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Businessmen fighting COVID-19

The calm before the storm: Business interruption insurance litigation

Thursday, April 09, 2020 @ 11:49 AM | By Tim Zimmerman and Gord McGuire

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Tim Zimmerman
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Gord McGuire
As the economic fallout of COVID-19 grows, businesses are scrambling for relief from government ordered closures and other pandemic-related losses. In addition to government aid programs that are being rolled out, businesses across Canada and the United States are looking to their commercial insurance policies to understand if there is coverage for pandemic-related business interruption.

It is clear that a line in the sand is being drawn between players in the insurance industry who have already warned that most businesses will not be covered and policyholders along with their lawyers advancing arguments for coverage — and in some cases enlisting legislatures in support of their cause.

A fortunate few companies will have policies that expressly provide coverage against pandemics. Some companies may also have potentially responsive coverages such as event cancellation insurance, infectious disease and other non-physical damage endorsements or specialized “manuscript” policies that have customized wordings tailor-made for the particulars of their business risks. Businesses lucky enough to have these coverages could receive substantial relief under their policies.

For many businesses, however, the only potentially responsive coverage will be their business interruption coverage found in their commercial property insurance policies. Importantly, these policies do not insure against business interruption per se; they insure against property damage and the corresponding loss of profit and extra expense of the physical damage related event.

The language used in many policies to describe what physical events will trigger coverage is “direct physical loss of or damage to the insured property.” However, in our experience reviewing policies, the ambiguity certain business interruption insurance wordings provide in respect of whether physical damage is required and to what extent may favour policyholders more than insurers may appreciate.  

The application of property insurance policies to COVID-19 losses raises many novel legal issues. One such issue is whether contagion on the premises at an insured business constitutes “damage to the insured property.” There is certainly case law in other contexts that suggests that physical alteration of the premises, even at a microscopic level, can constitute damage to the insured property.

A finding on this issue favourable to insureds could have broad implications and trigger other coverages, as many property policies contain business interruption extensions pertaining to physical losses at other premises, such as those of customers, suppliers or neighbouring premises.

Courts will also likely be required to interpret clauses which provide business interruption coverage in the event a civil authority orders the closure of a business. The issue of whether the “pollutant” exclusion or other exclusions apply to contagion on the premises will also likely require determination by the courts.

While guidance from the courts will be useful, many cases will be fact- and policy-specific. Though the wording of triggering conditions and exclusions is often similar across many policies, certain clauses such as those pertaining to closure by civil authority can vary widely.

Similarly, the recoverability of a COVID-19-related loss will very much depend on the specific facts that caused the loss. Policies will respond differently depending on whether the loss was caused by, for example, a general decline in demand caused by the pandemic, contagion on the premises, closure by civil authority, etc.

If business interruption coverage is triggered, an insured can expect to recover its loss of profit, any increase in the cost of working, such as additional labour or operating expenses and extra expenses. Depending on the policy type, the period during which losses can be claimed is limited to the period of restoration or repair of the property or until the business returns to the same level of profitability achieved prior to the commencement of the loss. All policies will also have a maximum length for which they provide indemnity, which is typically up to 12 or 24 months.

In the United States, where many courts are still operating, cases such as the “Oceana Grill” litigation in New Orleans are already addressing these issues, with the plaintiffs arguing that “It is clear that contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment.” [Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s London et al., Civil District Court for the Parish of Orleans State of Louisiana.] Many similar suits are expected in the United States and, once courts reopen, in Canada as well.

On the legislative front, the state of New Jersey is reportedly considering joining the insurance coverage war with an attempt to override exclusions in business interruption policies designed to preclude coverage for virus-related losses, and forcing insurers to pay these losses. The New Jersey Draft Bill A-3844 would, if passed, come into effect immediately and would apply retroactively to insurance policies in force as of March 9.

The authors have seen no indication that Canadian legislators are considering a similar move north of the border. Such a move would no doubt itself be challenged in the courts and, even if it withstood judicial scrutiny, may merely result in insurers requiring government support.

Although most commentary on the issue of pandemic-related insurance coverage has been decidedly unoptimistic from the perspective of policyholders, businesses would be well advised to wait and see how the above issues resolve themselves before writing off all hopes of recovery.

Tim Zimmerman is a partner in the litigation and valuation services practice of RSM Canada, a provider of audit, tax and consulting services focused on the middle market. Gord McGuire is a partner at Adair Goldblatt Bieber LLP. McGuire acts for individuals and businesses in all manner of civil and commercial litigation. His areas of practice include business and contractual disputes, employment law and real estate litigation.

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