As a result of COVID-19, countless businesses have been forced to temporarily shut their doors or change the way they operate significantly. As a direct result, many businesses have lost and continue to lose income. More and more businesses will be looking to their insurers for the answer.

What Could Be Covered?

Many businesses may have opted to obtain insurance for business interruption. Generally, this type of insurance insures against a business’s lost income due to a covered event (a specified perils policy), such as a fire for example, or due to all risks (an all-risks policy). The most fundamental step in determining whether any business interruption claim will succeed is to review the language of the policy of insurance.

Most business interruption policies will only provide coverage where there has been physical loss of or physical damage to the insured’s premises or property used to operate its business. For example, the policy might state that the property is insured against “all risks of direct physical loss or damage” or it may state that the property is insured against all “harm to the property”.

As such, the key dispute in terms of whether COVID-19 losses trigger business interruption insurance will turn on whether or not COVID contamination or COVID-related shut downs are considered direct physical loss or damage.

Insurers will argue that physical loss or damage requires that damage to an object is observable in that the object’s physical shape has been altered. That is, physical harm in the sense that such harm is visible or apparent. From that perspective, insurers will argue that closure due to COVID-19 is not direct physical loss or damage and it is not harm to property. COVID-19 relates to human to human interaction. The problem is not actual harm to property or damage, but a risk of human to human contact.

Of course, that isn’t the end of the story. Canadian case law has no firm and set definition of what is meant by direct physical loss or damage. Insureds will argue that COVID contamination, which is obviously a physical thing, could be sufficient to trigger coverage because of its physical nature. A number of American cases treat chemical releases and other like events (which do not physically alter the underlying structure) as physical loss.

The question of whether COVID contamination gives rise to physical loss or damage will most certainly be answered by the Courts in the coverage litigation that will ensue in the years to come. Those lawsuits have already begun in certain American jurisdictions, and when Canadian Courts re-open for normal operations, those lawsuits will be sure to come in Canada.

In addition, depending on the language of the insurance policy, coverage might arise for businesses that suffer a covered loss of use due to forced restrictions set by the government. However, some businesses closed or limited their hours before restrictions were imposed. For example, a few weeks ago it was strongly recommended that dental offices in some Canadian provinces should stop providing all services with the exception of emergent services. Any closures that occurred prior to a public health official prohibiting such operation could be seen to be voluntary, and thus – not covered.

Further, most specified perils policies would not include coverage for a pandemic. That said, many American all-risk policies started to include specific exceptions for viral outbreaks in response to the SARS crisis in the mid-2000s. Canadian policy writers do not appear to have included this type of exception in many Canadian policies. This fact – which is part of the surrounding circumstances that have to be used by a Canadian Court to interpret the policy – could be used against insurers. Clearly, they ought to have been aware of the potential exclusion, and the choice not to include it might support the argument that viral outbreaks were one of the “all risks” captured by a policy. Of course, insurers will argue there is no need to exclude something that is not a physical loss or damage to begin with.

Since the SARS outbreak in 2003, many Canadian insurance companies have begun to offer outbreak expense or pandemic policies. Given the extra expense and the unlikelihood of what is now unfortunately happening, many businesses may have opted out of such coverage – deeming it an unnecessary expense. As with all other policies, the language of these policies is crucial.

Conclusion + Recommendations

The impacts of the COVID-related shutdown are going to bring business interruption coverage disputes to the forefront. The possibility exists that businesses could obtain some relief if COVID impacts have triggered coverage under an existing policy. Parties are well advised to ensure their rights are protected now. 

Business owners and insurers should review their policies of insurance to determine whether there is coverage for COVID-19-related business interruption. That will depend on the policy itself and on the circumstances of the business’s closure or modification. Field Law's Insurance Group can assist in this regard: both with respect to policy review, and with respect to any ensuing coverage dispute.