Throughout this past year, the effects of COVID-19 on commercial businesses have been monumental. Despite a vaccine, the economic impact will likely continue, as more and more cities are undergoing lockdowns, particularly in the face of new strains of the virus.
Many businesses have been forced to close, limit their hours, or reduce their capacity. Some of those businesses, those who purchased business interruption insurance, may have attempted to claim their losses through their commercial insurer. The vast majority of such claims are being denied, and businesses are forced to proceed with litigation to have their policies honored.
Business interruption claims have become a global legal issue. In some countries, judgements have already been granted at lower levels and maybe in the process of being appealed. While in others, courts have provided direction on key definitions in interpreting each policy.
In the United States, as of December 2020, 1,432 COVID insurance related claims have been filed in an American court. A Motion to Dismiss was heard on 141 of those cases. A motion to dismiss is an application by one party to dismiss the case rather than proceeding to a full trial.
Where a Motion to Dismiss was heard, 107 cases were granted a Full Dismissal, meaning each court found that there was no likelihood of success in the business’ claim against the insurer. One of the main factors that the courts looked at was whether a “virus exclusion” policy applied. In 87 of the cases that were dismissed, the courts followed a strict interpretation of the policy and found that there was no case because the insurance contract itself specifically excluded any losses caused by viruses.
In 27 cases, the Motion to Dismiss was denied. This does not mean that the impacted businesses were successful, but that each case had enough merit to continue to trial.
In the United Kingdom, the Supreme Court recently granted an important decision in Financial Conduct Authority v. Arch Insurance (UK) Ltd & Others . Last summer, the Financial Conduct Authority filed a test case on behalf of hundreds of thousands of businesses. This test case was brought forth against a number of insurance companies whose policy and wording on commercial insurance contracts were similar. Following a lower court decision, the Supreme Court was asked to interpret and provide guidance on 2 issues: “disease clauses” and “prevention of access clauses”.
Disease clauses would cover losses resulting from any occurrence of a notifiable disease that is within a specified radius of the insured’s business. The Supreme Court found that as COVID-19 is a notifiable disease, any occurrence will meet the clause if it happened within that specified radius.
Prevention of Access clauses are those that provide coverage if a public authority ordered that a business be closed. For these clauses, the Supreme Court held that if a business is unable to use the premises for a specific activity, or unable to use a part of the premises, then coverage should apply. An example was if a department store was forced to close the retail portion, but was allowed to operate its pharmacy, then the policy should still be affective.
This ruling could have significant consequences. The Association of Business Insurers have stated “the insurance industry expects to pay out over £1.8bn in COVID-19 related claims .”
For Canadian businesses, these decisions will not be determinative, but will provide guidance to our courts. They may influence how Canadian jurisdictions interpret both COVID claims and each specific commercial insurance policy. There is no doubt that the interpretation of business interruption insurance policies will be before the courts for many years to come. If you have questions about how this might impact, your business, give us a call today.
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