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Coverage under builders’ risk policies for COVID-19 issues: Exclusions

Monday, July 20, 2020 @ 12:12 PM | By Samantha Ip, Satinder Sidhu and Rosalie Clark

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In this series, we consider coverage for COVID-19 related losses under a builders’ risk policy in the event of construction site shutdown or suspensions, resulting impact costs and delay of completion.

In the first instalment, we considered what is typically covered by a builders’ risk policy (also often referred to as a course of construction policy). In this second instalment, we consider exclusions that may remove from coverage losses related to COVID-19 issues.

Consider this scenario. COVID-19 has caused temporary total project suspension. Construction starts again, crews have been reduced to 60 per cent of total planned workforce to maintain social distancing and that will be the case until completion. The schedule has been heavily impacted and this will add another year to the original scheduled completion. Can an owner or a contractor make a coverage claim under a builders’ risk policy?

As discussed in detail in our first instalment, builders’ risk policies cover damage or loss to property during the course of construction and are triggered where there is physical damage to property (meaning tangible damage to property) or physical loss to property (including loss of use of property).

If the claim satisfies the requirements of the insuring agreement, then we must next consider whether any exclusions are triggered to remove coverage.

Typical exclusions that may remove COVID-19 claim from coverage

Builders’ risk policies may contain a micro-organism exclusion with similar following wording: “This Policy does not insure any loss, damage, claim, cost, expense or other sum directly or indirectly arising out of or relating to: mould, mildew, fungus, spores or other microorganism of any type, nature, or description, including but not limited to any substance whose presence poses an actual or potential threat to human health.”

The issue of whether a micro-organism constitutes a virus has not been considered by Canadian courts. The dictionary definition of micro-organism does include microscopic organisms (like a virus), and accordingly, a micro-organism exclusion may exclude coverage for any loss arising from an outbreak of COVID-19.

However, this exclusion is not standard in all builders’ risk policies. If the application of an exclusion clause requires interpretation due to ambiguity, then a court will usually interpret the clause narrowly in favour of coverage.

Other species of insurance policies may exclude loss or damage arising out of “contamination,” which could include a virus. Builders’ risk policies, however, typically do not broadly exclude damage arising out of contamination but rather exclude specific types of contamination from coverage, such as contamination resulting from radioactive matter or asbestos.

It is therefore unlikely that any contamination exclusion in a builders’ risk policy would capture losses arising from an outbreak of COVID-19 on site.

Some micro-organism exclusions specifically include the word “virus.” If a COVID-19-related coverage claim falls squarely within an exclusion clause, then the claim will likely be excluded, unless the claim is brought back into coverage through an exception to the exclusion, as in the decision of MDS Inc. v. Factory Mutual Insurance Company (FM Global) 2020 ONSC 1924.

What COVID-19-related claims could be covered?

If the policy in issue extends coverage for COVID-19 related losses, specifically losses arising from an outbreak of COVID-19 on site, and the loss is not excluded by any other provision in the policy, then the next part of the analysis is to consider what losses could be covered.

Repairs and replacements are the typical costs covered by builders’ risk policies. However, an outbreak of COVID-19 would not require any part of the project to be repaired or replaced. Some builders’ risk policies specifically provide for the cost of removing contaminants from the immediate surface of the site. Accordingly, costs such as cleaning costs to reinstate the property for use, could be covered.

There may be soft costs coverage. More significantly, builders’ risk polices may provide coverage for extra expenses, namely the amount by which the cost of completing the project exceeds the cost of construction had there not been an outbreak, or civil authority coverage. Builders risk polices may also provide for delayed start up coverage, indemnifying the insured for delay to the scheduled completion date, including loss of gross profits.

Final remarks

Whether a COVID-19-related coverage claim will succeed will depend on the circumstances of the loss and the specific policy wording in issue. Builders’ risk policies will typically require tangible physical damage or loss of use before coverage under the policy is triggered.

Loss of use may be established if there is proven infiltration of some element that made the project unsafe for access or operation. In Canada, it is likely that evidence of infiltration of COVID-19 on site, plus a government order preventing habitation or access due to that infiltration, will be required before physical loss or loss of use can be established to trigger coverage.

Even if the requirements of the insuring agreement are satisfied, an exclusion could still remove the claim from coverage, particularly if the exclusion specifically references “virus.”

This is part two of a two-part series. Part one: Coverage under builders risk policies for COVID-19 issues.

Samantha Ip is a partner and chair of Clark Wilson LLP’s insurance practice. Ip particularly enjoys insurance coverage and has specialized in construction and insurance in her several years of practice. Satinder Sidhu is a partner and co-chair of Clark Wilson’s infrastructure, construction and procurement practice in addition to her insurance law practice. Sidhu ensures clients can execute their projects and resolve their claims in a timely manner. Rosalie Clark is an associate in Clark Wilson’s insurance, infrastructure, construction and procurement and business litigation groups. Her practice focuses on infrastructure and construction matters and related disputes.

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