On March 23, 2020, the Ontario government announced that to fight the spread of COVID-19, effective March 24th at 11:59 pm, all businesses not deemed "essential" by the government would have to close their physical workplaces.[1] A little over a week later, the list of "essential" businesses was significantly restricted. Some businesses, such as certain retail establishments, remain "essential" but have been ordered to restrict their operations, such as by only allowing customer pickup of goods outside the store.[2] Non-essential businesses can only operate remotely, which for many means they operate at a reduced capacity, if at all.
Other provinces have taken similar action.[3] The result has been that across Canada, businesses are closing or restricting their operations. It is unclear how long these closures/restrictions will be in place. What is clear is that these measures, although necessary to ensure public health, are causing losses of revenue and increased expenses. This leaves many businesses wondering if they can recover any of these losses or expenses under the contracts of commercial insurance for which they have been paying premiums for years.
Unfortunately, there is no single answer that will apply to all insureds. Whether coverage is available will turn on the wording of the policy, and there are many different wordings sold in the Canadian marketplace. The only way to determine if you have coverage is to carefully and thoroughly review your policy. Although commercial insurance policies are complex documents, a lawyer specializing in insurance coverage is well-positioned to assist you.
This article provides basic information on business interruption insurance (BII), which is a common type of commercial property insurance. For many insureds, BII is the coverage most likely to respond to losses resulting from restrictions imposed to fight COVID-19.
What is BII?
In many policies, BII exists alongside property insurance that covers non-revenue assets, such as buildings, equipment and stock. BII often covers earnings or profits lost – or necessary extra expenses incurred – due to an interruption of or interference with the insured's business, caused by direct physical loss of, or damage to, other insured property (e.g., buildings, etc.). However, some policies may only cover losses or expenses resulting from a business interruption, not an interference. At least one Canadian court has indicated that under this kind of policy, there may be no coverage unless the business has suspended all operations.[4]
Under a commercial insurance policy, there may also be "civil authority" coverage, which may overlap with BII coverage. Civil authority coverage usually responds where the business has lost profits/revenue and/or incurred extra expenses, following a public authority denying access to the insured's premises, again due to direct physical loss/damage to other insured property.
Another type of coverage is contingent BII, which usually protects earnings/profits lost because of direct physical loss/damage to property owned by one of the insured's neighbours, suppliers, or clients. Contingent BII recognizes that a business which has suffered no property damage of its own may still experience significant lost earnings/profits when a supplier or client limits its business with the insured following a loss, or when damage to a neighbor's property restricts the insured from carrying on its own business.
Does coverage require direct loss of or damage to other covered property?
As noted above, direct physical loss/damage to other property insured by the policy is often required to trigger BII or civil authority coverage. Contingent BII will usually only be triggered where there has been direct physical loss/damage to property owned by one of the insured's neighbours, suppliers or clients. In a very recent Ontario case involving contingent BII coverage, the court found coverage in circumstances where there had been physical damage to property owned by one of the insured's suppliers, and no policy exclusions applied.[5]
Certain policies may not include a direct physical loss/damage requirement, which may make it easier to prove a covered loss. Some insurers offer a "civil authority" coverage known as "outbreak extra expense" insurance, which may cover extra expenses resulting from business interruptions/interference caused by a public authority's declaration of the outbreak of a serious infectious disease. Under this coverage, the insured does not need to prove direct physical loss/damage to insured property, although policy exclusions may restrict the kinds of extra expenses that will be covered. Given the orders made to date by various provincial governments, including declarations of states of emergency[6], any insureds with outbreak insurance will almost certainly have coverage.
Other policies may be triggered by the mere threat of physical loss/damage. For those policies requiring direct physical loss/damage to insured property, the question arises if a restriction ordered for public health reasons can constitute such loss/damage. Restrictions imposed to fight COVID-19 may have left the business unable to use its building and other insured property, but unless this loss of use is direct physical loss/damage, there will be no coverage.
Some policies may define "direct physical loss of or damage", which can clarify if there is coverage. However, many do not define these terms. The Canadian courts have not yet considered if loss of use of insured property resulting from public health orders is enough on its own to trigger coverage as direct physical loss of or damage to the insured property.
The issue has been considered in a few US cases. In General Mills Inc. v. Gold Medal Ins. Co., a regulatory order forbade the insured from selling oats contaminated with an unapproved pesticide. The oats were insured under a commercial insurance policy, which was triggered by "direct physical loss or damage to" insured property. Although they presented no health hazard to the consuming public, the Minnesota Court of Appeals found the oats had sustained physical damage because they could not be used in the insured's business.[7]
In Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co., the insured sought to rely on the decision in General Mills, in circumstances where an American insured could not receive its beef product from a Canadian supplier, because US authorities had banned beef imports following the discovery of mad cow disease in Canada. This ban applied to the insured's product, even though that product was not contaminated in any way. When the insured could not receive its product, it lost its best customer. It also had to obtain a new supplier. The insured incurred lost profits and extra expenses, and brought a claim under the BII section of its policy.[8]
Although the US 8th Circuit Court of Appeals found for the insurer, the decision arguably will not apply to many insureds, because of different policy language. In Source Food, BII coverage was triggered by a business suspension caused by "direct physical loss to [emphasis added]" insured property. The use of the word "to" was important. The court found that although contamination may create a situation where there has been direct physical loss/damage to insured property (as in General Mills), where there is no contamination, there is no direct physical loss to property. This is true even if an order prohibits the insured, for public health reasons, from making use of the uncontaminated property.[9]
Notably, the court remarked that the insured's position may have been stronger if coverage had instead been triggered by direct physical loss of property (as is often the case).[10] Indeed, in our opinion, a loss of use of property is a loss of property. The issue of whether property is contaminated with an infectious disease may be relevant to determining damage, but it has nothing to do with whether the property has been lost. In Canada, subject to the principle requiring a court to adopt the clear meaning of a term, words in a policy should be interpreted in a way that avoids redundancy.[11] The corollary of this is that "loss" and "damage" must mean different things – otherwise, the terms would be redundant.
