The COVID-19 pandemic has led to the shutdown of a large portion of the global economy. In Ontario, this has included the shutdown of most non-essential businesses, and the ongoing requirement for individuals to maintain physical distancing.
In turn, businesses have seen profits reduced to a trickle and in many cases, this has led to forced bankruptcies and closures.
The provincial and federal governments have implemented various measures for the assistance and protection of certain businesses, but for most, this is simply not enough.
Many of the Ontario businesses that have seen significant losses are in turn following the steps of many counterparts in the United States and looking to their insurers for coverage. More specifically, many companies are making enquiries about potential business interruption coverage under their all-risks insurance policies.
All-risks insurance policies are generally property policies, and they can provide a broad range of coverage for all risks of property damage, including business interruption losses.
Insurers will in turn usually rely on a number of specific exclusions in order to narrow this broad coverage. Property policies do not generally define the term "property damage", as is the case with most commercial liability policies, and therefore the scope of that term is often open to interpretation.
Although policy wording can vary, most property policies contain very similar policy language. Businesses are often unique however, and insurance risks can be underwritten in a way that is specific to that unique business.
Therefore, it is very important that insurers and policyholders review the actual wording of the policy at issue when considering potential coverage issues under an all-risks property policy.
Business Interruption Insurance
Business interruption insurance generally forms part of an all-risks policy, and provides coverage where the policyholder has suffered losses as a result of physical damage to either its property or to a nearby property, or physical damage elsewhere causing the disruption of its supplies or interference with the ability of customers to access the insured's business.
Requirement for Property Damage
One common condition for these types of coverages is the requirement that there be property damage in order to fit within the initial grant of coverage.
This becomes complicated when considering COVID-19 related business losses, as many policyholders will not have sustained direct physical damage to their property, such as would generally be caused in a water or fire loss. Instead, these businesses have had to close their doors because of provincial government orders.
Therefore, although the purpose of the closures is to prevent the spread of the COVID-19 virus to the property, there is not, on a narrow interpretation of the term, actual physical loss or damage to the property itself or to property within the supply chain.
This is the general position that most insurers are likely to take when considering questions of coverage for these types of business losses: COVID-19 related business interruption losses are not the result of physical loss or damage to property.
The Role of the Courts in Interpreting Coverage
However, where there is no definition of property damage in the policy, courts play an important role in providing guidance and will generally do so through the well-established principles of insurance policy interpretation.
This means a court will consider whether there is a clear literal meaning to the term, or whether it is capable of more than one meaning. If the term is capable of more than one meaning, there is in turn an ambiguity, and such ambiguities should be interpreted contra proferentem, or against the party that drafted the clause, so long as the outcome is within the reasonable expectations of the parties.
Traditionally, courts have interpretated the definition of "property damage" within the grant of coverage to require actual physical damage to the property itself. Some courts however, notably in United States, have taken a more broad view of the term "property damage", finding that where businesses have been shut down due to a government order, the ensuing loss of use of the property is physical loss or property damage.
A very recent trial level decision from the Ontario Superior Court of Justice follows similar reasoning in finding that a government ordered shutdown of a business did constitute physical loss or damage to property for the purpose of coverage under an all-risk property policy. Many now wonder whether this decision will provide for greater access to insurance coverage in response to COVID-19 related shutdowns.
MDS Inc. v. Factory Mutual Insurance Company
In MDS Inc. v. Factory Mutual Insurance Company, 2010 ONSC 1924 ("MDS Inc."), the court was asked to consider whether there was physical property damage where a policyholder's supplier was forced to close operations for a number of months because corrosion caused a radioactive leak of heavy water in its nuclear facilities.
The policyholder was unable to buy radioisotopes from the supplier because of the closure and in turn claimed loss of profits under its business interruption coverage as part of its all-risks insurance policy.
The insurer's position was that the loss of use of the premises did not equate to physical damage to property, while the policyholder argued a more broad interpretation where the loss of use of that property by government order meant there was physical damage to the property.
As is common, the term "physical damage" was not defined in the policy. The court considered conflicting lines of case law interpreting the term "physical damage" and in turn determined that there was no clear and literal meaning to the term in the context of an all-risks policy in Canada.
The question for the court was whether resulting physical damage should be defined narrowly to require actual physical damage or whether it should be defined broadly to include loss of use or function.
Ultimately, the court concluded that a broad definition of resulting physical damage was most appropriate under the specific set of facts at issue, and interpreted the policy to include impairment of function or use of tangible property caused by an unexpected event. The leak of heavy water precipitated the shutdown and caused the reactor to be inoperable and this was considered physical damage to property.
Policyholders are likely to see this decision as opening the door to a wider interpretation of business interruption coverage in the context of COVID-19 related claims. However, policyholders and insurers alike should proceed with caution.
The MDS Inc. decision was based on a complicated fact scenario, which will certainly make it distinguishable in most future coverage disputes. However, each determination will also be unique and fact specific, and so the precise wording of each specific policy term must be carefully considered in any analysis.
By Order of Civil Authority
Some businesses will also have additional insurance specifically for the consequences of a pandemic, including losses resulting from an order by a civil authority shutting the business or prohibiting access to the policyholder's property.
This second type of coverage will often not require physical damage to the insured property, although may or may not require a confirmed outbreak of the pandemic at the property itself.
This appears on its face to be a more straightforward type of coverage. However, here too there are disputes arising between insurers and policyholders over the proper interpretation of the policy terms, including the term "civil authority" and the term "order".
Further, consider where coverage requires proof that the shutdown occurred due to an actual outbreak at the insured's premises. Does a wide-ranging shutdown like we have seen in Ontario, done for the purpose of protecting against such an outbreak at the premises, therefore fit within the policy coverage even though the outbreak never occurred?
The answer is a difficult one, as the costs to the policyholder of the shutdown have arguably protected against the imminent peril of an otherwise covered claim.
This is one of many additional questions that will be decided on a case-by-case basis over the coming months and years, as businesses try to rebuild in the aftermath of COVID-19.
Although the COVID-19 impact on businesses in Ontario has been staggering, it is unlikely that private insurers will play a major role in assisting these businesses to rebuild.
Specifically, it is unlikely that COVID-19 related losses would be covered under the business interruption provisions of most all-risks property policies, which require actual property damage.
However, policy wording can be unique, and it is imperative for both policyholders and insurers to carefully review the actual language of the policy at issue and consider the unique facts of each claim for coverage before determining a coverage position.
Rogers Partners LLP is an experienced civil litigation firm in Toronto, Ontario. The firm represents insurers and self-insured companies in numerous areas, including motor vehicle negligence, occupiers' liability, product liability, professional negligence, construction claims, statutory accident benefits, disability benefits, municipal liability, medical negligence, sexual abuse, and insurance coverage disputes.
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.