Introduction
The Coronavirus pandemic has affected the lives of everyone on Earth in a way that none of us have experienced before. To date there are more than 525,000 cases worldwide, just over 4,000 of which are in Canada.[1] The impact on individuals is immeasurable and the impact on businesses has been extreme. This will no doubt lead to many businesses turning to their insurance policies to attempt to mitigate some of the losses they are currently facing.
Two types of coverage that will be involved in many claims arising out of the pandemic are business interruption and general liability insurance.
Please note that although the general information below may help in determining whether insurers will be liable for payouts under general liability or business interruption policies, ultimately, it is essential to examine the specific language of the policy at issue and the underlying facts of the claim to determine whether coverage will be triggered in any given scenario.
Business Interruption Clauses
Many commercial property insurance policies contain clauses regarding business interruption.
With regards to these types of policies, the president and CEO of the Insurance Brokers Association of Ontario stated that “business interruption was never designed to respond to pandemics, it’s generally linked to named perils within a policy, like floods and fires, for example. There’s a business interruption element to that, but a pandemic is something different.” [2]
The challenge for insurers in attempting to insure against losses due to a pandemic relates to the difficulty in defining pandemic risk and quantifying and pricing it. The Insurance Bureau of Canada stated that “generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19.”[3]
Though every policy will likely have slightly different wording, typically, these provisions contain wording that covers financial losses for a term (typically 12 to 24 months) arising from the interruption of a business operation resulting from insured physical damage to property of the type insured.[4] The requirement for physical loss or damage will be the main hurdle for insureds to claim coverage under their business interruption policies.
Physical Loss or Damage
The closure, suspension or slowing of operations due to coronavirus will likely be difficult to characterize as physical damage to insured property. The impact of the virus is generally too intangible to be able to be characterized this way.
A Canadian court has previously held that the presence of gasoline, which made a building unsafe for occupation, was covered under a policy where the coverage required “direct physical loss or damage to property.”[5] The wording in this particular policy was “all risks of direct physical loss of or damage to the properties insured.” The court determined that this separation of “physical loss of” or “damage to” meant that the damage to property did not necessarily have to be physical. The presence of gasoline fumes in the air constituted damage or injury to the premises.
This leaves an opening for a potential argument by an insured that the presence of a contaminated person in their premises contaminated it in the same way that the gasoline contaminated the building and that such “contamination” constitutes direct physical loss or damage”.
If this argument is successful, where a business chooses to shut down out of an abundance of caution, before any actual contamination has occurred, there will likely not be coverage.[6] Any business which elects to shut down or suspend some operations in order to prevent contamination will likely not be covered under their business interruption insurance.
The definition of property damage in policies sometimes includes “loss of use of tangible property that has not been physically injured.” Where this wording is used in the policy there is a stronger argument for the insured to make that the loss of use of their property will trigger coverage under their business interruption insurance.
This will likely raise the issue of what is considered “loss of use”? If a business chooses to shut down in order to protect itself and its employees, does this choice constitute loss of use? Where the insured could have continued operations, it may be difficult to say it has lost use of its tangible property, versus making a decision not to use it.
This wording is more common in general liability policies than property insurance, which provides for business interruption. However, since property damage is often not defined in property policies it may inform how property damage will be defined by the courts.[7]
Case law in Canada does not provide a clear answer to the issue of whether Coronavirus type of contamination can constitute physical damage and as of yet, there have been no Coronavirus-related claims initiated. Since many courts across the country have suspended operations, it may be some time before Canadian case law exists to assist insurers in determining coverage.
The United States, however, has already seen its first Coronavirus-related litigation. On March 16, 2020 a restaurant in Louisiana, USA, filed a lawsuit seeking coverage for business interruption due to closure related to the Coronavirus.[8] The restaurant owner alleges that Coronavirus in the insured premise and surrounding premises constitutes physical damage. However, as the courts have been closed in Louisiana until a tentative date of April 10, 2020, the likelihood of a decision being rendered soon is remote.
Without any clear guidance in Canada on whether Coronavirus will constitute physical loss or damage, insurers will likely face many claims similar to that of the restaurant in Louisiana.
