Many purchase insurance for protection against uncertainties and for peace of mind. What happens then when the IBA (Insurance Bureau of Canada) breaks the unpleasant news that “generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption due to a pandemic...” For many, the advertent announcement signals distress and pending litigation. While many insurance carriers have since issued their own clarifications regarding business interruption (BI) coverage, and explained that the insurance industry alone simply do not have the resources to cover such a broad-scale event, significant debates surrounding BI policies ensues.
How does commercial property insurance work? Business insurance generally falls under two broad categories: (1) named perils – covering only loss and/or damage caused by perils specifically listed in the policy, subject to exclusions. (2) Comprehensive – covering loss and/or damage caused by any peril, unless specifically excluded. Adding to the complication, business insurance policies often include variants, such as requiring proof of loss resulting directly from physical damage. The majority of BI coverages require businesses having sustained “direct physical damage” as a condition precedent in triggering a business interruption clause.
Furthermore, an insurance contract may be deemed impossible to perform, or frustrated, through no fault of the insurer or insured. The doctrine of frustration of contract was developed in the 19th century, where courts held in some circumstances the occurrence of a certain event beyond the control of the parties makes it impossible to perform a contract. One situation relevant to the Covid-19 climate today is the impossibility of performing a contract due to force majeure. Insurers are claiming that the recent Covid-19 pandemic is an unforeseeable major event that could not have been prevented with due diligence; thus, most claimants are not subject to payouts.
However, that is not to conclude business owners who wish to rely on the BI coverage found in their commercial property insurance policies have absolutely no recourse. In reviewing policies, courts tend to rely on the contra proferentem rule, which is to interpret ambiguous wording or clause in a contract against the drafter of the contract. Recent jurisprudence, MDS Inc. v Factory Mutual Insurance Company (“MDS”), 2020 ONSC 1924, is one such example. In MDS, the insured lost over $120,000,000.00 in profit over an unexpected 15-month shutdown. While the case may be fact specific, the judge chose to interpret the words “physical damage” broadly, in favor of the insured. Therefore, insurance companies may find themselves in a less advantageous position than they may appreciate. On the other hand, some players are advancing the argument that Covid-19 should no longer be an unforeseeable event, or force majeur that renders a contract impossible to perform. After all, this is not the world’s first encounter with a virus attack since the SARS outbreak in 2002 and MERS outbreak in 2012.
Lastly, some wordings in insurance policies and contracts are intentionally complex and open to interpretation. Whether you are an individual or organization, keep in mind each insurance policy is unique. There are some policies out there that cover business interruption expenses specific to pandemics.
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