Of course, a Canadian court may not agree with this viewpoint. Another issue a court may have to resolve is whether the words "loss of property" in an insurance policy require a permanent loss of property, or whether a temporary loss is sufficient. This issue is important in the context of the current health crisis, because in many situations the closure of businesses will only result in the temporary loss of use of property.
In our opinion, a temporary loss of use of property can trigger coverage. Such a view is consistent with a decision of the Arizona District Court in which there was coverage for business interruption losses resulting from the temporary loss of use of an insured computer system.[12]
If Canadian courts agree with this, it may help insureds frame their claim more broadly. Instead of being restricted to claiming business interruption losses resulting from the limited kinds of physical damage or destruction caused by COVID-19 (e.g., lost profits on stock that must be destroyed because it may be infected), if coverage can result from loss of property, the insured could claim all business interruption losses resulting from the loss of use of an insured building.
Finally, even an insured whose BII coverage is only triggered by loss/damage to property may be able to make out a claim, even if it cannot prove its property has been contaminated. Since Source Food was decided in the US, a Canadian court would not be bound to follow it, even if the facts in both cases are the same.
Additional Considerations
We hope the comments set out above have helped guide you through the common features of BII and similar coverages. We end with some additional issues you will want to consider. Again, we stress the importance of thoroughly reviewing your entire policy. Although your BII coverage may be triggered, it will likely be subject to exclusions which will limit the kinds of business interruption losses and expenses that would otherwise be covered.
As with all insurance, BII and similar coverages will be subject to limits of liability. Sometimes the limit permits the insured to recover incurred losses up to a certain amount. In other cases, the limit may be expressed as a time period, permitting an insured to recover losses incurred for a certain number of weeks, months or years after the date of the event triggering coverage.
Commercial property policies typically require the insured to give the insurer notice of loss or damage (e.g., lost profits/revenue) in writing as soon as practicable. Although the Insurance Bureau of Canada has communicated that insurers will accept the late filing of claims that would have otherwise been due, until authorities declare an end to the public health emergency[13], it is still good practice to submit a claim as soon as possible, if only to protect against an insurer that seeks to strictly enforce its policy. The sooner you submit a claim, the sooner your insurer must respond, and if the claim is covered, pay it.
Furthermore, if your insurer denies your claim, your only recourse will typically be to issue court proceedings. Many policies require that any such proceedings be brought within one year after the loss or damage first occurs. Therefore, if you think you have coverage, you should not wait to begin the claims process.
Finally, there is a duty under contract law to mitigate one's damages. Sometimes this is spelled out under the policy, and the insurer may even be required to contribute proportionately to any reasonable and proper expenses required to minimize losses. In any event, it is always good practice for an insured to take reasonable steps to mitigate losses.
Footnotes
[1] See https://news.ontario.ca/opo/en/2020/03/ontario-orders-the-mandatory-closure-of-all-non-essential-workplaces-to-fight-spread-of-covid-19.html.
[2] See https://news.ontario.ca/opo/en/2020/04/ontario-extends-business-closures-to-stop-the-spread-of-covid-19.html.
[3] E.g., see https://www2.gov.bc.ca/gov/content/safety/emergency-preparedness-response-recovery/covid-19-provincial-support/essential-services-covid-19l; see also https://www.alberta.ca/essential-services.aspx.
[4] See Le Treport Wedding & Convention Centre Ltd v Co-operators Insurance, 2019 ONSC 3041 at paras 246-254.
[5] MDS Inc v Factory Mutual Insurance Company, 2020 ONSC 1924 at paras 182-185, 415-417, 614.
[6] E.g., see https://news.ontario.ca/opo/en/2020/04/ontario-extends-declaration-of-emergency-to-continue-the-fight-against-covid-19.html, in which the Ontario government announced an extension of the previously declared state of emergency to May 12, 2020.
[7] General Mills Inc. v. Gold Medal Ins Co, 622 NW2d 147 (2001 Minnesota Court of Appeals) at pp 4-5, 7-8.
[8] Source Food Technology, Inc v US Fidelity and Guar Co, 465 F3d 834 (2006 USCA 8th Circuit) at pp 2-3.
[9] Ibid at pp 4-5.
[10] Ibid at p 5.
[11] See Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33 at paras 37, 40.
[12] American Guarantee & Liability Ins Co v Ingram Micro, Inc, 2000 WL 726789 (Arizona District Court).
[13] See http://www.ibc.ca/bc/business/covid-19.
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.
