"All-risk" policies typically cover risks of direct physical loss or damage to insured premises caused by a peril not expressly excluded. Controversy is arising over which losses incurred during the Pandemic flow from "physical loss or damage", and are therefore covered. For example, will the virus need to be detected on the property? Are losses sustained as a result of government-ordered shutdowns insured, even if the virus was never detected on the property? How must insurers treat losses sustained by businesses that continued to operate, but suffered dips in revenue from non-mandatory social distancing and self-isolation practices?
Recent Class Action
Earlier this month, a proposed national class action was commenced by a restaurant operator in Saskatchewan alleging that major insurers have committed negligence and breach of contract by failing to pay out claims for losses of revenue sustained as a result of government responses to the COVID-19 Pandemic (among other allegations). The putative class would include all Canadian residents with business interruption insurance claims against a named insurer. The plaintiff asserts many forms of loss, ranging from those sustained as a result of public health advisories to mandatory closures.
Recent Ontario Superior Court Decision
Some commentators have looked to the Ontario Superior Court's recent decision in MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924 ("MDS") for guidance on the availability of business interruption insurance coverage when a business property cannot be accessed. The case was filed before the COVID-19 Pandemic and turns on technical evidence from many experts. The plaintiff manufactured medical equipment using radioisotopes sourced from the Nuclear Research Universal Reactor at Chalk River. The plaintiff suffered business interruption losses when the Chalk River facility was closed by order of the Canadian Nuclear Safety Commission because a nuclear reactor was corroded and leaking heavy water. The plaintiff's insurer denied a claim under its business interruption coverage.
After finding that an exception for damage caused by corrosion did not apply, the Court turned to whether the plaintiff had suffered business interruptions caused by qualifying "resulting physical damage" under its all-risk policy. The Court interpreted "physical damage" to include both "corporal, tangible damage" as well as "impairment of use or function". The Court found in favour of the plaintiff, holding that the policy's business interruption insurance covered "impairment of function or use of tangible property caused by the unexpected leak of heavy water".
This case may be important because it expands the term "physical damage" to include "impairment of use or function." The Court found this definition most consistent with the purpose of all-risk insurance policies, which are purchased for the insured to have "peace of mind and to be indemnified by the [i]nsurer if it should suffer fortuitous damages."
The Current Judicial Debate
In recent days, thousands of business operators have been unable to use their properties as a result of the COVID-19 Pandemic. While business operators, including those that form the putative class in the proposed class action, may cite the MDS decision as a favourable precedent, there is still uncertainty as to whether pandemic-related business interruptions will qualify for coverage as another form of "physical damage" under standard all-risk policies.
In Canadian insurance law parlance, all-risk policies are understood to protect against "fortuitous losses" which are losses "unlooked for, unexpected or not intended by the insured". The question, then, is when does a business owner's inability to access an insured property qualify as a fortuitous loss? In MDS, the Court found that a leaking nuclear reactor sufficiently impairs the use of a facility to qualify as "physical damage" under the specific policy at issue. However the MDS case did not arise from the COVID-19 crisis, nor did it deal with pandemics, pathogens or human illness.
The law tends to expand the meaning of terms in specific, incremental steps, many of which are reversed on appeal. Given the significant interest generated by the MDS decision, it will likely be the subject of appeal. Until any appeal is determined, it is prudent to approach the decision as one that expands the possibility of recovering for business interruptions caused by the inability to access or use an insured property, but with no clear guidance about interruptions caused by the COVID-19 Pandemic.