The COVID-19 Pandemic and Insurance Coverage for Business Interruption in Canada.

• Author: Knutsen, Erik S.
• Position: Special Issue: COVID-19 and the Law

Introduction I. Pandemic-Related Losses Are Insurable II. Types of COVID-19 Pandemic-Related Business Interruption Losses III. Commercial Property, Business Interruption, and Civil Authority Insurance Coverage IV. Policyholder and Insurer Perspectives of Coverage V. Coverage in Commercial Property Insurance: "Direct Physical Loss or Damage" VI. Interpreting "Direct Physical Loss or Damage" VII. The Virus Exclusion Conclusion Introduction

Businesses reeling from income loss due to the COVID-19 pandemic may be counting on the commercial insurance policies they purchased to somehow provide financial assistance. In an attempt to curb the spread of the virus, government-forced shutdowns, travel bans, and required re-toolings of ways of doing business have meant that many businesses have been hit hard financially during the pandemic. Retail shops saw in-store patron levels plummet. Restaurants were forced to move from a dine-in to a take-out model. Airlines cut service as there were few travellers. Some businesses have had to temporarily close and decontaminate business premises because employees or patrons were infected with the COVID-19 virus.

But are most Canadian businesses insured for pandemic-related business interruption losses? Can insurance even cover such claims? Will the insurance industry go bankrupt if such claims arose in a widespread fashion?

Some businesses may have purchased business interruption insurance as part of their commercial property insurance policy. That insurance coverage typically provides coverage for "direct physical loss of, or damage to" property. (1) Canadian courts will have to determine if COVID-19 pandemic-related losses involve direct physical loss of, or damage to, property and are thus covered by insurance. This will require courts to construe that coverage clause. Fair and predictable insurance coverage results for pandemic-related business interruption claims can be achieved if policyholders, insurers, courts, and lawyers avoid a literalist, dictionary-focused approach to this insurance coverage issue and instead overtly account for how commercial property insurance should operate as a risk-based financial product.

1. Pandemic-Related Losses Are Insurable

   Fortuitous risk is the bedrock concept of insurance. (2) Anything that has an unexpected and accidental element can be insured. The unexpected loss of property or unexpected liability for harm to someone or something are insurable circumstances because they involve unexpected losses. Insurance does not insure certainties. For example, one cannot insure against the legal liability for intentionally punching someone--that punch is a certainty if one meant to punch someone and meant to injure the victim. Because the punch is not a fortuitous risk, it is not insurable. Even among some certain losses, insurance can still exist if the timing or amount of the loss is unexpected. For example, life insurance insures against the inevitable--death. Death can be an insured event because one does not know when one will die; that is fortuitous. The occurrence of the COVID-19 pandemic, the timing of pandemic-related losses, and the extent of such losses are all fortuitous things that can be insured against. (3)

   Since the start of the COVID-19 pandemic, words like "unprecedented" and "unexpected" have been bandied about. From the standpoint of an insurance company who may have to cover pandemic-related claims, such claims are not outside the realm of foreseeable (and thus susceptible to standard insurance underwriting principles to rate risk and charge premiums accordingly). The past decades have seen many instances of pandemics which offered clues to insurers that a disease-causing event could result in significant insured losses. From Ebola to SARS, H1N1, Zika, MERS, swine flu, and HIV/AIDS, insurers have known that these diseases can seriously influence commercial entities. They had the opportunity to model possible future claims costs.

   Insurers will not become financially insolvent if expected to pay claims for pandemic-related losses. Insurers had ample opportunity to model and prepare for this pandemic. One global insurer actually had a product on the market to cover pandemic-related losses. (4) Nobody knows the true extent of the actual pandemic-related losses. There are always exclusions in insurance policies, and not all policies cover all losses. Not all businesses are affected the same way by the pandemic. Some businesses are decimated. Others actually thrive. Online commerce exploded with use. Delivery services became the essential survival tool. So, not every business will have an insurance claim for pandemic-related losses.

   Insurers are financially healthy, with amassed wealth equating to the third largest economy in the world. (5) Insurers take an upfront premium from a policyholder in exchange for a promise to pay for a future potential loss. Insurers have that present-day premium money to invest, because every policyholder will have an insurance claim at once.

   Whether pandemic-related losses are actually insurable in a certain situation depends on the wording of the insurance policy and how the loss came about.

2. Types of COVID-19 Pandemic-Related Business Interruption Losses

   Losses can be due to:

   i. virus on the premises, whether brought by sick employees or customers, requiring temporary business closure due to sanitization efforts or loss of workforce, or actual closure due to quarantine and isolation of exposed employees;

   ii. forced closures from government-enforced stay at home orders aimed at curbing virus spread (which could be industry-specific limitations or closures, such as services requiring close contact like spas, salons, gyms, and healthcare, or industries reliant on congregations of people such as theatre, cinema, and tourist attractions);

   iii. changes in business practices which reduced or eliminated certain revenue-generating activities (such as limits to patron occupancy, enforcing physical distancing requirements, reconfiguration of business spaces to prevent virus spread, reconfiguration of business models from in-store to curbside pickup, or from dine-in to take-out only, and additional costs of personal protective equipment); and, iv. patron downturns as a result of recommended government urging to avoid non-essential outings.

3. Commercial Property, Business Interruption, and Civil Authority Insurance Coverage

   Not all insurance policies cover all business-related losses. The most common forms of insurance coverage to be implicated for most businesses in the COVID-19 pandemic setting are business interruption coverage or civil authority coverage. Both types of coverage can be added to a business' commercial property insurance policy for an additional premium. A commercial property insurance policy protects against any losses to a business' property such as losses from fire, theft, or weather damage. The modern commercial property insurance policy is an "all risks" policy that provides coverage for all "direct physical loss of or damage" to property. (6) Although the policy insures the property against "all risks," each...