April 14, 2020 by Greg Meckbach
Believe it or not, some commercial clients expect business interruption insurance to cover loss of income if the business gets interrupted, even if the cause of the interruption is a pandemic.
Regina restaurant owner Thomas Siarkos is one such client.
“I have been in the business 31 years and I always paid for insurance and we don’t cheap out on that,” said Siarkos, owner of Memories restaurant, in an interview. “We like to have the best possible coverage.”
Siarkos told Canadian Underwriter Tuesday he bought business interruption coverage and now his business is losing income because of the provincial order issued nearly a month ago that restricts Saskatchewan restaurants to takeout and delivery only. Similar orders are in place in other provinces including Ontario.
“When you go from really good business to zero, that is devastating because we have all the monthly fixed costs and some of them we cannot eliminate,” said Siarkos, citing cable, electricity, rent, insurance and phone as examples.
After reporting the situation to his broker, Siarkos said he received an email indicating his business interruption policy does not cover his loss due to COVID-19 because there was no physical damage to his property.
JKT Holdings Ltd. – the legal name of Memories – is the representative plaintiff in a proposed class-action lawsuit. The suit against more than a dozen Canadian insurers was filed this past Thursday with the Court of Queen’s Bench of Saskatchewan.
Allegations against the defendants have not been proven in court. Among the allegations are breach of contract, which is normally the main cause of action in an insurance coverage dispute.
“Every year, when we renew our insurance around May, they always try to ask us to upgrade our insurance and buy extra insurance for this and that. That’s what we did,” Siarkos said in an interview.
In the lawsuit filed Apr. 9, the proposed class of plaintiffs includes any Canadian with a business interruption claim resulting from COVID-19 against any of the defendant insurers.
The statement of claim does not quote from directly from the policy issued to JKT Holdings. Canadian Underwriter contacted the defendant said to have written JKT’s insurance, but did not hear back by press time.
In general, business interruption allows a business or business owner to make an insurance claim for income that the business would have expected to generate were it not for the intervention of an unexpected event, Merchant Law Group lawyer Anthony Merchant notes in the statement of claim.
Related: The advice some lawyers give commercial clients over pandemic BI coverage
But business interruption requires direct physical damage for coverage to be triggered, according to Timothy Zimmerman, partner with audit, tax and consulting firm RSM Canada, in an article published Mar. 20. Zimmerman was writing about policy coverage disputes in general and not about Merchant’s proposed class action.
“Debate and legal disputes over what constitutes physical damage and whether COVID-19 falls into the definition of physical damage are likely to ensue,” Zimmerman predicted. “However, in this evolving situation there is currently no clear guidance from insurers or courts on coverage interpretation.”
Insurers say BI is basically an add-on to a property policy. So if there is a fire, water damage incident, wind storm, or theft for example, the basic property policy should cover the property itself while the BI would cover income loss.
“For us, [the COVID-19-related closure is] a business interruption because we were forced to shut down,” Siarkos told Canadian Underwriter. “It may not be a physical loss in our dining room, but for us it is a great loss of business.”
Not all business interruption policies are identical, Merchant wrote in the statement of claim.
The restaurant’s policy did not exclude pandemic, Siarkos said in an interview.
Two other insurers named as defendants, reached by Canadian Underwriter, declined to comment on the class action lawsuit. One of those confirmed last week it had not been officially served with a statement of claim.
In the statement of claim, Merchant does not go into specifics on policy language but asserts that the risk of business loss from COVID-19 was a fortuitous random event that was not certain to happen.
After COVID-19 was declared a pandemic Mar. 11 by the World Health Organization, several provinces and municipalities in Canada either ordered businesses to close or imposed restrictions that effectively closed the businesses, Merchant wrote. This significantly limited the operating potential of plaintiffs who could be included in the class action. Those class members are entitled to recoup losses as a result of those restrictions from business interruption insurance, Merchant argues.
Related: MDS ruling begs the question: Are your BI pandemic exclusions iron-clad?
Meanwhile, the opposition Conservatives are calling on the federal government to come up with a plan specifically to help the nation’s restaurant, hospitality and tourism sectors, the Canadian Press reported Monday. Many in that sector were either among the first to close due to public health concerns related to COVID-19, or have seen dramatic declines in business as consumer spending drops. Among the ideas being proposed are temporarily allowing owner-operators to qualify for the federal wage subsidy program as well as refunding a year’s worth of sales tax remittances to small businesses, CP reports.