Period of Restoration/Period of Indemnity
If insurance coverage is potentially triggered under a business interruption clause, the policy should be examined for what is sometimes referred to as the period for restoration. Most policies will pay business income loss through to the point the business is restored or when coverage expires.[9] This will assist insurers in limiting the amount of indemnification required if an examination of the policy determines that coverage for business interruption should be granted.
Exclusions
Some business interruption policies contain exclusions for property damage arising from a virus, communicable disease, contamination or bacteria. Each policy should be carefully examined to determine if any such exclusion exists and whether it is worded in a way that will cover Coronavirus claims.
Business Interruption Coverage Extension: Civil Authority
Some commercial policies include an extension of coverage for act of civil authority or military authority, which impairs access to the company’s business operations. As an extension of business interruption coverage, many policies with this extension will still require physical loss or damage to property in order to trigger coverage.
A mandatory quarantine order would likely constitute an order that would trigger coverage. However, there would likely not be considered coverage where the business closes due to a fear of contagion or where the government has merely recommended closure.
Policies which are broadly worded and potentially cover situations beyond underwriters’ intentions are of concern. Many policies contain the following endorsement, which could expose the insurer to a large claim:
Civil Authority
This Policy insurers loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil authority to retard or prevent a conflagration or other catastrophe.
The list of essential services which are allowed to continue operation in Ontario, for example, is very broad.[10] This means that claims made by businesses which arguably fall under one of the categories for an essential service would not be covered under a civil authority clause since they have not been ordered to close.
Business Interruption Coverage Extension: Ingress & Egress
Ingress/egress coverage extensions cover losses where the company cannot access its own property other than due to an order of civil authority. These extensions will also generally require physical loss or damage in order to trigger coverage.
An inability to access the business due to a fear of contagion but not actual contamination would likely not be covered.
Contingent Business Interruption Insurance
Contingent business interruption clauses provide coverage where the loss is caused by business interruptions at the locations of the company’s suppliers or customers further in the supply chain. However, this type of policy coverage typically requires the business interruption of the other supply chain businesses to have been caused by physical loss or damage.
As discussed above, the physical loss requirement may be met where an actual contamination has occurred, but not where the business interruption is due to a fear of potential contamination. Even then, the argument that Coronavirus constitutes physical damage appears to one that could be difficult to bring successfully.
Commercial General Liability Insurance
Businesses may also be turning to their insurers regarding claims that they face in relation to the Coronavirus pandemic. General liability insurance provides broad coverage for third party claims alleging bodily injury, property damage or personal injury.
There may be claims against businesses such as:
- Claims that the company’s negligence led to the exposure and infection of clients or customers;
- Product liability claims relating to allegations that the company’s air filtration system failed, or that a mask failed to protect them from exposure or illness; or
- Occupier’s liability.
Many general liability policies include a definition of bodily injury which includes “sickness or disease.” This could lead to claims made by people who allege that they contracted the disease while attending at the business.
Occupier’s liability statutes create a duty of care in regards to: (1) condition of the premises; (2) activities on the premises; and (3) conduct of third parties on the premises. Though the condition of the premises generally leads to claims regarding slip and fall actions, there may be actions regarding whether conditions of the premises are safe in regards to cleaning and sanitizations measures.
The conduct of third parties on the premises can become problematic in light of the pandemic. In Pennsylvania, a small grocery store recently had to throw away more than $35,000 USD of food after a woman deliberately coughed on it in a “twisted prank.”[11]
These essential services like grocery stores who maintain operations in spite of the pandemic are faced with the actions of unreasonable customers who can become a risk to safety and security of other customers and employees.
Some common exclusions contained in general liability policies exclude coverage for damages resulting from bacteria viruses, pandemics or organic pathogens, which may prevent triggering of coverage depending on the wording of each policy.
These areas of liability raise questions for businesses about what precautions are needed and reasonable for safety of customers during such an unprecedented situation. Based on these concerns, occupiers liability issues may become a large source of claims made to insurers.
