COVID-19 has impacted every aspect of our economy. Educational institutions are closed. Retail operations, bars, restaurants, hotels and service providers are also closed or, in some cases, operating at significantly reduced hours. Public forms of travel are discouraged. Supply chains have been interrupted.
These developments will likely result in coverage disputes and litigation surrounding the availability of business interruption coverage; in particular, whether the COVID-19 Pandemic has triggered or will trigger such coverage. Indeed, a restaurant in New Orleans, Louisiana has already commenced an action in a Louisiana state court seeking a declaration of coverage for Coronavirus-related losses (Cajun Conti, LLC et. al v. Certain Underwriters at Lloyd's London, et al., Civil District Court for the Parish of Orleans, Louisiana). From our point of view, it is not a question if actions will be brought in Canadian Courts, but when.
Turning to the issue of business interruption coverage, the analysis begins with the Insuring Agreement in a policy as such Agreement sets out the scope of coverage. In a commercial property policy, coverage is triggered by an “occurrence” as that term is defined in the policy. Business interruption insurance in the context of an all-risk policy provides coverage for certain specified perils. It should go without saying that claims for business interruption coverage will turn on the specific facts of the case and wordings of the policy in issue.
In the context of the Cajun Conti, LLC action, the insured’s business interruption claim is based on the interpretation of “physical damage” in the policy in issue. Specifically, the restaurant alleges the duration which the COVID-19 virus survives on surfaces renders the business unusable until such time as professional sanitization of all surfaces can be arranged. The crux of the restaurant’s position is that the loss of use of its property due to the presence of the virus amounts to “physical damage” that triggers business interruption coverage under its property policy.
SARS as Coverage Trigger
Given the lack of Canadian jurisprudence dealing with the issue as to whether a pandemic will be treated as a "trigger" event resulting in the activation of business interruption coverage, we can look to other jurisdictions for guidance. In New World Harbourview Hotel Co. Ltd. v. ACE Insurance Ltd. & Ors, FACV No. 12 of 2012, [2012] HKEC 264, the Hong Kong Court of Final Appeal considered the issue of a trigger event in the context of the SARS Pandemic.
By way of background, Hong Kong media sources began reporting the outbreak of an acute respiratory syndrome in south China on February 10, 2003. Shortly after these media reports, the Hong Kong government asked hospitals to report all cases of severe community acquired pneumonia. The reporting was voluntary.
The World Health Organization declared SARS to be a pandemic in March 2003. The Hong Kong government made it a mandatory obligation for hospitals and health care professionals to report SARS cases on March 27, 2003.
The plaintiffs in New World Harborview operated convention facilities, hotels and parkades. They claimed that they suffered business losses as a result of the SARS outbreak. The defendant insurer had issued two CGL policies to the plaintiffs. The Insuring Agreement in the policies provided coverage for, among other things, the following:
“This Policy is extended to insure actual loss sustained by the Insured, resulting from a Reduction in Revenue and increase in Cost of Working as a result of murder, suicide, infectious or contagious disease, food or drink poisoning or contamination and closure... due to vermin or pests all occurring on the Premises of the Insured or of a notifiable human infectious or contagious disease occurring within 25 miles of the Premises...” [Emphasis is ours]
The policies also defined various other terms, including "Loss Period" and "Damage". In this regard, "LOSS PERIOD" was defined as:
"LOSS PERIOD means the period during which the Revenue of the Insured Business has been affected in a consequence of Damage from the date of loss to the resumption of the business and thence 180 days."
"DAMAGE" was defined as "physical loss, loss of use, damage or destruction"
The policies were effective over the period July 1, 2002 to July 1, 2003. The earliest of the losses claimed by the plaintiffs was on March 9, 2003 which, while within the period of insurance, occurred prior to March 27, 2003 when SARS became a notifiable infectious disease under the local government's decree.
The Hong Kong Court of Final Appeal considered whether the coverage available to the plaintiffs under the terms of the policies:
(a) was limited to losses sustained as a result of infectious diseases which had become "notifiable" (where a government or other authority requires citizens or organizations to report the presence of the disease as a matter of law); or,
(b) extended to losses caused by the disease before it became "notifiable" as a matter of law and while the disease was subject to administrative reporting requirements
The Hong Kong Court of Final Appeal held that "notifiable human infection or contagious disease" meant an infection or contagious disease that was required by law to be notified to an authority. In this instance, the Hong Kong government made it mandatory for hospitals and health professionals to report SARS cases on March 27, 2003. Consistent with Canadian jurisprudence (see Progressive Homes Ltd. v. Lombard Insurance Co. of Canada, 2010 SCC 33), the Hong Kong Court of Final Appeal held that:
The interpretation which should be adopted in the case of an insurance contract, as with other commercial contracts, is that which gives effect to the context, not only of the particular provision but of the contract as a whole, consistently with the sense and purpose of the provision.
