COVID-19 and Business Interruption Insurance
With the ongoing disruption to the economy caused by the COVID-19 pandemic, many business owners are now turning to their insurance policies for relief. The question becomes whether pandemics generally and COVID-19 in particular falls within the company’s insurance policy. The short answer is “maybe”. As with all insurance questions, it depends on the precise wording of the policy and the circumstances of the loss. In this short article, I will discuss how business interruption policies work along with a potential alternative route for obtaining compensation where the policy does not cover the loss – suing the broker who negotiated the policy.
What is business interruption insurance?
Business interruption insurance protects companies from the loss of profits they suffer due to some unforeseen disaster. The classic example is a fire that destroys a store and prevents the business from operating. A typical property policy indemnifies the business owner for the destruction of the store itself and its contents, but many businesses also take out business interruption insurance to protect their profits. Business interruption policies provide a formula for calculating lost profit, which is typically based upon the business’s profits in the preceding year and the additional expenses the business is now facing as a result of the loss. However, these details can often be less than clear, which can lead to disputes between insurers and their insureds regarding the precise quantum of the loss.
Business interruption policies provide broad coverage, but the coverage is inherently limited to the insuring agreement (usually found in the first paragraph of the policy). The typical business interruption policy states it insures against loss of profit caused by “physical” damage, often using a phrase such as “direct physical loss, destruction or damage.” This is the key takeaway: most policies require that there be actual physical damage to the business property, meaning the building, equipment, stock or premises.
If a loss generally falls within the scope of coverage, it may still be excluded. Every business interruption policy will include various exclusions to coverage, such as damage caused by earthquakes, floods, war and other specified perils. It is a black letter principle of insurance law that coverage is interpreted broadly and exclusions narrowly, meaning that if an insurer wants to exclude a peril from coverage, it must do so using very explicit and specific terminology. For this reason, the insurer will usually employ several similar terms in its exclusions in an attempt to “catch” any potentially related event. For example, an exclusion against damage caused by war may read as follows:
by war, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection or military power.
How to know if the policy covers COVID-19
The typical business interruption policy would not likely provide coverage in the case of the COVID-19 pandemic. This is because a pandemic does not typically cause “direct physical” loss or damage to the property itself. For the most part, loss of profits occur not because the business premises is damaged, but because the government orders the business to shut down as part of a general health policy, or because potential customers socially isolate.
There are of course exceptions to this general rule. Following the SARS pandemic of 2003, some insurers began selling policies that provide coverage for business interruption caused by a pandemic or other health crisis. With the World Health Organization’s declaration of a pandemic, there can be no doubt that the current COVID-19 crisis would qualify. But, again, these are specialized endorsements that certain companies purchase. They are not typically part of a standard form business interruption policy.
The other exception is where the business closure is not due to a government-imposed lock down but rather due to an outbreak of COVID-19 at the business premises, which then either forces the business to cease or limit operations, or dissuades customers from patronizing the store. In these circumstances, there is an arguable case that the loss was caused by physical loss or damage to the property itself, just as if there had been an outbreak of pests. However, the courts have not yet had a chance to develop doctrine on this point, and it would, in any case, be highly contingent on the specific circumstances of the loss.
In sum, policies differ between insurers and between insured businesses. Whether an event such as COVID-19 falls within the scope of a business interruption policy will depend on the wording of that policy, the negotiations leading up to the policy’s procurement and the precise reason for the business closing or losing profits. Even for sophisticated business owners, it is always preferable to consult with a lawyer to learn what your rights are under the policy.
Pursuing the broker for negligence
If the insurance policy does not provide coverage based on the wording of the policy and the circumstances surrounding the loss, that may not be the end of the story. In many cases, businesses do not purchase policies directly, but instead go through a broker firm. If the business made it clear to the broker that it wanted business interruption coverage for any and all reasons, and not merely limited to physical damage, then the broker may be on the hook for failing to procure such a policy and liable to indemnify the business for the the loss of profit. Brokers typically have responding insurance policies of their own with limits that are more than adequate to compensate the business for its loss.
Indeed, in my experience litigating insurance coverage claims, it is the broker not the insurance company that is typically the target of the lawsuit. Insurance companies will of course sometimes deny claims unfairly, but more often the dispute is between the insured and the broker for failing to obtain the “correct” policy. The law is clear that brokers are not mere conduits between the insured and insurance company. On the contrary, it is “well-established that insurance brokers owe a duty to their customers to provide not only information about available coverage but to advise about what forms of coverage is required to meet their needs” (see Giangrande v. Secure Insurance Solutions Group Inc. et al., 2019 ONSC 5826 (CanLII), para 89). Thus, if an insured can demonstrate that “but for” the broker’s negligence, it would have obtained the correct policy, then the broker will be liable to compensate the insured as if it had obtained the correct policy. Once again, this depends heavily on the specific facts of the case and it is important that business owners consult with a lawyer to obtain proper legal advice on the matter.
Insurance policies can be difficult to understand and there is a mountain of case-law built around how they ought to be interpreted. And the law on the duties owed by brokers to their insureds is in some ways still developing. Put succinctly, this is a complex area of law. It is therefore essential that business owners, insurance companies and brokers each obtain legal advice to determine their rights and obligations, generally and especially when dealing with business interruption policies in the COVID-19 world.
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Asher practices in the area of insurance law. Contact him to learn more.
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