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COVID 19 – Loss of Business Insurance

COVID-19 | June 17, 2020 | Written by Peter Loewen

With the various government stay at home orders and quarantines, many businesses will be submitting claims to their insurer under loss of income or loss of business coverage. Insurers may be desperate to deny the onslaught of claims and the battle lines on coverage are beginning to be drawn.

It is important to understand, that insurance coverage is contractual, meaning each policy may contain different terms and exclusions. Therefore, not one set of principles will apply to every coverage question. The following article discusses some of the possibilities.

Battle Line 1: Is COVID 19 physical property damage?

Often times coverage is predicated on damage being caused by direct physical loss or damage to property. Some insurance companies have relied on this provision to exclude coverage saying that COVID-19 does not amount to property damage. In a proposed class action out of Saskatchewan, several insurers are being challenged on their denial of coverage on this point.

In the United States direct physical loss or damage caused by “sources unnoticeable to the naked eye” have been recognized (Port Authority v. Affiliated FM Ins. Co., 311 F.3d 226 (3rd Cir. 2002), if it renders the property uninhabitable or unusable (Universal Image Prods. V. Chubb Corp., 703 F. Supp 2d 705, 709). However, there is precedent to suggest that if the harm can be “cleaned” there is no physical harm (Mama Jo’s, Inc. v. Sparta Ins. Co., No.17-CV-23362-KMM, 2018 U.S. Dist. Lexis 201852).

In Canada however, there is less authority on that point. From the British Columbia Court of Appeal, physical loss means an alteration in the appearance, shape, colour or other material dimension of the insured property (Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2015 BCCA 347).

Notably in the recent decision of the Ontario Supreme Court, MDS Inc. v. Factory Mutual Insurance Co, 2020 ONSC 1924, the court considered whether a heavy water leak would be considered physical damage in an all risks policy covering a nuclear reactor. In considering the physical property damage exemption the court commented at paragraph 443, “there are conflicting lines of cases on how to interpret the meaning of resulting physical damage. There is no definitive decision defining the meaning of resulting physical damage in all-risks policies in Canada.” At paragraph 451 the court seems to skirt the issue, “A lengthy, convoluted chain of events followed the discovery of the leak of heavy water to safely rectify the leak, and these various steps are included under the umbrella of resulting physical damage.” The court went on to conclude that a broad interpretation of physical damage but focused on the contextual background of that particular policy. In particular, that loss of use of the nuclear reactor was something that should be considered “physical loss”.

It is uncertain which way Canada will go on this issue, or what contractual nuances may come into play to help the court interpret “physical loss”.

Battle Line 2: Did government interference cause the COVID 19 related loss?

Many policies include coverage for losses suffered by government interference. Accordingly, was the business loss caused by a government order or mandate to close business doors or was that a decision that the business made without the government requiring it?

Each case will be decided in relation to its time specific context. There were many different orders and directions made at both the Federal and Provincial level. I expect this factor will have a strong bearing on the ultimate outcome of COVID 19 insurance litigation.

Battle Line 3: Is COVID-19 a force majeure or frustrating event?

Some insurers have claimed COVID-19 is a force majeure event or a frustrating event, which relieves them from living up to certain obligations under the insurance contract. For more information on force majeure and frustration see my article on that topic:

Force Majeure and Frustration, in the Context of COVID-19

Where an unanticipated intervening force makes it impossible to perform on a contract, the party invoking the force majeure or frustration, may claim relief from all or part of a contract. Business losses in insurance contracts are usually a cash proposition, accordingly, I expect that an insurer would need to show an inability to pay out on policies in order to effectively advance this defense, unless the insurance policy indicates otherwise.

Making a Claim

If you have suffered a loss of business income it may be worth while to submit a claim in any event and gauge your insurer’s response to the claim before deciding whether to proceed further.

Keep in mind there are timelines for doing so. Accordingly, you should get early legal advice and carefully prepare a proof of claim.

In order to advance a claim, it is important that you advance a timely claim and at a minimum you will be looking to:

  1. Submit a Proof of Claim;
  2. Start your lawsuit within the prescribed time; and
  3. Maintain copies of all of your records showing your loss and any efforts you took to mitigate (reduce) the amount of money your business lost.

Written by Peter Loewen, Senior Associate, Linley Welwood LLP  June 17, 2020.

© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.


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