The Court of Final Appeal went on to hold that the object of the Insuring Agreement in issue was not to indemnify against loss resulting from a serious infectious disease which was likely to cause loss to the plaintiffs’ business. Rather, the object of the Insuring Agreement was to indemnify against actual loss of revenue sustained as a result of a notifiable human infectious or contagious disease. Again, SARS did not become notifiable in Hong Kong until March 27, 2003. As a result, the Hong Kong Court of Final appeal upheld the decisions of the Courts below and dismissed the plaintiffs’ appeal.
Noxious Substances as Coverage Trigger – Interpretation of “Physical Damage”
Despite the lack of jurisprudence as to business interruption coverage in the event of a pandemic, both the American and Canadian Courts have considered the availability of business interruption coverage in the context of similar factual scenarios. These cases may serve as road maps as to how our Courts might address business interruption coverage claims arising as a result of the COVID-19 Pandemic.
Historically, the availability of business interruption coverage has turned on the requirement in commercial property policies that there be “physical damage” to the insured premises in order to trigger coverage. In cases involving fire, water, hail or other typical forms of damage claims, the physical damage is obvious. However, it is those cases in which the insured property does not suffer tangible physical damage that are particularly analogous to the circumstances arising from COVID-19.
U.S. Jurisprudence
In Mama Jo’s, Inc. v. Sparta Insurance Company, 2018 LEXIS 201852 (S.D. Fla. June 11, 2018), the Plaintiff brought an action against its insurer to recover:
(a) the costs it incurred to clean dust and debris that had accumulated in its restaurant on a daily basis while road work was carried out on an adjacent street; and,
(b) resultant business interruption losses.
The all-risk policy in issue provided coverage for "direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss". The policy defined "Covered Causes of Loss" as "direct physical loss unless the loss is "excluded or limited". The policy provided additional coverage "to remove the debris of Covered Property caused by or resulting from a Covered Cause of Loss that occurs during the policy period". Finally, the policy included a Business Income Loss (and Extra Expense) Coverage Form whereby the insurer agreed to "pay for the actual loss of Business Income [the insured] sustain[ed] due to the necessary 'suspension' of [the insured's] 'operations' during the 'period of restoration'. The 'suspension' must be caused by direct physical loss or damage to property."
The Court dismissed the plaintiff's claim as, even if it were to adopt a more expansive definition of "direct physical loss or damage", the plaintiff would not be entitled to coverage. The Court cited certain U.S. case authorities for the proposition that "physical loss" occurs when property becomes "uninhabitable" or substantially "unusable". In this case, the restaurant was not "uninhabitable" or "unusable". Rather, the restaurant remained open every day, customers were always able to access the restaurant and there was no evidence the dust had any impact on its operation other than requiring daily cleaning. The fact that the restaurant needed to be cleaned more frequently did not mean that the plaintiff suffered a "direct physical loss or damage".
With respect to the plaintiff's claim for business interruption coverage under the policy, the Court held that the plaintiff must prove (a) there was direct physical loss or damage to covered property, (b) the damage was caused by a covered cause of loss, (c) there was a necessary "suspension" of the insured's "operations", (d) the "suspension was caused by the cover damage”, (e) there was an "actual loss of business income" during a "period of restoration" and (f) the "actual loss of income" was caused by the "suspension" of "operations". The Court also dismissed this aspect of the plaintiff's claim as the plaintiff could not establish any suspension of operations caused by "physical damage" given the restaurant remained open every day, customers were always able to access the restaurant and suppliers were always able to access the restaurant.
In Gregory Packaging, Inc. v. Travelers Property Casualty Company of America, 2014 LEXIS 165232 (D. N.J. Nov. 25, 2014), ammonia was released inside one of the plaintiff's manufacturing facilities. Travelers denied the claim on the ground that the plaintiff did not suffer physical loss or damage to covered property and because the loss was subject to a specific Exclusion in the policy.
The Court in Gregory Packaging summarised the jurisprudence in New Jersey as follows: while structural alteration provided the most obvious sign of physical damage, property could sustain physical loss or damage without experiencing structural alteration. Travelers did not dispute that (a) the ammonia release physically transformed the air within the plaintiff's facility such that it contained an unsafe amount of ammonia or that (b) the heightened ammonia levels rendered the facility unfit for human occupancy until such time the ammonia could be dissipated. As a result, the Court found that the ammonia discharge inflicted "direct physical loss of or damage to" the plaintiff's facility as that phrase would be construed under state law because the ammonia physically rendered the facility unusable for a period of time.
The plaintiff television production firm in Universal Image Productions, Inc. v. Chubb Corporation, 703 F. Supp. 2d 705 (E.D. Mich. 2010) carried out operations in a leased commercial building which was insured by way of an "all-risk" policy issued by the defendant. Following a heavy rainfall, the plaintiff discovered a bacterial contamination in the building's ductwork that was also present in the air within the building. The building's landlord took steps to address the bacterial contamination which the plaintiff contended caused a major disruption to its business activities. It eventually moved to another location. The plaintiff made a claim for business interruption losses under its insurance policy which claim was denied on the ground that neither mold contamination nor the threat thereof constituted a "direct physical loss" under the express language of the policy.
