On 23 March 2020 the Ontario government announced that to fight the spread of COVID-19, effective 24 March 2020 at 11:59pm, all businesses not deemed 'essential' by the government would have to close their physical workplaces.(1) Soon after, the list of essential businesses was significantly restricted, although certain restrictions are now slowly being lifted. Some businesses, such as certain retail establishments, remain essential but have been ordered to restrict their operations (eg, allowing customers to collect goods from outside the store).(2) Non-essential businesses can operate only remotely, which for many means that they must operate at a reduced capacity, if at all.
Other provinces have taken similar action.(3) The result has been that across Canada, businesses are closing or restricting their operations. It is unclear how long these closures and restrictions will be in place. However, what is clear is that these measures, although necessary to protect public health, are causing lost revenue and increased expenses. This leaves many businesses wondering if they can recover any of these losses or expenses under the contracts of commercial insurance for which they have been paying premiums for years.
Unfortunately, there is no single answer that will apply to all insureds. Whether coverage is available will depend on the wording of the policy, and there are many different wordings sold in the Canadian marketplace. The only way for a business to determine if they have coverage is to carefully and thoroughly review their policy. Although commercial insurance policies are complex documents, a lawyer specialising in insurance coverage is well-positioned to assist businesses.
This article provides information on business interruption insurance (BII), which is a common type of commercial property insurance. For many insureds, BII is the coverage most likely to respond to losses resulting from restrictions imposed to fight COVID-19.
In many policies, BII exists alongside property insurance that covers non-revenue assets (eg, buildings, equipment and stock). BII often covers earnings or profits lost – or necessary extra expenses incurred – due to an interruption of or interference with the insured's business, caused by direct physical loss of or damage to other insured property (eg, buildings). However, some policies may cover losses or expenses resulting from only a business interruption, not an interference. At least one Canadian court has indicated that under this kind of policy, there may be no coverage unless the business has suspended all operations.(4)
Under a commercial insurance policy, there may also be 'civil authority' coverage, which may overlap with BII coverage. Civil authority coverage usually applies where a business has lost profits or revenue or incurred extra expenses following a public authority denying access to the insured's premises, again due to direct physical loss or damage to other insured property.
Another type of coverage is contingent BII, which usually protects earnings or profits lost because of direct physical loss or damage to property owned by one of the insured's neighbours, suppliers or clients. Contingent BII recognises that a business which has suffered no property damage of its own may still experience significant lost earnings or profits when a supplier or client limits its business with the insured following a loss, or when damage to a neighbour's property restricts the insured from carrying on its own business.
As noted above, direct physical loss or damage to other property insured by the policy is often required to trigger BII or civil authority coverage. Contingent BII will usually be triggered only where there has been direct physical loss or damage to property owned by one of the insured's neighbours, suppliers or clients. In a recent Ontario case involving contingent BII coverage, the court found coverage in circumstances where there had been physical damage to property owned by one of the insured's suppliers, and no policy exclusions applied.(5)
Certain policies may not include a direct physical loss or damage requirement, which may make it easier to prove a covered loss. Some insurers offer a civil authority coverage known as 'outbreak extra expense' insurance, which may cover extra expenses resulting from business interruptions and interference caused by a public authority's declaration of the outbreak of a serious infectious disease. Under this coverage, the insured need not prove direct physical loss or damage to insured property, although policy exclusions may restrict the kinds of extra expense that will be covered. Given the orders made to date by various provincial governments, including declarations of states of emergency,(6) any insureds with outbreak insurance will almost certainly have coverage.
Other policies may be triggered by the mere threat of physical loss or damage. For those policies requiring direct physical loss or damage to insured property, the question arises as to whether a restriction ordered for public health reasons can constitute such loss or damage. Restrictions imposed to fight COVID-19 may have left businesses unable to use their building and other insured property, but unless this loss of use is direct physical loss or damage, there will be no coverage.
Some policies may define "direct physical loss of or damage", which can clarify if there is coverage. However, many do not define these terms. The Canadian courts have not yet considered if loss of use of insured property resulting from public health orders is enough to trigger coverage as direct physical loss of or damage to the insured property.
