When courts might rule against insurers in business interruption coverage disputes

A commercial insurer could end up paying for losses that the carrier never intended to cover if a business interruption insurance policy covers government orders or advice to shut down a workplace without clearly excluding something like a widespread pandemic, a defence lawyer warns.

“We are warning our clients that any ambiguities regarding how public authority or administrative closure provisions are worded are likely to be interpreted against the insurers,” said Eric Charleston, Toronto-based associate with Miller Thomson LLP, who provides coverage advice to commercial insurers.

Charleston was interviewed in the context of a recent ruling by the Tribunal de Commerce de Paris against French insurer AXA over a business interruption coverage dispute with a restaurant that closed this past March, after COVID-19 was declared a global pandemic by the World Health Organization.

Miller Thompson is advising insurers that the business interruption from a pandemic is a systemic risk and underwriters need to be cautious that they are not exposed to unforeseen coverage consequences down the line, said Charleston.

In the case of AXA, the Tribunal de Commerce de Paris appears to have held that the administrative closure coverage applied to an order by civil authorities for business closures in an entire region due to COVID-19, said Charleston. His comments are based on reading media articles in French translated into English, rather than on reading the ruling itself.

AXA appeared to make two broad arguments, said Charleston. One was that it was not covered under administrative closure. The second was that insurance is not contemplated to cover risk that is this pervasive.

“I can certainly see this being argued in Canadian courts — that this type of policy language requires specific closure orders related to the insured as opposed to broad-based orders that apply jurisdiction-wide,” said Charleston. “But if the wording of the policies is imprecise, insurers face significant risk that a court will interpret that ambiguity against them.”

Several breach-of-contract lawsuits before Canadian courts have been filed by businesses that were forced to close — or severely curtail — their operations because of the provincial states of emergency. A case in point is Regina restaurant Memories, the representative plaintiff in a proposed class-action lawsuit against more than 10 Canadian insurers filed this past April with the Court of Queen’s Bench of Saskatchewan.

In Ontario, the owner of three Toronto-area restaurants — Catering Wala, Goa Kitchen and The Fat Rabbit — is taking Allianz to court over a policy said to cover “damage caused by order of civil authority to retard or prevent a conflagration or other catastrophe.”

Policy language is critical when deciding whether or not an insurance agreement covers business interruption during a pandemic, said Ari Krajden, partner with law firm Kawaguchi Krajden LLP, in an earlier interview. Krajden was commenting in general on BI coverage and not on any insurer or any case in particular.

“If the court agrees that the insured’s interpretation of the wording is reasonable, the court would normally rule in favour of the insured, even if an underwriter can argue that it was not the intent to cover in the way the insured interpreted it,” said Charleston. “That is why underwriters take a long time to craft language before they issue policies and it is why now, underwriters are going to have to take a second look at their wordings and revise them accordingly, to ensure that if administrative closure is covered, in the future, they narrowly tailor that wording to government or administrative authority orders that are particularized to the insured’s business.”