Business insurance in a pandemic
LAST UPDATED April 9, 2020
With the outbreak of the novel coronavirus (COVID-19) at the forefront of the news cycle, governments and businesses are working to minimize the pandemic’s effect on the world’s economy, both at the macro and micro level. Despite those efforts, businesses are sure to face significant and unexpected changes in their day-to-day operations, which will likely affect their various insurance policies. This is a brief review of how COVID-19 may trigger or be relevant to two important and commonly-held insurance policies: business interruption policies and liability policies.
Most businesses maintain “business interruption insurance,” which normally covers loss of revenue and increased costs that result from an insured peril (or an insured event). While it is most common that business interruption policies are triggered by physical losses to insured property, depending on the wording of the policy, coverage may be extended to other perils.
In response to COVID-19, businesses in many jurisdictions, particularly those in the food, hospitality, travel, and fitness industries, have been required by their respective governments to close or reduce hours. Businesses may also see a slow- or shut-down of its supply chain as a result of other outfits’ responses to the pandemic. These are “business interruptions” in a nominal sense, but they might not be in the contemplation of a policy for this type of coverage.
Business interruption policies typically contemplate the loss of the premises due to physical damage. A pandemic does not result in physical damage, but arguments might be available to insureds that a premises in which a COVID-19 case was detected or was employed requires closure and is, therefore, a business interruption loss, a defence to this claim being that the loss is limited to the time needed for the property to be remedied or rendered safe—a much shorter period than a likely closure.
Many policies exclude the effects of pandemics, or use more general language such as “diseases” or “biological agents.” Such exclusions are very likely to prevent a successful claim for business interruption losses on the basis that the pandemic eliminated an insured’s trade. Interruption of a supply chain--often titled “contingent business interruption” in policy language, is less likely to have premises-based exclusions: this coverage applies to circumstances where suppliers to a business cease operating and the consequential effects prevent the insured from itself operating. Contingent business interruption coverage is rarely open-ended; if available, a time limit of weeks or even days is possible.
A business interruption policy might cover losses arising from an order of a civil authority. If the insured is closed by operation of law to counter the risk of spreading COVID-19, this coverage might be of assistance. It will likely not be available if a business closes because trade is discouraged by a public entity, or simply ceases as customers avoid public commerce.
Businesses are well-advised to review their policies, given that COVID-19’s economic impact, in terms of severity and duration, is still unknown.
Another area of inquiry is whether the insurance industry may see a rise in claims with respect to personal injury or death as a result of COVID-19. A likely scenario would be where a business remains open after learning of a potential incident of COVID-19 and thereby causes customers, members of the public or employees to be exposed. Businesses could face lawsuits from third parties for failing to take steps to adequately protect these individuals from contracting COVID-19. Accordingly, these businesses may seek a defence and coverage for these lawsuits under their commercial general liability policy.
Whether claims of these kinds will be defended and/or covered by the insurer is not guaranteed and is completely dependent on the wording of the policy. Insurers could potentially rely on similar exclusions to those often applicable to business interruption coverage (biological agents) to avoid both defending and covering claims as a result of COVID-19. Given the disease’s novelty, however, the courts have yet to issue any cases speaking to coverage or to third-party liability. Businesses should at least be familiar with their policies, should they be faced with a lawsuit.
In a very recent decision, the Ontario Superior Court has adopted an interpretation of the phrase “physical damage” in insurance policies that may suggest that business losses that result from the closure of a premises due to COVID-19 could be covered.
As we set out in Part I, business interruption policies typically contemplate the loss of the premises due to “physical damage.” We indicated that while a pandemic does not result in physical damage to a premises, insureds could argue that a premises requiring shut-down due to the presence of COVID-19 could still be covered, depending on the wording of the policy.
In MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, the plaintiff’s nuclear facility experienced a leak of heavy water containing radioactive material. The facility was proactively shut down, absent a government order, but was later ordered to be shut down by the regulator. The shut-down lasted longer than anticipated and the plaintiff incurred business losses. The plaintiff sought coverage for these losses under their business interruption insurance policy. The insurer denied coverage, alleging that the loss was caused by corrosion, which was excluded under the policy. The plaintiff argued that even if the corrosion exclusion applied, “resulting physical damage” caused by corrosion was exempt from that exclusion, and its business loss was covered. The insurer argued, in response, that the loss of use of one’s premises was not resulting physical damage.
In MDS, the court held that the insurer could not establish that the leak was caused by corrosion. It did, however, go on to consider whether the resulting damage exemption applied.
The court determined that the leak, and the shut-down, caused “the disruption of the normal movement of the supply of isotopes” to the plant, which was a consequence of the shutdown. The court held that this disruption, and the shut-down that followed, was resulting physical damage. In coming to this conclusion, the court referred to the particular wording of the business interruption policy. It also relied on the fact that the policy did not define “resulting physical damage” or “physical damage” and that prior case law had not conclusively defined the phrases’ meaning in all-risks policies in Canada. The court also looked to previous Canadian and American cases, in which the courts held that the presence of foreign vapours or fumes constituted physical damage. Similarly, the court in MDS favoured a broad interpretation of the phrase and held that the loss of the function or use of a building—such as when it is rendered uninhabitable due to the presence of foreign substances in the air—is physical damage. Such an interpretation, according to the court, was in line with a well-known principle of insurance law, being that coverage provisions are to be interpreted broadly and exclusion clauses narrowly.
While the MDS decision did not deal with COVID-19, the court’s comments with respect to what is meant by “physical damage” in business interruption policies are helpful to insureds. Notwithstanding that, the MDS case did turn on its particular facts and the particular wording of the policy. The court also noted that the policy did not define “resulting physical damage” or “physical damage” and much of the court’s commentary on these definitions were obiter. A key takeaway from this case, however, is the court’s willingness to classify non-tangible losses as “physical damage,” which will be relevant to both businesses and insurers. Now more than ever, businesses and insurers are well-advised to review their respective policies and coverages.
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Resource first posted March 19, 2020, with a report from Anthony Foderaro.