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Business Interruption Insurance and COVID-19 in
Ontario
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Shapiro,
Mark S. Hulton, Wendy
G. Bain,
Paul E. Di
Giorgio, Liana C.

April
23, 2020

Industry Alerts

During the COVID-19 pandemic, most businesses have suffered losses
caused by business interruption, whether related to staff falling ill, loss of
customers or suppliers, or governments requiring new forms of compliance. Some
businesses have made COVID-19 related claims which have been met with resistance
by their insurers and are already taking legal action as a result – for example,
a nation-wide class action was recently launched in Saskatchewan against several
insurance companies in respect of denied claims relating to COVID-19, and a
group of Ontario optometrists has started a petition urging their insurers to
approve claims resulting from COVID-19. It is important to note that generally
speaking, commercial property insurance policies cover losses caused by
actual physical damage.

In the past few weeks, the Ontario Superior Court’s decision in MDS
Inc. v. Factory Mutual Insurance Company has made waves throughout the
legal and insurance communities. Some interpretations of this decision have
suggested that courts may require all-risk and business interruption insurers to
cover certain losses caused by COVID-19. However, a closer review of the
decision reveals that these interpretations are likely too good to be true for
insureds. This decision does not relate directly to COVID-19, nor does it alter
the terms of all-risk and business interruption insurance policies as they
relate to losses caused by COVID-19.

The Facts

MDS Inc. (the “Plaintiff”) was in the business of
buying and selling radioisotopes. A leak occurred at the nuclear reactor
facility from which the Plaintiff obtained radioisotopes, causing an unexpected
shutdown of the facility. The leak did not cause physical damage to the area of
the facility responsible for producing the radioisotopes. The shutdown lasted
over a year and prevented the Plaintiff from sourcing these radioisotopes. As a
result, the Plaintiff suffered over $120M in losses.

At the time of the incident, the Plaintiff had an all-risk insurance
policy (the “Policy”) in place with Factory Mutual Insurance
Company (the “Insurer”) for losses from all risk of physical
loss or damage, except as excluded by the policyThe Plaintiff made a claim for
its losses under the Policy but the claim was denied by the Insurer.

The Reasoning

One of the main issues explored in the decision is the meaning of the
term “resulting physical damage” found in the Policy. The Insurer claimed there
was no resulting physical damage as physical damage would require
actual damage to the area where the radioisotopes were produced. The
Plaintiff argued for a broader interpretation, suggesting the shutdown caused by
the leak should constitute resulting physical damage, as it prevented the
facility from being used.

Though the Court ultimately agreed with the Plaintiff, this decision
involved specific facts, and an important factor was the language contained in
the Policy. The term “resulting physical damage” was not defined in the Policy.
As such, the Court turned to a Supreme Court decision that held that the
interpretation of the scope of a resulting damage exception should be informed
by the specific language of the policy and the relevant factual matrix,
including the reasonable expectations of the parties.

The Court applied this principle and spoke to the purpose of all-risk
insurance being to provide broad coverage for risks not typically covered by
other types of policies. The purpose of the Policy included the compensation of
the Plaintiff for interruptions to its supply of radioisotopes caused by
unforeseen events.

The Court also conveyed that certain other provisions in the Policy
supported the broad interpretation of “resulting physical damage.” Though the
Court did suggest that physical damage could include the loss of use of certain
property despite there being no actual physical damage to such
property, this decision was based on a unique fact pattern, and it is
unlikely that the decision alone would support the broader notion that physical
damage includes intangible harm that restricts the use of property.

Conclusion

In this case, the Court adopted a broad interpretation of “physical
damage” in light of the purpose of the Policy and the distinctive set of facts
before it. While the decision may have some application to future claims
involving COVID-19, one should not read the decision as suggesting that business
interruption or all-risk insurance coverage will unequivocally extend to
interruptions caused by COVID-19.

Some policies may expressly cover business interruption caused by
contagious diseases or restrictions imposed by governmental authorities, some
may expressly exclude these events (as a result of insurers’ experiences with
the SARS and H1N1 outbreaks), and some may be entirely silent.

It will be very interesting to see how Courts interpret different types
of insurance policies in light of COVID-19 – some may sympathize with claimants,
while others may not be willing to shift the burden of uninsured losses to
insurers. We also expect different insurers to behave differently in the face of
uncertainty with some being more generous and others more aggressive in their
approach to covering losses before insurance laws catch up to
COVID-19.

If your business has experienced losses caused by COVID-19, Dickinson
Wright may be able to assist by reviewing your existing insurance policies and
advising in respect of how they relate to potential claims for such losses.
Susan Benedict can also help you navigate disputes with your insurers
regarding the same. If you have suffered these types of losses you should act as
quickly as possible as your insurance policies may require you to make claims
within a certain time period.

Related Services

COVID-19
Developments

Corporate

Insurance

Contacts

Paul
Bain

Partner
Toronto

T:416-646-8364

E:[email-masked]

Liana
Di Giorgio

Associate
Toronto

T:416-646-4610

E:[email-masked]

Wendy
Hulton

Partner
Toronto

T:416-777-4035

E:[email-masked]

Mark
Shapiro

Partner and
Canadian Litigation Practice Group Chair
Toronto

T:416-646-4603

E:[email-masked]

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