The issue has been considered in a few US cases. For instance, in General Mills Inc v Gold Medal Ins Co, a court found coverage for an insured who had lost use of its products due to a contamination.(7) In Source Food Technology, Inc v US Fidelity and Guar Co, the insured sought to rely on the decision in General Mills, in circumstances where a US insured could not receive its beef product from a Canadian supplier, because the US authorities had banned beef imports following the discovery of mad cow disease in Canada. This ban applied to the insured's product, even though that product was not contaminated. When the insured could not receive its product, it lost its best customer. It also had to obtain a new supplier. The insured incurred lost profits and extra expenses, and brought a claim under the BII section of its policy.(8)
Although the US Eighth Circuit Court of Appeals found for the insurer, the decision arguably will not apply to many insureds because of different policy language. In Source Food, BII coverage was triggered by a business suspension caused by "direct physical loss to" insured property. The use of the word "to" was important. The court found that although contamination may create a situation where there has been direct physical loss or damage "to" insured property (as in General Mills), where there is no contamination, there is no direct physical loss "to" property. This is true even if an order prohibits the insured, for public health reasons, from making use of the uncontaminated property.(9)
Notably, the court remarked that the insured's position may have been stronger if coverage had instead been triggered by direct physical loss "of" property (as is often the case).(10) Indeed, arguably a loss of use of property is a loss of property. The issue of whether property is contaminated with an infectious disease may be relevant to determining damage, but it has nothing to do with whether the property has been lost. In Canada, subject to the principle requiring a court to adopt the clear meaning of a term, words in a policy should be interpreted in a way that avoids redundancy.(11) The corollary of this is that 'loss' and 'damage' must mean different things – otherwise, the terms would be redundant.
Of course, a Canadian court may disagree with this viewpoint. Another issue that a court may have to resolve is whether the words 'loss of property' in an insurance policy require a permanent loss of property or whether a temporary loss is sufficient. This issue is important in the context of the current COVID-19 health crisis, because in many situations the closure of businesses will result in only the temporary loss of use of property.
Arguably, a temporary loss of use of property can trigger coverage. Such a view is consistent with a decision of the Arizona District Court in which there was coverage for business interruption losses resulting from the temporary loss of use of an insured computer system.(12)
If the Canadian courts agree with this, it may help insureds to frame their claim more broadly. Instead of being restricted to claiming business interruption losses resulting from the limited kinds of physical damage or destruction caused by COVID-19 (eg, lost profits on stock that must be destroyed because it may be infected), if coverage can result from loss "of" property, the insured could claim all business interruption losses resulting from the loss of use of an insured building.
Moreover, an insured whose BII coverage is triggered only by loss or damage "to" property may be able to make out a claim, even if it cannot prove that its property has been contaminated. Since Source Food was decided in the United States, a Canadian court would not be bound to follow it, even if the facts in both cases are the same.
Businesses should thoroughly review their insurance policies. Although their BII coverage may be triggered, it will likely be subject to exclusions which will limit the kinds of business interruption loss and expense that would otherwise be covered.
As with all insurance, BII and similar coverages will be subject to limits of liability. Sometimes the limit permits the insured to recover incurred losses up to a certain amount. In other cases, the limit may be expressed as a time period, permitting an insured to recover losses incurred for a certain number of weeks, months or years after the date of the event triggering coverage.
Commercial property policies typically require the insured to give the insurer notice of loss or damage (eg, lost profits or revenue) in writing as soon as practicable. Although the Insurance Bureau of Canada has communicated that insurers will accept the late filing of claims that would have otherwise been due, until the authorities declare an end to the public health emergency,(13) it is still good practice to submit a claim as soon as possible, if only to protect against an insurer that seeks to strictly enforce its policy. The sooner businesses submit a claim, the sooner their insurer must respond and, if the claim is covered, pay it.
Further, if an insurer denies an insured's claim, the insured's only recourse will typically be to issue court proceedings. Many policies require that any such proceedings be brought within one year after the loss or damage first occurs. Therefore, if businesses think that they have coverage, they should not wait to begin the claims process.
Finally, there is a duty for insureds under contract law to mitigate their damages. Sometimes this is spelled out under the policy, and the insurer may even be required to contribute proportionately to any reasonable and proper expenses required to minimise losses. In any event, it is always good practice for an insured to take reasonable steps to mitigate losses.
(2) See https://news.ontario.ca/opo/en/2020/04/ontario-extends-business-closures-to-stop-the-spread-of-covid-19.html; see also https://news.ontario.ca/opo/en/2020/05/ontario-further-eases-restrictions-on-retail-stores-and-essential-construction-during-covid-19.html; and see also www.ontario.ca/page/list-essential-workplaces.
(6) See, for example, https://news.ontario.ca/opo/en/2020/05/declaration-of-emergency-extended-while-ontario-gradually-reopens-the-economy.html, in which the Ontario government announced an extension of the previously declared state of emergency to 2 June 2020.
(7) General Mills Inc v Gold Medal Ins Co, 622 NW2d 147 (2001 Minnesota Court of Appeals) at pp 4-5 and 7-8. In General Mills, a regulatory order forbade the insured from selling oats contaminated with an unapproved pesticide. The oats were insured under a commercial insurance policy, which was triggered by "direct physical loss or damage to" insured property. Although they presented no health hazard to the consuming public, the Minnesota Court of Appeals found that the oats had sustained physical damage because they could not be used in the insured's business.
(13) See www.ibc.ca/bc/business/covid-19.