COVID and Business Interruption

In a study of nearly 11,000 Canadian small businesses, 22% answered that their revenue had dropped to 0$ during the COVID-19 pandemic.

Businesses across Canada are struggling to keep afloat amid mandatory closures and reductions in operations. If you’re the owner of one of those businesses, you may be wondering whether you’ll be able to make an insurance claim to help you through these trying times.

The answer isn’t a simple yes or no. To understand whether or not you can make a claim on your business insurance, you’ll need to understand the types of policies and the potential exceptions.

The Types of Business Insurance Policies

The physical assets of your business are protected against loss and damage by your business insurance policy. Depending on what type of policy you have, different perils are covered.

With a named perils policy, you’re protected against loss and/or damage that results from perils actually named and listed in the policy. There are exclusions in these policies but, in most cases, loss and/or damage outside of those specifically listed perils aren’t covered.

In a comprehensive policy, you’re protected against loss and/or damage that results from any peril. The policy might name some perils that are excluded from coverage.

Business interruption (BI) coverage isn’t usually a standard part of a business insurance policy. This is an add-on to your business insurance that covers businesses when they need to temporarily shut down.

There is any number of variations of BI policies, depending on the insurer. Generally speaking, this coverage is intended to cover expenses that incur during a shutdown and even replace profits that were lost as a result. Most indicate that the temporary shutdown must be a “necessary suspension” and that the policy only covers what is lost during “the period of restoration”.

Will Your Insurer Cover Your Losses Due to COVID?

Standard business insurance policies don’t usually cover loss or damage sustained from something like the COVID-19 pandemic. However, a specialized business interruption policy may apply to business interruption and disruptions in the supply chain that have been caused by this outbreak and the measures that are being taken to slow and stop its spreading.

In order for a business interruption policy to come into effect, there are three conditions that must be met. These are:

  1. There must be direct physical loss or damage.
  2. The direct physical loss or damage must be of covered property.
  3. The direct physical loss or damage must result from a covered cause.

Among these three conditions, claimants looking to make an insurance claim under the circumstances presented by COVID-19 will likely find it difficult to prove the “direct physical loss or damage” condition. For example, a business whose factory sustained damage as a result of fire could make a straightforward claim for business interruption as long as the factory is covered for fire damage. But that same business would have a difficult time making a claim for business interruption when the factory is closed due to a pandemic. 

However, it’s not unlikely that this strict definition of physical loss and/or damage will be broadened during this unprecedented situation. Indeed, the Courts have demonstrated in the past their willingness to broaden the definition.

How Does the MDS Decision Impact Your Claim?

The COVID-19 pandemic has led to closures of non-essential businesses across the country. Even those that have not closed completely are experiencing losses. And while a business interruption claim might be difficult to prove in the traditional understanding of physical damage, one recent Superior Court Casemight hold a clue as to whether or not your business will be covered from COVID-19.

In MDS Inc. v. Factory Mutual Insurance Company, the Ontario Superior Court ruled that “resulting physical damage” had to be interpreted more broadly when it pertained to an exception to an exclusion. In the final ruling, “resulting physical damage” was interpreted to include loss of use and not simply actual physical damage.

This Superior Court case interpreted physical damage to include “impairment of function or use of tangible property.” From this interpretation, no actual physical damage to the property that’s covered is needed in order to meet the first and third conditions of business interruption.

While this may be applied to business interruption claims that arise from COVID-19 eliminations and reductions of business operations, it should be mentioned that the MDS claim, and the result of that claim, is limited to the particular facts and the specific policy of that case.

At the same time, that case demonstrated the Court’s willingness to interpret an “all-risks” policy as one of a more general nature. They mentioned that these policies are purchased in order to protect a business in the case of unforeseen circumstances, and that should be understood as broad coverage.

With that said, business who haven’t been forced to close or who have only experienced a reduction in operations may not meet even these broad criteria for a business interruption claim. A large part of the decisions in the MDS claim had to do with the fact that the facility had to temporarily shut down. In the future, the Court may not be willing to include anything less than a complete shutdown as an “impairment of function or use of tangible property” warranting an interpretation as physical damage.

Has Your Business Been Affected By COVID-19 Shut Downs?

Businesses across Canada are experiencing extreme difficulties as a direct result of the measures being taken to slow the spread of COVID-19. In this context, many business owners are wondering whether or not their insurance policies cover losses incurred as a result of a pandemic. And while standard policies don’t typically extend coverage to losses that come from a pandemic, a business interruption policy might.

In the past, physical loss or damage was one of the most important considerations in a business interruption claim. But in a recent Superior Court case, the Courts chose to interpret physical damage more broadly to include loss of us. It’s this case that may help businesses make a claim that underwrites COVID-19 as the reason for loss and damage.

However, the facts of that case were specific to MDS and their insurer. There’s no guarantee that your business can establish similar criteria. For that, you need an expert. Contact us at Sharma Law to find out whether we can help you make a claim under your insurance policy.

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