COVID-19 and Business Interruption Insurance

For Canadian businesses, the impact of the COVID-19 pandemic has been sharp and direct: Whether due to government-imposed shutdowns or independent decisions sparked by economic or health- related factors, business of all types have had to halt operations temporarily. Needless to say, owners are reeling. They have been left to ponder the best ways to get back up-and-running in the future, and to recoup some of their losses if possible.

This article discusses the basics of Business Interruption Insurance, and examines whether the business fallout from the COVID-19 pandemic might give rise to a claim for coverage. Because insurance policies generally require an insured to promptly notify the insurer of a loss event or claim, it is important for business owners to consider their business insurance policies sooner than later.

The Basic Concept

Like all insurance policies, Business Interruption Insurance provides coverage for the types and categories of losses specified in the policy issued by the insurer. This particular form of insurance redresses an insured business owner’s “fortuitous” loss of income during any temporary closure of operations that has been prompted by unforeseen events. In the legal context, the term “fortuitous” refers to an event that is “unlooked for, unexpected or not intended by the insured”.1

A typical claim under a Business Interruption Insurance policy might stem from a temporary halt of the owner’s operations because the premises themselves have been directly damaged or destroyed – for example where there has been a fire, flooding, or vandalism on the property. The insurance proceeds allow the owner to cover routine business expenses until operations can be fully restored.

However, depending on the wording of the policy, this type of insurance may also cover external events or third-party disruptions in the particular business’ sales or supply chain, arising from unexpected challenges faced by those outside entities. For example, there may be a critical shortage of key parts from a supplier, or a steep unexpected drop in orders from a major client to whom a significant portion of the business’ annual sales are made.

As with all insurance policies, the scope of coverage under a Business Interruption Insurance policy will vary with the policy wording. If the language in the contract is ambiguous, there may be “grey areas” as to what risks are covered. In the insurance law context, our courts are known to construe an ambiguous policy contra proferentem against the insurer.

General Interpretation Principles for Insurance Contracts

In an “all-risks” policy insuring against physical loss or damage, the numerous exclusion clauses will dictate whether the insurer is justified in denying liability, especially in the face of an unusual or unanticipated event. If an exclusion applies, the insured needs to examine the policy for any exception to those exclusions that may bring the insured’s claim back to cover.

There are a few main principles that are worth noting here. The first is that the insurer bears the onus of proving that an exclusion clause applies.2 Conversely, the insured must prove that the facts fit into any exception to that exclusion.3 Exceptions are to be broadly interpreted.

Next, the legal principle of contra proferentum pervades the policy interpretation exercise; any ambiguity is resolved against the insurer.4 And finally, the interpretation of the policy wording must be consistent with both the factual context and the reasonable expectations of both the insured and the insurer, viewed against the background of the commercial atmosphere.5

Can COVID-19 Trigger a Business Interruption Insurance Claim?

The COVID-19 crisis raises some novel legal issues and introduces uncertainty. Clearly the health crisis has not caused any physical damage to business’ property or premises – the impact has been more intangible in nature. This adds to the difficulty in predicting the outcome of any claim.

If an insurer denies coverage, a key task for the courts will be to decide whether the global economic standstill prompted by the pandemic is captured by a policy’s exclusion clauses, to the insured’s detriment. This will be determined on a case-by-case basis.

A key question is whether such policy is contingent on physical damage.

The Issue of “Resulting Damage” Under a Policy

A very recent Ontario case6 might shed some light on this key question. The decision examined the contours of whether tangible, physical damage to a property is necessary before an insurer’s obligations to the insured are triggered under a Business Interruption Insurance policy.

In 2009, the walls of the Nuclear Research Universal Reactor in Chalk River, Ontario unexpectedly experienced a small leak. Heavy water containing radioactive Tritium seeped through, causing a complete shutdown of the facility. Although it was originally scheduled to last only 36 hours, it ended up lasting 15 months.

The insured, MDS, had been routinely purchasing isotopes produced at the Nuclear Reactor, and was in the business of selling them to others worldwide to be used for cancer treatment, sterilization of medical products, and cardiac imaging. MDS held a Business Interruption Insurance policy (the “Policy”) that insured it for loss of profits flowing from physical damages endured by its suppliers, including the Nuclear Reactor. That 83-page Policy covered all risks of physical loss or damage, except as specifically excluded by the Policy’s wording. One such clause excluded risks pertaining to corrosion of the Nuclear Reactor (the “Corrosion Exclusion”).

After the leak, MDS submitted a claim to its Insurer for loss of profits amounting to over $121 million. In an epic judgment spanning almost 750 paragraphs, the Ontario court held that the Corrosion Exclusion clause relied on by the insurer to deny coverage for business interruption caused by the leak did not operate to absolve it of liability – i.e. MDS was entitled to be paid out for its business income losses.

Although this alone resolved the parties’ dispute, the court went on to consider a second argument: That even assuming the Corrosion Exclusion did apply, the exclusion exception for “resulting physical damage” also would have brought MDS’s claim back under the coverage umbrella, allowing it to recover its losses.

The court noted the Policy itself did not define the term “physical damage”. For all-risks policies in Canada, there was no “bright line” or definitive prior decision to define the meaning of “resulting physical damage”. Instead, the meaning was to be considered in light of the specific wording in each policy, as well as the legal and factual context.

The matter simply boiled down to whether “resulting physical damage” should be defined narrowly to require actual, tangible physical damage (as the Insurer argued), or whether it could be defined more broadly to include simply “loss of use” (as MDS contended).

The court preferred MDS’s argument: Loss of use was covered in the term “resulting physical damage” as used in the Policy. While the heavy water did not structurally damage the Nuclear Reactor in the traditional sense, it changed the character of certain of its attributes. The court agreed with MDS that tangible, physical damage to those attributes was not a prerequisite for qualifying for the exception to the Corrosion Exclusion. Plus, if the Policy wording was ambiguous, the contra proferentem principle resolved the matter in MDS’s favour.

The court added that this interpretation was consistent with the overall Policy, with other exclusions contained in it, and with the parties’ reasonable expectations. MDS has contracted for broad all-risks coverage for the economic loss sustained if its ordinary business operations were interrupted; this encompassed protecting what amounted to almost half of its worldwide business income generated from the re-sale of the isotopes produced by the Nuclear Reactor. The court awarded MDS the maximum limit of its coverage under the Policy, which was $25 million.

Can COVID-19 Trigger Business Interruption Insurance?

As this case shows, for a business owner with Business Interruption Insurance, it may not be necessary to show that there has been any physical damage to the premises or property, before a successful claim can be made. In some circumstances, the more intangible negative effects of the COVID-19 pandemic could potentially be captured by the wording of a policy. The outcome in each case will depend on the wording of each policy and the facts concerning the loss.