The ongoing COVID-19 pandemic and its associated restrictions on businesses have led to an increase of insurance coverage disputes, raising unique issues for the insurance industry.
Of particular concern is the denial of coverage for COVID-related "business interruption losses", raising questions about insurer liability for losses as a result of the pandemic.
Emergence of Litigation Regarding Business Interruption Losses
Insurance coverage for business interruption losses has become a notable subject of litigation. Indeed, several pandemic-related claims are currently making their way through Canadian and global courts for business interruption losses as a result of businesses seeking to mitigate their financial burden from reduced or complete cessation of business activity.
Summarily, the plaintiffs allege, either in an individual or class action lawsuit, that insurers have breached their contractual obligations by refusing to honor policy agreements and provide coverage for business interruption losses due to federal, provincial and regional authorities either restricting or closing non-essential business operations.
Many of the policies at issue are "all-risk";1 limited coverage to "direct physical loss or damage" to the policyholder's property;2 or explicitly contained infectious disease coverage3. The analysis of whether pandemic-related losses are covered under business interruption insurance is based on underwriter policies and contractual interpretation principles, whereby coverage is dependent on the extent and impact of the interruption, as well as the relevant policy language stipulating any express definitions, exclusions, exceptions, extensions, contingencies or circumstances requiring special coverage (see our prior bulletin for a more fulsome description of these principles).
The requirement that a business interruption must result from "direct physical loss or damage" is a standard term in most insurance policies, and the interpretation of this term by the courts will likely determine whether or not specified insurance policies for business interruption cover losses resulting from COVID-related interruptions.
The MDS Inc. v Factory Mutual Insurance Company Decision
The most recent and notable Canadian jurisprudence on the interpretation of "physical damage" are the trial and appeal decisions in MDS Inc. v. Factory Mutual Insurance Company4 ("MDS"). At the trial level, the insured brought a claim for business interruption coverage under an...