There will be a large variety of exposure to claims depending on the industries of each business. Insured businesses should be taking very prudent measures and informing themselves of the recommendations of relevant governments, health organizations or industry regulators. Many businesses that remain open, such as grocery stores and medical facilities have already implemented plans to contain the spread of the virus.
Following guidelines and implementing appropriate containment measures will help to limit the insured’s exposure to claims against them in relation to the pandemic.
Legislation Mandating Coverage
Currently there is no official discussion of mandated coverage in Canada, but three US state legislatures are considering legislation aimed at forcing insurers to cover losses related to the Coronavirus.[12]
Such legislation would override any exclusions written into the policy and retroactively alter contracts to force insurance payouts. Obviously there are many arguments to be made in opposition of such legislation. In the United States, the Constitution contains a clause in Article 1 regarding Obligation of Contracts, designed to prevent states from interfering with private contracts.[13]
The director of the Centre for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina, Dr. Robert Hartwig, stated that standard business interruption policies have contained a virus or bacteria exclusion since the SARS outbreak.
The vast majority of policies in the US, similar to Canada, require “direct, physical loss or damage” of property. The Bill in Massachusetts states that “no insurer in [Massachusetts] may deny a claim for the loss of use and occupancy and business interruption on account of (i) Covid-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property”.[14]
This Bill is currently set to apply to insureds with 150 or fewer full-time equivalent employees. The Bills in New Jersey and Ohio would currently apply to insureds with up to 100 employees. Though this limits the scope of mandated coverage to smaller businesses, it is still a vast potential payout for insurers, which stretches beyond what they have contractually agreed to.[15]
There has been further political pressure in the United States attempting to influence insurer’s willingness to payout coronavirus related losses. On March 19, 2020, eighteen members of Congress wrote to representatives of the insurance industry urging them to extend their business interruption coverage in light of the pandemic.[16]
Despite the fact that there has not yet been any pressure of this type in Canada, it is possible that, based on these actions south the border, it is simply yet to come. This may be particularly true if any state successfully passes this type of legislation and it survives a constitutional challenge.
Conclusion
As with everything else in these incredibly uncertain times, it is difficult to predict the outcome of insurance claims relating to Coronavirus. Every claim will need investigated based on an examination of the relevant coverage clauses and exclusions applicable in each circumstance and the facts surrounding the claim.
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[1] www.worldometer.com
[2] https://www.canadianunderwriter.ca/insurance/will-commercial-bi-policies-cover-pandemics-after-covid-19-1004175813/
[3] https://www.canadianunderwriter.ca/insurance/will-commercial-bi-policies-cover-pandemics-after-covid-19-1004175813/
[4] https://www.canadianunderwriter.ca/features/cc-understanding-business-interruption-losses/
[5] D.P. Murphy Inc. v Laurentian Casualty Co. of Canada, 1992 CarswellPEI 41, In the present case, the presence of gasoline fumes in the air to the extent that the building was unsafe for occupation constituted damage or injury to the neighbouring premises.
[6] Property Damage Claims under Commercial Insurance Policies.
[7] Property Claims under Commercial Insurance Policies at 4:150
[8] https://www.lexology.com/library/detail.aspx?g=126dce6e-e436-4674-a5e5-19111eadadba
[9] http://www.ibc.ca/bc/business/covid-19
[10] https://www.ontario.ca/page/list-essential-workplaces
[11] https://www.washingtonpost.com/nation/2020/03/26/coughing-grocery-store-coronavirus/
[12] http://mobile.royalgazette.com/re-insurance/article/20200326/insurers-face-business-interruption-battle&template=mobileart
[13] http://mobile.royalgazette.com/re-insurance/article/20200326/insurers-face-business-interruption-battle&template=mobileart
[14] http://mobile.royalgazette.com/re-insurance/article/20200326/insurers-face-business-interruption-battle&template=mobileart
[15] http://mobile.royalgazette.com/re-insurance/article/20200326/insurers-face-business-interruption-battle&template=mobileart
[16] https://www.lexology.com/library/detail.aspx?g=126dce6e-e436-4674-a5e5-19111eadadba
