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One of the many issues arising from the coronavirus (COVID-19) pandemic is whether business losses resulting from mandatory and voluntary shut-downs will be covered under business interruption coverage. Most business interruption policies require direct loss or physical damage to property in order to trigger coverage, which can be a wide-ranging inquiry. Interesting questions arise when considering the loss of perishable products.
Take, for instance, a scenario where an insured manufactures sandwiches for distribution to various stores. The insured has a supply contract with those stores. The manufacturing and storage of the insured’s sandwiches occurs on the premises of “Business B”. As a result of the pandemic, Business B decides to forbid the insured entry to the premises. Because the insured cannot access the sandwiches for distribution, they go bad and are no longer edible. The insured is in breach of its supply contract because it failed to deliver the requisite number of sandwiches by the specified delivery date. However, because the sandwiches were not “damaged” as a direct result of the virus, does the loss of the sandwiches constitute physical loss or damage such that coverage is triggered?
Other situations may arise where there is no actual physical damage to the product, but an economic loss is incurred in averting the threatened physical damage. This scenario is illustrated in the case of Spartan Steel & Alloys Ltd. v Martin & Co (Contractors) Ltd.[1] (which did not involve the interpretation of an insurance policy). In this case, the plaintiffs manufactured stainless steel alloys at a factory which was supplied with electricity by a cable from a power-station. Continuous power was required to maintain the temperature in the furnace in which the metal was melted. The defendant’s employees, who were working on a nearby road, damaged a cable while using an excavating shovel. The electricity board shut off the power supply to the factory for 14½ hours until the cable was repaired. Because there was a danger that a “melt” in the furnace might solidify and damage the furnace’s lining, the plaintiffs poured oxygen onto the melt and removed it, thus reducing its value by £368. If the supply had not been cut off, they would have made a profit of £400 on that melt and £1,767 on four other melts which would have been put into the furnace. They claimed damages from the defendant in respect of all three sums. The defendants admitted that their employees had been negligent but disputed the amount of liability. The Court of Appeal allowed the plaintiffs to recover for foreseeable physical damage to property and for any resultant economic loss, but not for pure economic loss (i.e. losses not tied to physical damage).
The general inability for a plaintiff to recover pure economic loss is reflected in the language of insurance policies, which require physical loss or damage. However, the law may take a wide approach as to what constitutes “property damage”.
Although involving a general liability policy, Bulldog Bag Ltd. v. AXA Pacific Insurance Co.[2] illustrates the broad interpretation given to “property damage”. In that case, Bulldog supplied defective packaging for manure to a company called Sure-Gro Inc. As a result of the defective packaging, Sure-Gro incurred the expense of repackaging and lost 10% of its raw material. Bulldog paid Sure-Gro’s claim and in turn, claimed indemnity under its general liability insurance policy. The insurer denied coverage on the basis that there was no physical injury, or alternatively the damage was limited to the 10% of product lost. The British Columbia Court of Appeal accepted that the damaged bags constituted “property damage” and awarded damages for costs directly associated with packaging different soil and manure products for sale to Sure-Gro’s client, removing the raw materials from the defective packaging, disposing of the defective packaging, and the loss of about 10 percent of the raw material in the salvaging process.
Questions may arise as to what constitutes “direct” physical loss of or damage to property. In the case of 942325 Ontario Inc. v. Commonwealth Insurance Co.[3] the owner of a chain of grocery stores sustained losses of perishable food due to the lack of refrigeration resulting from a province-wide power failure. The store owner’s all risk policy insured against “all risks of direct physical loss or damage to property, except as herein excluded.” The insured brought an application for a declaration that the insurers were obliged to indemnify the insured for all its losses. The court held that property losses suffered by the insured were directly, proximately, caused by the blackout and were covered by the policy unless they fell within an exclusion clause in the policy. The policy excluded loss or damage caused directly or indirectly by “changes of temperature”. A cessation of power would prevent the refrigeration units from remaining cold and thus would result in change of temperature within the refrigerators and within the perishable items consistent with the exclusion. However, the exclusionary clause incorporated an exception to the exclusion for “loss or damage caused directly by a peril otherwise insured and not otherwise excluded under this Section”. This qualifier served to negative the exclusion, given that the loss was caused directly by an insured peril. Ultimately, however, the insured’s claim for business interruption and loss of profits was not covered. The longest period that any store was closed was 37 hours. Coverage was stated to be “subject to the provisions of any … waiting period stated in the Declarations”. The Declarations clearly stated that a two-day waiting period applied with respect to business interruption coverage.
By obtaining business interruption insurance, the insured (presumably) has a reasonable expectation that where economic loss results from physical damage to perishable products, they will be indemnified for that loss. When presented with claims relating to perishable items, insurers must carefully consider what losses result directly from the loss of the perishable product versus other indirect economic losses, as well as consider any applicable exclusions within the policy.
While coverage is dependent upon the type of insurance and specific wording of the policy under consideration, the law indicates that the sandwich example above will likely constitute “physical loss”, despite a lack of direct damage from the virus. The amount of the loss will generally be limited to the value of the damaged sandwiches only, and for that particular batch of sandwiches. The insured’s general financial loss related to the pandemic and overall interruption of business will likely not be covered since that loss is not linked to the perishable sandwiches.
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[1] Spartan Steel & Alloys Ltd. v. Martin & Co (Contractors) Ltd., [1973] 1 QB 26 (U.K. C.A.).
[2] Bulldog Bag Ltd. v. AXA Pacific Insurance Co., 2011 BCCA 178.
[3] 2005 CanLII22135 (ON SC).
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.
