Say a commercial insurance policy stipulates that a coverage dispute lawsuit cannot proceed unless the client launches it within a year of discovering the loss. What happens if there is business interruption both before and after start of the limitations clock?
The question is not whether the client is continuing to suffer a loss or damage, Justice William Hourigan of the Court of Appeal for Ontario wrote in Marvelous Mario’s Inc. v. St. Paul Fire and Marine Insurance Co, released July 31. Instead, the question is whether the insurer has engaged in multiple breaches of contract at different times.
In its recent unanimous ruling, the appeal court ruled in favour of Toronto-based St. Paul Fire and Marine, which is now owned by The Travelers Companies Inc.
Marvelous Mario‘s arose nearly 20 year ago when a baked goods vendor’s products got infested by insects.
In the late 1990s, St. Paul Fire and Marine wrote business insurance for Marvelous Mario’s and several related firms that were part of the Bakemates International Inc. group, which provided baked goods to coffee shops and supermarkets.
The policy covered not just physical damage but also “direct loss resulting from” any covered peril. The business interruption clause said “the business carried on by the Insured shall be interrupted or interfered with by a Peril Insured against, the Insurer will pay the Insured the amount of loss resulting.”
Marvelous Mario’s is one of several firms owned by Mario Parravano, one of the plaintiffs in the coverage dispute. One of those firms, Sweet-Ease Inc., had goods recalled in 1999 after an insect infestation. The following year, holding company Bakemates International went into receivership.
Several different court proceedings ensued, some of which were coverage dispute lawsuits against St. Paul Fire and Marine (which became part of Travelers in 2013).
In 2003, a coverage dispute with St. Paul Fire and Marine was settled for about $2 million by KPMG, the court-appointed receiver at the time.
But some plaintiffs – including Marvelous Mario’s – said they still had claims under the policy which were never settled. Those claims relate to lost lease income and a loan which was never paid back. A four-day trial was held in November, 2017.
In a ruling released April 6, 2018, Justice Jasmine Akbarali of the Ontario Superior Court of Justice ruled party in favour of the insurer. She said the plaintiffs’ claims for lost lease income and an unpaid loan are not covered by the St. Paul policy.
That finding was upheld on appeal in the Court of Appeal for Ontario ruling released July 31, 2019.
Another finding by the trial judge – that the client’s business interruption claim is subject to a rolling limitation period – was overturned.
That finding was on a separate but related coverage dispute filed in November, 2002 by Marvelous Mario’s, Parravano, two numbered companies and Snack Crafters International Inc. In that lawsuit the plaintiffs alleged they were wrongfully deprived of property during the bankruptcy proceedings. The Bakemates business – along with some equipment – was sold in late 2000 as a going concern. The plaintiffs said St. Paul should have paid out on business interruption because they lost equipment that they should have been able to keep.
Justice Akbarali ruled in 2018 that any business interruption losses from prior to Nov. 16, 2001 were barred by the terms of the policy, but business interruption losses from Nov. 16, 2001 and after were not. Whether or not there is coverage would have to be decided in another trial, Justice Akbarali said at the time.
The insurance policy stipulated that “Every action or proceeding against the insurer for the recovery of any claim under or by virtue of this contract is absolutely barred unless commenced within one year next after the loss or damage occurs.”
Justice Akbarali erred by focussing her analysis on the question of whether the insureds were continuing to suffer losses rather than on the issue of whether the insurer had a recurring contractual obligation, Justice Hourigan wrote on appeal.
St. Paul’s insurance policy covered business interruption losses and the insurer “was obliged to pay those losses in their totality, subject to any limits in the policy,” wrote Justice Hourigan.
“The fact that there was a 24-month cap on the business interruption losses does not convert [the insurer’s] obligation to indemnify into a recurring contractual obligation. Therefore, this was not a proper case for the application of a rolling limitation period.”
The appeal court upheld Justice Akbarali’s finding that the policy does not cover the loss of unpaid receivables or the risk that the insured will got into receivership.
The plaintiffs argued that the insect infestation caused lost sales and ultimately meant that the operating companies could not make their lease or loan payments to the related companies.
The five plaintiffs in the first lawsuit – two numbered firms, Snack Crafters International, Marvelous Mario’s and Mario Parravano – are on the same contract of insurance as the Bakemates group, which owned the stock that was spoiled.
“The proximate cause of the loss of payments due to the plaintiffs (assuming they were due) was the failure of the Bakemates group of companies to make the payments that were due. The damage suffered by the plaintiffs was caused by the failure to make the payments, not the infestation,” Justice Akbarali wrote.
The lost revenue covered by the 2003 settlement would, in theory, have been paid to the plaintiffs, she reasoned.
“If the plaintiffs can separately recover for those losses, the policy would provide for double recovery.”
This, she said, would be “a windfall to the insureds”
Furthermore, it would encourage an insured party to fail to make payments to a related co-insured “in the hopes of maximizing the group’s total insurance recovery.”