensation for these economic losses under their insurance policies.
The potential impact of this decision in the face of mandated shutdowns and related loss of profit is significant for both businesses and insurers. However, it is important to keep in mind that many decisions will depend on the type of policy in question, the specific wording of the policy, and the unique factual context of each case. Future decisions could also be impacted by the risk of exposing the insurance industry to an overwhelming number of loss of use claims.
The impact of the pandemic has been significant for businesses both large and small across the country. If losses of use caused by lockdowns and health precautions are included as a basis for coverage on a wide scale, it could create an incredible increase in costs to both insured businesses and insurance companies going forward.
We will continue to monitor the ongoing business interruption cases in Canada and report on any trends as they develop.
Contact Milosevic Fiske LLP in Toronto for Representation in COVID-Related Contract and Insurance Disputes
The lawyers at Milosevic Fiske LLP in Toronto are skilled at providing strategic litigation advice in complex commercial matters, including insurance disputes and COVID-19-related corporate contract litigation. If you are involved in litigation resulting from the effects of COVID-19 on your business or expect to be, our exceptional team can fight for your rights. To learn how we can help you, call us at 416-916-1387 or contact us online to schedule a consultation.