Is a COVID-19 business interruption covered under a standard Business Interruption policy?

To the lay person, it only stands to reason that a business interruption policy would respond to what for many enterprises isn’t merely an interruption in their business, it is quite possibly a death knell. This is certainly the sentiment of the Regina restaurateur who has launched a class action lawsuit on behalf of anyone with a potential business interruption claim against any of the insurers named in the class action suit.

At the end of the day, it will be for the courts to decide whether standard business interruption policies provide coverage for claims resulting from the COVID-19 outbreak. However, I expect that business owners hoping to collect under their regular policies will confront a couple of very significant – likely, insurmountable – challenges.

To begin with, business interruption policies do not stand on their own: coverage is triggered by direct physical damage to the owner’s building, stock or equipment. Although the COVID-19 virus is certainly damaging to human life, it does no damage at all to buildings, stock or equipment. In the absence of damage to physical property, there is nothing to trigger business interruption coverage. Adding to the challenges faced by potential claimants is the fact that their business closures are precautionary. The closures are not the result of the actual, proven presence of the virus at, or anywhere near, the insured site.

A recent case, MDS Inc. v. Factory Mutual Insurance Company (2020 ONSC 1924), has caused some to question whether actual physical damage is in fact required in order for business interruption coverage to be triggered. Cassels Brock & Blackwell LLP recently published a review that discusses how the issues raised in this recent case might be brought to bear with respect to COVID-19. As stated by the authors of the review, MDS Inc. is not a case that resulted from, or in any way addresses, the COVID-19 pandemic or its impacts. Not that this means the courts couldn’t possibly rule in a plaintiff’s favour with respect to business interruption claims arising from the COVID-19 outbreak. As noted in the Cassels review, the MDS Inc. case ‘should be viewed as a warning sign that courts may be implored (and possible tempted) to become more sympathetic to intervention or public policy arguments’ and ‘may see an influx of legal arguments and positions which seek to have the courts extend coverage as a form of social benefit, even in the face of clear policy language’. This is a very serious matter. The authors of the Cassels report close by noting that, given the magnitude of losses associated with COVID-19, the creation of remedies for claimants ‘represents an exponentially greater harm to all participants and stakeholders of the insurance industry than can be justified by any individual result, no matter how equitable such a result may seem’.

Even if the courts rule that direct physical damage to the insured’s property is not required, the second challenge faced by business owners hoping to collect on their standard business interruption policy as a result of COVID-19 is that not only must there first be physical damage to property, the damage must be caused by an insured peril. Although commercial property policy wordings are not standardised, a commercial property policy may well include a seepage/pollution/contamination exclusion that excludes any loss arising from any kind of contamination and which then goes on to define a contaminant as anything which endangers or threatens to endanger the health, safety or welfare of persons or the environment.

Given the certain absence of physical damage to their property, combined with the likely presence of a contamination exclusion in their underlying property insurance policies, it seems unlikely that business owners will succeed in pursuing a COVID-19 business interruption claim under a standard policy wording.

All this is not to say that specific coverage for business interruption arising from a pandemic is unavailable. It is available, but apparently at great cost. Following the SARS outbreak in 2003, The Wimbledon Championships has been buying pandemic coverage. The annual policy premium is reported to be £1.5 million. Over the course of the past seventeen years, this coverage has cost The Championships over £25 million. As expensive as that is, it is a bargain in view of the payout of £114 million that the insured is now set to receive as a result of the COVID-19 outbreak.