All risk property policies issued to businesses typically include coverage for business interruption losses. We expect that those Canadian businesses who are suffering losses due to the global COVID-19 pandemic may attempt to make claims under their policies for such losses. Will business interruption coverage respond to cover these claims? There are various hurdles which may prevent such coverage being available to policyholders. A typical business interruption insuring agreement reads:
This Form insures up to the amount stated in the Declarations, the loss of earning sustained, lost operating expenses which do no necessarily continue, during the necessary interruption of business caused directly by the perils insured against damaging the real or personal property during the term of this policy on the premises, where such damage or destruction is covered elsewhere in this policy.
This type of coverage is often found in an "All Risk" business property policy. Unlike the name implies, "All Risk" coverage does not encompass every conceivable type of loss. Rather, in order for damage to be covered by an All Risk policy, it must be due to some fortuitous circumstance or casualty. A policy's business interruption coverage will only respond if the damage or destruction to real or personal property is also covered by the policy.
To trigger coverage, most All Risk policies require that there be physical damage to property. There is some uncertainly in the law on this point, because some court decisions have held that damage to property does not necessarily require an element of physical damage, however, these cases tend to have policy wording that varies slightly from the norm. The more common policy wording is that there must be "direct physical loss or damage" to property and most cases in Canada have held that this requires physical damage to property. One example is the B.C. Court of Appeal case Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347, where the court confirmed that "physical loss" 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. In the context of COVID-19, if a business is forced to close because of government mandate or a lack of customers and employees due to self-isolation practices, in most instances, it is unlikely that the Policyholder will be able to establish a "direct physical loss" to the property insured.
This interpretation may be different if the business's employees were infected with COVID-19 and subsequently attended at the business premises. In such a case, the Policyholder may argue that the premises suffered a direct physical loss as a result of being "contaminated". There is precedent for this type of argument in American case law. The Minnesota Court of Appeal considered a similar issue in Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W.2d 296 (Minn. Ct. App. 1997). In that case, the policyholder discovered its apartment buildings contained asbestos fibers on the carpeting and other surface. The building owner claimed coverage for physical loss to the building as a result of the asbestos "contamination". The Court noted that the policy in question required there to be direct physical loss to insured property. The insurer argued that asbestos contamination, absent some structural impairment, did not constitute such damage.
The Court found coverage under the policy. Although asbestos contamination did not result in tangible injury to the physical structure of a building, the Court determined that a building's function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants. As such, the Court concluded the property was "damaged".
In Sentinel Management and other cases, American Courts have held that direct physical loss can exist without actual destruction of property; that it is sufficient that the property is injured in some way. This broad American approach to "damage" was discussed in Acciona. The Court of Appeal noted that the broad approach had been rejected by English Courts. Such a broad definition has not been accepted by Canadian Courts. In Accoiona, the Court of Appeal distinguished the case it was considering from "simply a case of functional inutility", suggesting that a case of inutility would not fall within the definition of physical loss.
While the Court may not be the answer for business owners seeking to find coverage for business interruption losses arising from the COVID-19 pandemic, Governments may be the answer. For instance, on March 16, 2020, just days after the State of New Jersey declared a State of Emergency, the New Jersey Legislature introduced Bill No. 3844 which, if passed, would require business interruption insurers to indemnify certain New Jersey policyholders for business interruption due to COVID-19 regardless of the wording of the policy.
Each business interruption policy must be examined on its particular wording, however, in the absence of legislation like that proposed in New Jersey, we expect that for businesses unable to use their premises due to the COVID-19 pandemic, whether or not the premises are "contaminated", in most instances Canadian Courts will conclude the premises are not physically damaged and the result will be no coverage for business interruption due to COVID-19.
Should you have any questions or require further information, please feel free to contact us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.