With Memories in Regina, the restaurant initially did not offer to takeout and delivery because the restaurant is “not that type of place,” Siarkos told Canadian Underwriter Tuesday. “As early as Wednesday, we will offer takeout because our accounts are draining.”
A survey by Restaurants Canada estimates about 800,000 jobs have been lost as a result of the pandemic, CP reported. Almost one in 10 restaurants have already closed and nearly one in five expects to close if conditions don’t improve in a month.
South of the border, bills have been tabled in a few state legislatures proposing to force insurers to retroactively cover COVID-19 related BI claims.
So what would happen to their capital position if insurers were forced by courts or legislatures to pay out on every COVID-19 BI claim? “A lot of people say it’s almost impossible [for insurance to cover] and it’s billions and billions of dollars that they have to pay,” said Siarkos. “But that’s what we pay insurance premiums for. I hope they realize that’s why we buy insurance.”
While I understand the frustration of this situation for Mr. Siarkos, insurers cannot be expected to cover these losses, nor can they. The capital requirements would bankrupt the entire insurance industry and impact the financial industry in a myriad of ways.
You are totally correct Eric. If the insurance industry is forced to cover these BI claims, it would have far reaching consequences. People need to realize that if you bankrupt the insurance industry, there will be no insurance available in the future and they would have to cover all losses themselves.
Independent of bankrupting the industry because if it deserves to go bankrupt, it should, if one read the wordings, the answer is crystal clear. The problem is he never read the wordings of the contract he entered into from day 1, as almost all people don’t. One can’t buy a burger, eat it everyday, and then 10 years later complain there is no pickle in it. People make a fundamental mistake when buying insurance thinking they’re buying what they want. They’re buying what an insurer is willing to sell. An insurance company isn’t your friend. They’re a third party entering into a contractual agreement with you. If an insurer choses and states that they’re not covering that, that’s their choice. That’s called freedom and we’ve all accepted this gift. Some have forgotten it comes with consequences. Without sounding harsh, the restaurateurs’ statements are the exact problem with our childish, immature culture. “I bought the best therefore it should do everything I want” Problem happens, must be somebody else’s problem.
Perhaps they have a case against their broker. It would’ve been incumbent upon their broker to identify all exposures that could hinder the operations of this restaurant and advice them of coverages. If the broker is found to be negligent by the judge in this case, the broker’s E&O policy will have to defend the broker and pay any damages to make the restaurant whole.
I know a lot of people in the insurance community like to say that insured don’t read policy wordings. Well my response it, insured are not necessarily sophisticated enough to understand and interpret policy language in the same manner as an insurance professional can. Hence, insurance professionals owe a duty of care to their clients, which may have been breached.
Furthermore, insurance is a business of removing financial uncertainty and distress from people’s lives in times of need. I understand the need to make a profit and the need to remain liquid in order to carry on business, but at this time, we must act with empathy, not with self-interest. Insurance companies with good u/w practices can recover their losses in due course.
Well all E&O policies are claims made, and have been adapted to exclude pandemic losses so those policies won’t be paying. To put it on brokers to predict a global pandemic, and to advise customers of an exposure for which they could not have purchased coverage, is an unrealistic expectation.
There are so many things to say about this article. First, when will people and businesses learn that paying premium is not like a savings account? Mr. Siarkos has been paying his premium for 30 years, so what? Does he seriously think the insurance company still has all this money around? Of course not, it has been used to pay other businesses’ claims. Mr. Siarkos has gotten exactly what he paid for, protection against fire, theft, flood for 30 years.
Second, when will people and businesses (and law firms!) learn to read their insurance policies. I have not read the policy myself, but I am fairly certain that business interruption is only triggered as a result of direct physical damage. Period.
Third, the law firm does not even do its due diligence, launching its lawsuit against the 10 biggest insurers in Canada, regardless of whether or not they provide commercial insurance, or cover restaurants in particular. Lazy, lazy!
As another reader pointed out, the insurance industry cannot afford to pay pandemic business interruption across Canada, we will all be bankrupt. Who will cover regular fires, car accidents, storm damage, etc.? All other claims are still happening!
The IBC needs to step up its education effort with the public on this file.
Thomas Siarkos is a true leader, Thank you for inspiring the business community and giving us hope. Insurance company have to be a part of this loss,
LOL – Hi Thomas, thanks for posting!
I bet those same insurance companies offer and sell BI insurance to others that don’t have physical property.
Find a business with no physical property that was sold BI insurance and there’s your case in the bag.
J A this does not exist. The purchase of business interruption insurance is dependent on having physical property.
