Colin Piercey and Sam Ward

During this unprecedented crisis, almost all businesses have been negatively affected. Some have been forced to shut down entirely while others have been severely curtailed in their ability to earn income. A question at the forefront of many business-owners’ minds is whether or not their insurance can assist. The answer will likely depend on whether or not their insurance policy includes business interruption coverage, and the scope of that coverage.

Business interruption insurance is aimed at protecting the income of the insured during a period of shutdown. Typically, this type of insurance is added onto property insurance policies and triggered by damage to insured property resulting from typical events such as fire, windstorm or other natural disaster. For example, a manufacturing business that has suffered fire damage to its manufacturing plant and equipment may have to close for a period of time to conduct repairs and get plant and equipment back up and running.

Less commonly, business interruption insurance may be written or extended to cover loss of business income which does not result from the loss of, or damage to, property. If coverage is available, business interruption insurance would typically pay an insured’s loss of profits and any continuing expenses.

Here are a few questions that business owners should be asking:

Do I have business interruption insurance?

For many business-owners, the answer to this first question may be obvious. For others, it may not be, seeing as how business interruption insurance is often purchased as an add-on to an existing property insurance policy, and not commonly a stand-alone policy.

Business owners should look at their existing policy, beginning with the declarations or coverage page. In particular, close attention should be made to determine if there are any extensions or endorsements to the policy that provide for business interruption insurance.

Am I covered?

Commercial insurance policies cover insured “perils”. A “peril” is the event that triggers the coverage. Commercial insurance policies will generally cover either named perils or be all risk.  Policies covering named perils will only cover losses caused by perils specifically listed in the policy, subject to any exclusions. Examples of named perils in a typical property insurance policy include “fire” or “windstorm”.  Comprehensive, or “all risk” policies will cover losses caused by any peril unless specifically excluded.

While business interruption policies are not standardized, most policies will contain language indicating that the insurer will pay for the actual loss of “business income” due to the “necessary suspension” of operations during the “period of restoration”. Traditional policies will require that three conditions be met in order to trigger coverage: (1) direct physical loss or damage; (2) of covered property; (3) resulting from a covered cause of loss.

Of particular note in the wake of the COVID-19 crisis is the first requirement: that there be physical loss or damage.

As noted above, traditionally, business interruption insurance was meant to protect a business’ income stream after it had sustained some kind of damage to its physical operations, for example due to a fire or flood. Economic loss without a tangible physical loss to accompany it will often be insufficient to trigger coverage. For this reason, most policyholders will likely not be covered for interruptions related to COVID-19.

However, insured parties should examine their policies carefully to see whether or not there is specific coverage for interruptions caused by non-physical events. For example, some policies may even provide specific coverage in the event of an “epidemic”, “pandemic” or access to the premises being prohibited by a “civil authority”.

Beyond the common requirement that there be a physical loss of, or damage to, property, there are other requirements to think about in the context of the COVID-19 crisis. One of these is that there be a total cessation of business. Traditional policies often will not provide coverage in the case of a mere downturn of business. This was confirmed recently by the Ontario Superior Court of Justice in Le Treport Wedding & Convention Centre Ltd. v. Co-operators Insurance¹. In interpreting the words “interruption of business” in a policy, the Court found that these words indicated a requirement that the business cease operating.

Whether or not you will be covered for an interruption caused by COVID-19 will ultimately depend on the wording of your policy and the particular facts of your business, so be sure to examine the policy carefully and watch out for (1) a requirement that there be some physical damage; (2) explicit language covering losses arising from specified risks such as “epidemics”; and/or prohibition of access to the premises, and (3) a requirement that the business be completely shut down.

What exactly is covered?

Recognizing that we are currently in the middle of the COVID-19 crisis and what occurs in the coming weeks remains uncertain, another important consideration in determining the extent of coverage available, is the length of the indemnity period. There are typically two types of policies covering two different time periods:

1. Limited coverage covers the time until the business resumes and damage has been repaired or property replaced. It will not cover any losses following the reopening of the business even if that business has not regained its previous level of earnings. Coverage will also expire at the end of a maximum defined indemnity period, regardless of whether or not the business has reopened.
2. Extended coverage covers the time until a business resumes its normal, pre-interruption level of business, subject again to any maximum defined indemnity period.

There might also be a requirement in a policy that the insured exercise due diligence in seeking to rebuild and replace its damaged property, or more relevantly in the present circumstance, otherwise attempt to mitigate its lost earnings.

Coverage may also exist for extra expenses that a business must incur in remaining operational during a period where it has been affected by loss or damage. For example, if a business must move to a new premises and incur rental costs for equipment, these costs might be covered under a policy that includes extra expenses. Expenses incurred in attempting to mitigate loss, if economically justified, will often be covered.

What this means for you

Business interruption insurance is one of the more complicated forms of insurance offered. As noted, it is only triggered in certain circumstances and is always subject to certain exclusions and limitations. Business owners should examine their policies carefully and where necessary, seek legal advice on the coverages available to them.

¹ 2019 ONSC 3041.

This article is provided for general information only. If you have any questions about the above, please contact a member of our Insurance Group.

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