MDS Inc. v. Factory Mutual Insurance Company (FM GLOBAL) 2020 ONSC 1924, and COVID-19 Business Interruption Claims
With the unprecedented evolution of COVID-19, businesses are anticipating that Canada’s property and casualty insurance industry will begin introducing pandemic business interruption coverage. However, due to the grand size and scale of pandemic exposure, along with the distinctive characteristics of each pandemic, it would make it nearly impossible for the industry to offer blanket pandemic coverage to businesses at affordable rates.
Business interruption coverage is usually an add-on to an existing commercial policy of insurance, that covers continuing expenses or replaces lost profits, in the event that a business is forced to temporarily shut down or slow down. There are three types of business interruption policies, and the coverage afforded by each vary:
- Gross Earnings Policy: the policy will respond until property or damage is replaced or repaired and/or stock is replaced;
- Profits from Policy: the policy will respond until a business resumes its normal, pre-interruption level, in accordance with the policy limits; and
- Extra Expense Policy: the policy will respond during the period that extra expenses are required, as the business can remain operational, though being affected by loss and/or damage.
It is no surprise that most industries are facing financial deficits due to COVID-19 and the central question surrounding all is whether business interruption losses as a result of COVID-19, in any one of the aforementioned policies, would trigger insurance coverage for those losses.
On March 30, 2020, the Honourable Madam Justice Wilson released her decision in MDS Inc. v. Factory Mutual Insurance Company (FM Global) 2020 ONSC 1924 (hereinafter “MDS”), which included an analysis of the definition of “physical damage” with respect to an all-risks property insurance policy. In this case, it was argued that the loss of use of a premise without any actual damages to the premise or a component of the premise should not qualify as physical damage under the policy as physical damage requires tangible damage.
This argument generally forms the basis for decisions to deny insurance coverage, as the interruption has led to what would be classified as a “loss of use” rather than “property damage.” However, this argument was rejected in MDS with the Court finding that loss of use could be considered property damage so as to trigger the business interruption coverage.
Madam Justice Wilson emphasized that there is no definitive meaning of resulting physical damage in all-risks policies in Canada and there are conflicting lines with respect to the interpretation. Her Honour explicitly rejected the notion that physical tangible damage be apparent and instead adopted a broad interpretation, which would treat the loss of function or use of premises as physical damage. Accordingly, Madam Justice Wilson concluded that all-risks property insurance is meant to provide broad coverage and as such, said interpretation is in accordance with that principle. To simply interpret physical damage to be tangible would deprive policyholders of a vital aspect of coverage for which they contracted, which would undoubtedly be in direct contrast of the commercial purpose of all-risks coverage.
It is important to note that MDS did not deal with COVID-19. However, this decision could be used to eliminate a significant hurdle that businesses would have had to overcome with respect to claiming business interruption losses arising from COVID-19 under traditional commercial policies.
Without a doubt, this landmark decision will have an impact on business interruption loss claims as they relate to COVID-19, as both businesses and insurance companies strive to assess coverage.
Should you require any assistance with coverage, investigation and defending of any such claims, please feel free to contact FCL LLP.