Policies under the microscope

Coverage disputes over denied business interruption claims arising from the COVID-19 pandemic are making their way through Canadian courts and judges will be asked to rule on a multitude of policy wordings.

Restaurants, hotels, and retailers whose operations were reduced or shut down completely are among the clients signing up for class-action lawsuits or filing their own standalone lawsuits.

Generally, business interruption coverage disputes arising from the pandemic can be grouped into two types of policy wording, said Eric Charleston, a Toronto-based associate with Miller Thomson LLP. One type requires damage to property. A second type ties coverage grants to decisions by civil or government or public authority about business closure.

Charleston, a lawyer who provides coverage advice to commercial insurers, was not commenting on any particular case before Canadian courts. But he does predict that lawyers will be watching the ongoing test case launched by Britain’s Financial Conduct Authority.

At the time of writing, an eight-day trial was scheduled to start July 20 before the High Court of England and Wales. The test case involves 17 business interruption policy wordings from various insurers providing commercial coverage in Britain.

“If I were involved in a coverage dispute in Canada regarding business interruption and COVID-19, I would be watching the FCA case very closely,” said Charleston. “Not only will the outcome of the test case in Britain have an impact in the Canadian market, but the arguments on both sides will have an impact on practitioners.”

With its test case, the FCA is seeking clarity on whether the disputed wordings provide coverage for BI related to government orders or advice to shut down a workplace. The outcome in Britain will be legally binding on the insurers that are parties to the test case, but only with respect to the policy wordings considered by the court.

The case is not intended to encompass all possible disputes, nor is it intended to figure out how much is actually payable on those policies.

Some of the insurers in the test case appear to have accepted some BI claims in Britain. But under the wordings at issue, many claims have been rejected outright, the FCA said in an argument filed this past July.

One example of disputed policy wordings is as follows: “access to or use of the premises being prevented or hindered by … any action of government police or a local authority due to an emergency which could endanger human life or neighbouring property.”

Another is: “interruption of or interference with the business arising from  … any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS-related condition) an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it.”

Similar policy wording covers the “occurrence of a notifiable disease within a radius of one mile of the premises.”

These wordings, FCA argues, cover some policyholders who were forced to shut down due to the British authorities’ pandemic restrictions. The clients making that case need to prove that a person contracted COVID-19, such that it was diagnosable, within the distance specified in the policy from the client’s premises specified (whether that’s one mile or 25 miles), the FCA suggests.

One of the insurers in the test case contends that this wording did not create coverage for many of the British businesses that had to shut down due to COVID-19, even if there were outbreaks of the virus near their business location. For this insurer, a key question is this: If it were not for the manifestation or occurrence of COVID-19 within the relevant geographical area, would the client still have suffered an interruption or interference because of the pandemic? If the answer is yes, then the claim is not covered, the insurer argues. Under this line of reasoning, none of the social distancing precautions or closures were caused by the presence of COVID-19 within any specific geographical area, but instead arose from the worldwide pandemic and the British authorities’ response. Essentially, this dispute between the insurers and FCA is about how the “but for” test is applied.

The insurer says a client can be covered if there are two concurrent “proximate” causes of a loss (the local and global presence of a virus, for example), but only if those causes are interdependent (i.e. you can’t have a global pandemic without having a local presence of the virus). However, there  is no coverage if there are two concurrent and independent proximate causes of loss. In other words, you can’t simply assume the local presence of a virus just because there is a global pandemic; the two are independent, in the sense that the local virus may not be present, even if the global pandemic is. The insurer says the majority of claims it received in Britain did not identify or refer to local outbreaks of COVID-19 and did not explain how such local occurrences caused their business interruption.

In its argument, the insurer raises the following hypothetical example. Two clothing shops are located a couple of hundred yards away from one another. Both shops have the same policy for BI that cite the occurrence of a notifiable disease within a radius of one mile of the premises. One of those shops is slightly less than a mile from a hospital where people are admitted and diagnosed with COVID. The other shop is slightly more than a mile from the same hospital. Both shops had to shut down because of the British government’s pandemic emergency orders.

If the shop located less than a mile away gets coverage while the shop more than a mile away does not, this becomes a “postcode lottery” and is not the intent of the policy wording, the insurer suggested in its filing.

FCA counters that there is nothing in the wordings at issue that deny or reduce coverage if the loss was caused by COVID-19 more generally, such as other public authority action, or public reactions to the pandemic. The insurers’ argument that policy extensions cover only local events and not pandemics is a common theme in the test case, FCA reports.

The regulator also takes issue with how some insurers are denying coverage for business interruption caused by prevention of access, prevention of use, hindrance of access, and hindrance of use. Some insurers argue this applies only if there is a total closure of the business or if entry to the premises is physically obstructed or impossible.

The FCA counters that when the government took action to prevent the spread of the virus, that did in fact result in a “prevention or hindrance” to the business, even if that did not result in a complete shutdown or obstruction. The government’s advice or instructions to stay at home, work from home, or restrict activity were all aimed at preventing people from accessing businesses in some cases, the FCA says.

“In reviewing skeleton arguments from FCA, it is evident FCA is trying to make the case that a very exacting standard regarding the policy language is not appropriate under the circumstances,” Charleston said. “In Canada, when it comes to policies giving coverage for closure as a result of civil authority and/or notifiable disease, the FCA skeleton argument provides a road map for anyone who is looking for arguments in favour of or against coverage.”

Shortly after the World Health Organization declared COVID-19 to be a pandemic, several Canadian provinces enacted emergency legislation mandating closures. In Ontario, for example, only workplaces deemed “essential” could remain open.

Two proposed class-action lawsuits in Ontario were announced during the second week of July. One was filed by Koskie Minsky LLP and Merchant Law Group on behalf of several representative plaintiffs against 22 defendants, collectively representing 15 insurers writing business in Canada. A separate $100-million class action was started against Aviva Canada. Several other BI coverage disputes are in the works.

In the class action against Aviva, the litigators take aim at several different policy wordings. One passage refers to insurance for loss of business income as a “direct result” of “an outbreak of contagious or infectious disease within 25 kilometres of the ‘premises’ that is required by law to be reported by government authorities.”

That type of wording is being evaluated in the FCA test case, Charleston observed.

In the Merchant and Koskie Minsky lawsuit, the proposed class is all persons and corporations in Canada who had contracts for business interruption insurance and suffered losses either as a consequence of or as a result of decisions regarding COVID-19.

In Britain, the policy wordings at issue include refer to an incident during the period of insurance, within the vicinity of the business premises, that results in a denial of or hindrance in access to the business premises imposed by the police or other statutory authority.

“The FCA sees this as a massive insurance question without an obvious answer,” said Charleston.