BI claims during COVID: What the courts will examine first

When business interruption coverage disputes arising from COVID-19 make their way into court, judges may look at whether insurers priced for pandemic, but by far the key consideration will be policy language, says one insurance defence lawyer.

“Because an insurance policy is simply a contract, albeit with some special features, the insurance policy wording remains the key consideration for any court reviewing coverage,” said Hollis Bromley, member at large of ARC Group Canada and partner at Alexander Holburn Beaudin + Lang LLP, one of ARC Group’s seven member law firms. “I do not expect this to change, even given the magnitude of the COVID-19 pandemic and resulting effects.”

Generally, commercial property and casualty insurers say business interruption coverage is triggered by an insured peril on a property policy. So if a pandemic does not damage the client’s property, even if the client had to close down, BI is generally not covered, depending on policy wording.

“Many policies limit coverage to certain specified perils, which does not typically include pandemic events,” said Bromley, whose areas of practice include insurance defence. If a policy requires physical loss, this would apply to obvious physical losses, such as smoke damage from a fire, or water damage from a flood, she said.

Bromley was commenting in general on BI coverage disputes and not on any particular case before the court, any particular claim, or any particular insurer’s policy wording.

“One can see an argument that premises contaminated with a virus, thus necessitating closure, may also constitute ‘direct physical loss.’ Whether it can extend so far as to capture closures as a result of government orders, where said virus is not in the premises itself, remains questionable,” Bromley told Canadian Underwriter.

What about “public policy” arguments? Examples would be inviting the courts to inquire into what business interruption should cover, or whether or not an insurer has enough capital pay out to every client whose business was interrupted by the pandemic?

“Courts have generally been loath to accept the ‘opening-of-the-floodgates’ policy arguments, but admittedly these are unprecedented times,” said Bromley.

Clients and insurers might lock horns over what the party’s “reasonable expectations” were from a contract of insurance.

“Specifically, did the parties to the insurance contract reasonably expect that there would be coverage provided for business interruption losses resulting from a global pandemic and, for some businesses, government-mandated shut downs?” said Bromley. “The financial position of an insurer then may become relevant to evidence that it did not expect that there would be such coverage and accordingly was not charging premiums commensurate with that risk.”

Nonetheless, she points out, the Supreme Court of Canada has said a judge should look at the actual policy wording first in a coverage dispute. She cited Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, released by the Supreme Court of Canada in 2010.

Progressive Homes was sued after homes it built were allegedly discovered to have significant water damage. It sought defence costs under a CGL policy. The client was unsuccessful in both the B.C. Supreme Court and provincial appeal court but the Supreme Court of Canada ruled against the insurer in 2010.

“The focus of insurance policy interpretation should first and foremost be on the language of the policy at issue,” Supreme Court of Canada Justice Marshall Rothstein wrote in 2010 in Progressive Homes. “General principles of tort law are no substitute for the language of the policy.”

“I do not anticipate that any court would alter this clear position set out by the supreme Court of Canada when reviewing any COVID-19 business interruption claims,” Bromley told Canadian Underwriter this week.