Business Interruption Coverage
- July 6, 2020
- Jon Troth
- Comments Off on Business Interruption Coverage
One of the questions arising from COVID 19 is whether a business who was required to shut down may recover lost income through the business interruption coverage in their policies. Many businesses purchased policies containing business interruption coverage. Many insurers take the position there is no coverage for income loss due to Covid 19.
Whether there is coverage really depends on the wording of the policy. There is no standard wording between different insurers for “all risks” policies although common wording exists. When a claim for coverage is made, a review of the wording in the insurance policy is needed to determine if coverage exists and/or if any denial by an insurer is correct or not.
Some policies contain very clear wording that there is business interruption coverage for loss due to pandemic/contagion. Alternatively, some policies contain exclusions indicating the insurer will not pay for any losses incurred due to pandemic/contagion. When SARS was a prevalent topic, some insurers reviewed their policies and added wording to indicate there would be no coverage in the event of a pandemic/virus/contagion.
If there is no clear wording that includes or excludes business interruption insurance, insurers are typically denying COVID related business loss coverage stating that business interruption coverage only applies if there is direct physical “damage” to the business premises. An example of this is what would occur with a fire.
There are legal questions on how the word “damage” should be interpreted and if damage can include loss of use of the premises alone. There is not yet a Court decision which considered this issue in light of a pandemic. An Ontario recent decision in MDS Inc. v. Factory Mutual Insurance is being pointed to as suggesting that there could be coverage for loss of use without visible physical damage. The MDS decision relating to a nuclear plant being unable to sell medical isotopes is not directly on point but is well thought out in the purpose of all risks insurance, what an insured expects when they purchase insurance, and what “damage” means. The Court in MDA thought that “loss of use” of the premises was included in the definition of damage. There are other decisions not directly on point but similar that are of assistance – some arising out of the massive black out where there is a loss of use of the premises without visible damage. A lower level Court decision in P.E.I. thought that “air contamination” qualified as damage. There are also construction defect cases at the appeal Court level which are again different but address the definition of damage.
Presently, there are court actions started both in Canada and the US on business interruption and coverage denials for COVID 19 business closures. These legal proceedings have not reached conclusions as of yet. One of the Canadian cases is a Saskatchewan effort for a “National Class Action” but it is not certified, not all insurers are named as defendants, and it is uncertain whether this issue can or should be addressed by way of class action.
Some policies contain coverage for closure due to “Order of Civil Authority”. One of the questions that can arise is whether a business’ voluntary closure in an attempt to avoid the virus and people becoming sick can still qualify for business interruption coverage. The insurer can take a position that there is no coverage because there was no mandatory closure Order at the time of the voluntary closure. The other option is that coverage could start from the date of the mandatory closure Order. Coverage can be uncertain and again depends on the policy wording and how the case law develops.
The bottom line is that there is no clear appeal level case law that will guide lawyer to provide firm legal opinions on whether there is coverage when dealing with business interruption and Covid when the issue is the interpretation of the word “damage”. Further, as policies are worded differently, a full review of the policy wording in each situation is needed.
Businesses with policies and who lost earnings due to COVID 19 should still make a claim to their insurer. The insurer might deny the claim. If a denial occurs and the business believes the value of their loss and the amount of insurance money possibly available justifies involvement of a lawyer, the business should seek a coverage opinion from a lawyer experienced with insurance coverage issues before jumping into any law suit. Once the coverage opinion is done, a discussion should occur with the lawyer on whether next steps should be pursued or not.
If this is an insurer reading this paper, then if a challenge to the coverage denial occurs, it would be wise to have counsel also review the complete policy and the updated law on this issue to revisit whether the denial is correct or not and ensure that the duty of good faith to the insured business is met.
The business needs to ensure the coverage opinion and starting a claim if deemed appropriate occur within ONE YEAR of the damage starting as most policies contain a one year limitation clause.
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