COVID-19: Insurance considerations for business disruptions in Canada

11 March 2020

It has been more than a month since the World Health Organization declared Coronavirus Disease 2019 ("COVID-19") a Public Health Emergency of International Concern. Several people in the United States have become infected despite having no known connection to a previous case, and Canada confirmed its first "community spread" case last week. As the spread of the virus begins to have a ripple effect on global industry and markets – and ever-increasing travel restrictions are put in place – supply chain disruptions are beginning to impact businesses and consumers worldwide.

Businesses are turning their minds to their supply chains and other areas of risk: the 90th Annual Geneva Motor Show has been cancelled; Hyundai has suspended its production in South Korea due to supply shortages; and speculation is growing around the possibility that the 2020 Olympic Games in Japan will be canceled or postponed. The current trajectory of COVID-19 suggests that it may have an ongoing and far-reaching impact on businesses and the global economy.

One key consideration for businesses when facing potential losses as a result of COVID-19 is the availability of insurance coverage for business interruption and related losses. Companies often allocate the risk of unexpected disruptions to their operations through their insurance policies and contracts. Insurers may see an increase in insurance claims as COVID-19 continues to spread and authorities work to contain the outbreak and impact thereof. Whether or not a loss arising from COVID-19 is covered will depend on the terms and conditions of the policy applied to the specific circumstances of the loss.

Business Interruption Insurance

Many property insurance policies set out the specific perils and covered consequences. In these cases, the risk assumed by the insurer is defined by the subject matter of the insurance, the interest covered and the exclusions contained within the policy.

Not all property insurance policies fit neatly within a specific category of insurance (i.e. fire, hail, or livestock insurance). Many property insurance policies are set out on an "all risks" basis, with a typical insuring agreement covering, "all risks of direct physical loss or damage… from any external cause." These policies, by their very nature, offer broad coverage narrowed by specific exclusions outlined in the policy.

Business interruption insurance is a form of property insurance that provides coverage for lost income and extra expenses during a period of interruption arising from a "direct physical loss" to the insured property. "Interruption" refers to a business's inability to put insured property to its normal use due to damage caused by a covered peril.

Whether or not there has been physical damage is often not an issue – it is generally obvious in the case of flood or fire. However, it is not as clear whether a loss can or will be considered "physical" in the context of a global pandemic. Much will depend on the specific wording of the policy and the factual details surrounding each individual loss.

A "physical loss" may arise in the context of COVID-19 where the work premises become contaminated and therefore unusable. Here, it would be important to consider whether a business' loss is connected to the contamination of tangible property at the insured business premises – such as factory equipment, company vehicles or uniforms. This may be the case for an airline whose passengers have been found to be infected. In these cases, a key constraint to the availability of coverage for COVID-19 will be providing sufficient proof of actual damage, to the insured property – the cause of the loss must be tied to damage to the insured tangible property.

Specific Extensions

Typically, "virus" and "disease" are not named perils unless added by endorsement, and may in-fact be expressly excluded.

Following the 2002-2004 Severe Acute Respiratory Syndrome ("SARS") and 2014-2016 Ebola outbreaks, the insurance market saw the introduction of specific endorsements to include viruses or diseases as insured perils in the context of business interruption coverage. Examples include coverage for interruptions caused by communicable/contagious disease, and interruptions caused by mandatory closures due to pandemic diseases. Losses covered by these endorsements are similar to what is covered by regular business interruption insurance, with the addition of coverage for crisis response expenses and decontamination costs.

Supply Chain Insurance

In recent years, the insurance market has offered coverage extensions for "contingent business interruption" and "supply chain risk". These endorsements protect against losses arising from disruptions to an insured's supply chain – which may include both suppliers and customers. Depending on the wording of the specific policy, coverage for business interruption insurance may apply in the event that a supplier ceases operations as a result of COVID-19, and thereby adversely impacts the operations of the insured.

The terms of contingent business interruption coverage vary greatly, but generally provide coverage for interruptions caused by direct physical loss or damage to the property of a supplier, or a customer, of the insured. The coverage provided may be subject to certain limitations, such as a specified geographic territory, specified goods/services or only "direct" suppliers.

Whether coverage will extend to losses arising from COVID-19 is, again, highly fact-dependent.

Civil Authority

Commercial property insurance policies may also include coverage for losses, and extra expenses, when access to the insured property is denied by government order. Typically, this form of coverage only applies where the government order resulted from direct physical damage to the insured property. Some policies extend coverage to apply where the relevant property damage is within a stipulated vicinity of the insured property. Other policies include coverage for the prevention of ingress to, or egress from, the insured property, which may include the denial of access to roadways leading to the insured property.

Key to the availability of this form of coverage is that there was a government "order" causing the loss. Government action, such as an advisory to stay indoors following a riot, may not rise to the level of an order, and therefore no civil authority coverage may be available. As the insured peril is the government order itself, coverage for civil authority circumvents the requirement that COVID-19 must be an insured peril for business interruption coverage to be available. An example may be the lockdown and mandatory extension of the Lunar New Year holiday period imposed by the Chinese government this year.

Considerations in the face of COVID-19

Losses may arise from a multitude of causes, both covered and excluded. An analysis of whether there is coverage for a combination of covered and uncovered causes will turn on an analysis of the wording of the policy and the specific causes of the loss.

Even where coverage is available, providing proof of financial losses can be complex –similar to proving lost profits damages in commercial litigation. Causation, and the quantum of losses, must be well documented and mitigation efforts should be made and documented. In the face of the evolving COVID-19 outbreak, businesses should consult with their insurance representatives and legal counsel from an early stage to mitigate their business losses.

Gowling WLG (Canada) LLP has extensive experience in dealing with crises, complex business losses, and contested insurance claims. Our professionals are available to meet with you or your organization to discuss any questions or concerns you may have regarding the impact of COVID-19 to your business, and the insurance solutions which may be available.

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