Life and business insurance in the time of COVID-19 - Part 3 - Business Interruption and newer case law

April 14, 2020, Kitchener, Ontario

Posted by: Robert Deutschmann, Personal Injury Lawyer

Our last couple of posts have dealt with the unprecedented crisis faced by business small and large posed by COVID-19. The devastating financial losses will prove devastating for many small and medium business owners, and many businesses are now turning to their insurers to bear some of the cost of the closures.

The unexpected closures of business lead to major financial losses. These include rent/mortgage payments, staff costs, inventory, loss of income, and other expenses. Many businesses operate on a month to month basis meaning that they rely on their credit cards to float expenses until the invoices are paid by clients. Others may have some cushion but small business cannot often carry on for more than a couple of months without serious thought being given to closing permanently.

As we’ve discussed, business interruption insurance has been generally interpreted to interruption caused by a physical damage. These may include a fire, or some other destructive physical force damaging the premises in some way. This crisis may prompt governments and courts to broaden their interpretation of the nature of what the causation of the interruption is.

To be sure, insurers are watching this situation very carefully as they face serious financial crisis themselves if they are forced to payout to their insureds on the basis that COVID is included as a valid cause of business interruption. A recent Ontario Superior Court Decision, MDS Inc. v. Factory Mutual Insurance Company, 2019 ONSC 1924 dealt with the understanding of ‘physical damage’ in a round about way.

In this case the Plaintiff was a business that purchased and processed radioisotopes created in Chalk River at the NRU (Nuclear Research Universal Reactor). In 2009 a leak of radioactive water was found resulting in corrosion and a subsequent shutdown order by the Canadian Nuclear Safety Commission. This shutdown lasted 15 months and as a result MDS whose sole supplier is the NRU lost over $120 billion in profits. MDS turned to its insurer Factory Mutual making a claim for lost profits. Factory Mutual denied the claim relying on an exclusion in the Policy for ‘physical damage’ caused by corrosion.

The Court focused primarily on the validity of the expert evidence on the nature of the corrosion. The technical question was whether the corrosion was non-fortuitous or whether the leak was caused by an aggressive corrosive agent  In the end the Court held that the leak was caused by by an aggressive corrosive agent (likely chlorine) and that this was unanticipated and unexpected. On that basis the Court ruled that the exclusion in the insurance policy regarding corrosion did not apply. The fortuitous corrosion would thus be covered under the Policy. In its ruling the Court carefully considered the wording of the Policy specifically part:

1.  This Policy excludes the following, but, if physical damage not excluded by this Policy results, then only that resulting damage is insured:

3) deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect. 

In its ruling the Court determined that the policy required ‘physcal damage’ to result but that the term’ resulting physical damage’ was not used in the policy itself. The Court went on to frame the question in the following terms:

“should resulting physical damage be defined narrowly to require actual physical damage, or should it be defined broadly to include loss of use?”

In the end the Court determined that the term ‘resulting physical damage’ as an exception to the exclusion in the Policy should be interpreted broadly and that this is in fact consistent with the nature of insurance policies. In this case the Insured had an all risk policy[MO1] . The Court went on to state that ‘resulting physical damage’ which was not referenced in the Policy can include the loss of use of the property where there is no apparent or tangible damage.

In the decision the Court noted explicitly that “the purpose of all-risk property insurance…is to provide broad coverage’. Time will tell how this ruling will be interpreted and how it will impact COVID-19 based claims.

About Deutschmann Law

Deutschmann Law serves South-Western Ontario with offices in Kitchener-Waterloo, Cambridge, Woodstock, Brantford, Stratford and Ayr. The law practice of Robert Deutschmann focuses almost exclusively in personal injury and disability insurance matters. For more information, please visit www.deutschmannlaw.com or call us at 1-519-742-7774.

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