Insurer May Not Deny Coverage for Business Losses, Even When Another Party Is Liable To Pay

November 25, 2016 | Evan Bawks

In the recent decision in 2224981 Ontario Inc. v. Intact Insurance Company, 2016 ONCA 870, the Ontario Court of Appeal dismissed an appeal from an insurer that had sought to deny coverage to their insured for business losses due to a fire. The appeal was from a decision of a motion judge pursuant to Rule 22 of the Rules of Civil Procedure. Rule 22 allows for a hearing in which parties that concur on a question of law present a special case to the Court for a determination on that question.

The respondent 2224981 Ontario Ltd. (as “Eco-Lux”) was a commercial tenant that conducted its manufacturing operations at premises leased by the respondent landlord, 2047193 Ontario Ltd. (the “Landlord”). After a fire destroyed the premises, Eco-Lux stopped production and stopped paying rent; they had gone out of business by the time the premises was repaired some eight months later. Eco-Lux’s insurer, the respondent Intact Insurance Company, provided coverage for lost profits pursuant to the property and business interruption policy. Coverage was based on an estimate of the gross profits the insured would have made, less expenses that would have included rent paid by Eco-Lux to the Landlord.

The Landlord also sought coverage for business losses, which was particularized as the eight months of lost rental income, from its insurer, the appellant Zurich Insurance Company. Zurich denied coverage on the basis that Eco-Lux was obligated to pay rent during the period of eight months, despite the fire. In Zurich’s view, this obligation meant that there was no actual rental loss.

The motion judge found that the lease between Eco-Lux and the Owner was frustrated by the fire and, as a result, the obligation to pay rent ceased. Thus, the Owner did suffer business losses that were covered by the Zurich insurance policy. Zurich appealed on all the findings.

The Court of Appeal determined that Zurich was required to cover the Landlord’s business losses, but for different reasons than the motion judge – in particular, they determined that it was not necessary to determine whether or not the lease was frustrated. They found (and it was not disputed) that a loss of rental income constituted a “Business Income Loss” pursuant to the policy; “business income” included “rental value”, which was defined as including the “total anticipated rental income from tenant occupancy”. As such, the Court found that the motion judge was only required to determine whether the loss of rental income resulted from the necessary interruption of the business and whether the necessary interruption was caused solely by the fire loss. The Court found that since the leased premises were largely destroyed by the fire, which caused Eco-Lux to cease operations, the “necessary interruption” was caused solely by the fire.

The Court found that Zurich was not entitled to deny coverage on the basis that Eco-Lux was liable to pay rent, despite the fire. The Court stated that the Owner was under no obligation to pursue remedies against Eco-Lux before making a claim for business losses under the Zurich policy. Zurich was therefore obligated to cover the claim under its policy with the Owner and then pursue Eco-Lux for the amount of rent owed as a subrogated claim, if it chose to do so. The inability of Eco-Lux to satisfy a judgment did not allow Zurich to shift the loss onto its own insured.

This appeal decision illustrates the importance of policy language in determining coverage decisions. For policies that cover business losses, insureds may be entitled to claim from their insurer without being obligated to pursue another party.


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