The Court found that the all-risk nature of the policy meant that the insured could recover for damage to the insured property regardless of the peril that caused the harm unless such peril was specifically excluded. The Court went on to find that, while the first floor of the building was engulfed by an appalling odour, there was no evidence that the stench was so pervasive as to render the premises uninhabitable. Indeed, the plaintiff's own expert did not recommend that the building be evacuated but, rather, recommended that (a) occupants of the building's first floor wear respirators, (b) the building owner authorize an immediate shutdown of the ventilation system and (c) a complete remediation of the ventilation system be undertaken. The Court also dismissed the plaintiff's claim for business interruption losses on the ground that the impairment of the plaintiff's operations must have been "caused by or result from direct physical loss or damage by a covered peril to property". Indeed, there was no evidence of any mold damage to the plaintiff’s equipment or property.
Canadian Jurisprudence
In Canada, there have historically been two divergent approaches to the interpretation of physical damage:
(a) the narrow view that limits “physical damage” to tangible, corporeal damage to a physical structure, and,
(b) a broad interpretation that encompasses both tangible damage and loss of use or function. Until recently, the broader interpretation has not gained much traction in Canadian Courts.
However, the recent decision of the Ontario Superior Court decision in MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924 may pave the way for our Courts to apply the broader interpretation of “physical damage” and extend coverage for business losses despite the lack of any tangible damage to insured premises.
MDS Inc. brought a claim for business interruption coverage under an all-risks policy issued by its insurer after the facility from which MDS Inc. purchased radioactive isotopes was shut down for 15 months. The closure was due to a leak of heavy water through a chamber wall caused by unanticipated corrosion of the wall due to the presence of chlorine. The policy in issue included a Contingent Time Element Endorsement which covered loss of profits if a supplier was unable to furnish a project, subject to any relevant exclusions. The policy also included a Corrosion Exclusion which had an exception for resulting “physical damage” not otherwise excluded by the Policy.
The Ontario Superior Court ultimately determined that the Corrosion Exclusion did not apply to the loss. However, even if the exclusion had applied, the Court determined the exception would bring the losses back within coverage. The Court indicated that the leakage of heavy water (rather than corrosion of the chamber wall) presented an imminent threat (i.e. nuclear meltdown) which caused the facility’s governing regulatory body to order it be shut down until a complete investigation was conducted and repairs implemented. As such, the physical loss or damage of the leak of heavy water is what triggered the closure and resulted in the losses to MDS Inc.
While the facility did not suffer tangible physical damage due to the presence of heavy water in the interior of the chamber, the Court found this event rendered the facility unusable which amounted to resultant physical damage which was covered under the exception to the Corrosion Exclusion. In effect, the Court held that the loss of use of the facility was encompassed within the meaning of “resultant physical damage”.
Implications for Business Interruption Coverage During COVID-19 Pandemic
The foregoing American and Canadian cases appear to stand for the proposition that “physical damage” may include loss of use of property which has not suffered any actual, tangible corporeal damage if the premises is rendered unusable or uninhabitable by a covered cause of loss.
Notably, an analogy can be drawn between the argument advanced in Cajun Conti, LLC with respect to COVID-19 and these cases; if the restaurant can establish the presence of COVID-19 is a covered loss and has rendered the insured premises unusable, their claim for business interruption coverage could be valid.
However, it is difficult to see how the American and Canadian jurisprudence could have general application to all-risk policies in the context of the COVID-19 Pandemic. The Court in MDS Inc. made clear that its interpretation of resultant physical damage was largely dependent upon the specific wording of the policy and the factual matrix/context at issue when the policy was placed. Some commercial property policies contain virus or organic pathogen Exclusions which would potentially preclude coverage (subject to any exceptions).
Further, aside from the fact that the Court decision in MDS Inc. is largely distinguishable on its facts from the situation generated by the COVID-19 Pandemic, the Court’s analysis largely revolved around the ordered shut-down of the facility by the governing regulatory body due to the perceived imminent threat of nuclear meltdown resulting from the presence of heavy water. Presumably, for any similar analysis to apply in the situation of COVID-19, a business would have to be ordered to close due to the presence of COVID-19 on the business premises which created an imminent threat to the occupants of or visitors to the premises.
Other difficulties will arise for any business advancing a business interruption claim under a commercial property policy on the basis of the COVID-19 Pandemic. The fact that any contamination by the virus is likely transient in nature (lasting on surfaces for only a limited time), the loss of use arising from the presence of the virus on an insured premises would be short lived. The prevalent reason for any ordered closure would not be the actual presence of the virus on surfaces but, rather, the potential risk of transmission by carriers of the virus to others within the premises. It seems clear that during the COVID-19 Pandemic, the loss of use of an insured’s premises has little to do with the property itself. As such, it will be difficult to maintain business losses arising during the pandemic are as a result of “physical damage” to the insured premises.
While a case may be made for coverage under all-risk property policies in certain instances (depending on the specific policy wording and the facts at issue), the jurisprudence to date suggests it is unlikely there will be widespread business coverage available under property policies for losses arising from the COVID-19 Pandemic.
By Domenic Venturo Q.C. and Celeste Small