Business interruption insurance: recent decision may impact whether COVID-19 disruptions are covered

Colin D. Piercey, Joe Thorne and Sam Ward

On March 25, 2020, we published an update setting out considerations for businesses impacted by the COVID-19 pandemic. In particular, whether business interruption may respond to these types of losses, and what questions a business should ask when considering whether to make a business interruption claim with its insurer.

Our previous update can be found here.

In our previous update, we noted that most business interruption 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.

The requirement that there be “direct physical loss or damage” has been seen as a barrier to a claim arising from the COVID-19 pandemic.

However, a recent decision from the Ontario Superior Court of Justice may lower the threshold for a business interruption insurance claim for COVID-19-related closures.

In MDS Inc. v. Factory Mutual Insurance Company,[1] released March 30, 2020, the Court concluded that:

• “Physical damage” may be interpreted broadly to include “impairment of function or use of tangible property”;
• This may be the outcome even where there is no actual physical damage to the covered property.

While this decision was highly fact-specific, was not decided in the context of a COVID-19 claim and resulted from a leak of heavy water at a nuclear facility, it does offer a potential avenue for business interruption claims during the pandemic.

The decision

The Plaintiffs, MDS Inc. and MDS (CANADA) Inc. (together, “MDS”), purchased and sold radioactive isotopes produced by Atomic Energy of Canada Limited (“AECL”) at AECL’s facility. On May 14, 2009, a leak of heavy water at AECL’s facility led to a 15-month shutdown as ordered by the Canadian Nuclear Safety Commission.

MDS had an “all-risks” policy against “losses from all risks of physical loss or damage except as excluded” (the “Policy”) issued by the Defendant insurer, Factory Global Mutual Company (“Factory Mutual”). The Policy included coverage for such losses arising from damage to a supplier’s property, including AECL.

MDS submitted a loss of profits claim to Factory Mutual totalling $121,248,000. Factory Mutual denied the claim because, among other things, the water leak did not cause actual physical damage to AECL’s property.

One of the issues before the Court was the interpretation of “physical damage” in the Policy. MDS argued that “physical damage” should include loss of use of the property despite no actual damage. Factory Mutual argued that the Policy should be interpreted narrowly to require actual physical damage.

The Court reviewed cases interpreting “physical damage” in Canada and the US and concluded that there was not one single determinative definition of that term applicable to the Policy.

The Court determined, however, that there were cases that indicated that “physical damage” in the insurance policy context was broader than just actual physical damage to property.

Applying those cases, the particular provisions of the Policy, the facts of the MDS claim, and the principles of contractual interpretation, the Court concluded:

In assessing the objective reasonable expectation of the parties as to the meaning of physical damage, it makes common sense that if the unanticipated leak of heavy water…precipitates the shutdown…ordered by CNSC….that this circumstance….would constitute resulting physical damage

…I conclude that a broad definition of resulting physical damage is appropriate in the factual context of this case to interpret the words in the Policy to include impairment of function or use of tangible property caused by the unexpected leak of heavy water.

This interpretation is in accordance with the purpose of all-risks property insurance, which is to provide broad coverage.  To interpret physical damage as suggested by the Insurer would deprive the Insured of a significant aspect of the coverage for which they contracted, leading to an unfair result contrary to the commercial purpose of broad all-risks coverage.

While there were US cases before the Court where contamination did not rise to the level of “physical damage”, they were found to be distinguishable on the basis that, in those cases, the contaminated premises were still considered usable, whereas the leak at AECL’s facility required it to be shut down.

What it means for you

As set out above, this case was highly fact-specific and was decided on the provisions of the Factory Mutual Policy and the facts of the case. Every claim against an insurance policy will turn on such considerations.

While there was a precipitating event namely the leak of heavy water that resulted in the ordered shutdown, this decision does indicate that our courts may take a broader view of “physical damage” as a usual precondition for business interruption claims.

The COVID-19 pandemic has had a huge and wide-reaching impact on business across Canada. Many businesses have had access to their bricks-and-mortar operations reduced or eliminated either by government decree or by social distancing in general.

Coverage still might not be available to those businesses that have not been forced to close entirely. The fact that AECL’s facility had to be shut down was significant to the Court’s decision in this case. A mere downturn in business caused by COVID-19 might not be considered an “impairment of function or use of tangible property” sufficient to rise to the level of “physical damage”.

The federal and provincial response to the COVID-19 impact on business is an evolving process. To date, the governmental focus has been on financial aid and tax relief. However, there have been laws passed in US states mandating that insurers provide retroactive coverage for COVID-19 business interruption losses. Whether such laws may be considered in Canada remains to be seen.

Any business holding a form of business interruption insurance should review their policy and consider seeking legal advice about a potential claim for COVID-19-related disruptions to their operations.

[1] 2020 ONSC 1924.

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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