Which industry has the strongest ability to rebound from these current economic hardships. The industry in which you HAVE to pay (law) or the industry in which your freedom of choice determines if you’re gonna patronize their business or not. Sorry, my hearts not breaking for the CEO who might loss his guaranteed bonus this year. Hundreds and hundreds of billions of dollars in assets, let that sink in for a premium minute.
Sorry to burst your bubble, but the facts are (in rough numbers from regulator website):
1- 165 billions in assets (and not “hundreds and hundreds of billions”) BUT
2- 124 billions in liabilities, mostly claims to be paid to injured people, or to rebuild damaged homes and businesses.
We are left with 41 billions in equity. The government’s help is already double that amount. The magnitude of this crisis can only be dealt with by the government, and not by re-writing insurance contracts.
PS: There is no law forcing anyone to purchase property insurance.
I reckon he’s right folks, everybody should stop paying insurance during this crisis and stand in the government bread line, as so promptly advocated by the insurance giants from their ivory towers. The people who said they’ll be there to help are only there to help themselves. Sometimes great challenges require great people. Perhaps there are no great people in the insurance industry just cowards.
Arthur Morgan calling the insurance industry cowards is not only not helpful, it is totally inaccurate. An insurance policy only ever responds to a loss if the policy provisions allow it to. Many above posts mention that there must be physical damage in order for a policy to pay Business Interruption. That is true and has always been true. How is it cowardly for an insurance company to rely on their policy words? They always rely on their policy wording!
You are right SheilaG. A lot of people also think that insurance covers everything, but it doesn’t. There are somethings, property, operations and events, that are simply not insurable and the insurance companies shouldn’t be expected to cover losses that they don’t insure and didn’t rate for. People are complaining about the insurance rates now, but if they had to cover these COVID-19 business interruption losses and didn’t go bankrupt, I shudder to think what the rates would be then.
A lot of greedy people in our society. When they are making money, they are reluctant and/or try to avoid paying tax. They may understate their business revenue to lower the insurance premium. When they lost money, they cry for subsidies from the government. No, not good enough; let’s sue the insurance companies even though the coverage is not there in the first place. Soon, these CEO, will be claiming accounts receivable bad debts due to the pandemic. We can bankrupt the world wide insurance industry; then start to self insure our homes, auto and businesses. We can not argue with greedy people especially they have donated their brains a long time ago.
Accounts receivable coverage wouldn’t cover this Andrew. Trade credit insurance would but very few companies actually purchase this type of policy.
We aren’t including in this discussion the most glaring question… If we were to rewrite the coverage to include what has historically been considered a government responsibility we would also have to look at including coverage for similar exclusions like War, Terrorism, Nuclear Disaster because what is the difference? After this types of losses and a government inability to react to societies expectations the same arguments would be made. What would a policy premium look like if all those events were also covered because you can’t rule that pandemics had to be covered without also finding that everything else also had to be covered. And if by some miracle people did pay those crippling premiums how soon would they revolt at the pot of money the industry was sitting on waiting for one of those events? It seems that the lawyers want to make the case that exclusions have meaning until the exclusions apply to the masses.
I feel for the clients, but no insurer has the solvency to underwrite this coverage. If you cant quantify and aggregate your exposure, you cannot offer the coverage. You need assets to cover the expected liabilities that are expected to be generated. Good luck working out your exposure for “anything bad that happens”. Not possible.
Also, insurer’s assets are currently being decimated due to the meltdown of the stock markets world wide, means they will have less solvency to cover losses.
Those lawyers across Canada starting to “advertise” these class actions are the only ones who will make money from these actions. The legal costs for the defendant insurers, and possibly brokers, will drain the insurer’s monies as this goes on. That alone will cause, most probably, and perhaps massive increases in all insurance premiums. And, sooner than later; all businesses, homeowners, indeed vehicle owners and operators will wind up absorbing the costs of all this litigation. Everyone pays. My personal hope is that the courts will understand the economic crisis these class actions may create and intervene.
The insurance industry is one of the very few that has not been impacted by the pademia. All employees are still getting paid their outrageous salaries for mainly going out and drinking between them on the companies credit cards. It is a monopoly in which they can rise their prices at will and we all business owners have to buy because it is legally enforced. Government should step in and provide insurance for small businesses. This will encourage people to open more companies without shelling out thousands of dollars to these companies.
“The insurance industry is one of the very few that has not been impacted by the pademia. All employees are still getting paid their outrageous salaries for mainly going out and drinking between them on the companies credit cards.” – you funny