Insurers expect to see ‘tsunami’ of claims
Canadian business owners looking to claim interruption insurance due to crisis
As the COVID-19 pandemic wears on, insurers could face “a tsunami of claims” from businesses looking for interruption coverage, experts say.
These lawsuits are ramping up in the United States and Europe, Toronto employment lawyer Sivan Tumarkin said.
Canada is starting to see its own lawsuits, both class-action and individual, from business owners looking to claim business interruption insurance.
In March, when the pandemic was starting to take hold here, several Ontario dentists spent two weeks trying to get their provider to pay them under their business interruption insurance, which specifically mentioned pandemic-caused closings. Insurance giant Aviva Canada did eventually pay; its CEO said the dentists had a unique arrangement for such coverage.
In Toronto, restaurant owner Hemant Bhagwani launched a suit against his insurance provider related to three of his restaurants after his business interruption claims were denied.
And a Saskatchewan-based law firm has launched a national class-action suit representing businesses that have had business interruption claims denied.
Whether the suits will be successful or not will largely depend on the type of coverage the business has and, interestingly, the court’s interpretation of what constitutes “physical damage.”
After the 2003 SARS outbreak, Tumarkin said insurance companies started offering policies that cover a pandemic or “infectious disease.” But COVID-19 has shown that even these policies aren’t enough: some insurance companies will say the virus needs to have hit geographically close to the office to result in a payout.
“They’re trying to avoid a floodgate situation,” he said.
If such a case comes before a judge,
Tumarkin said the policy “better have a specific exclusion” or the judge is sure to favour the insured — and in many cases the claim will be settled out of court to avoid bad PR, he said.
But many businesses don’t have that extra coverage, he said.
Traditional business interruption policies don’t offer pandemic-related coverage, said Vanessa Barrasa, media relations manager with the Insurance Bureau of Canada.
Regular business interruption policies are focused on one type of interruption: physical damage, such as fire or water. The payout is meant to cover the cost of repair and replacement, Tumarkin said.
Getting a payout in such situations will be much harder, but there are some precedents that indicate it may be possible.
A recent Ontario court case unrelated to COVID-19 has turned heads in the legal community, said Tumarkin, and some think it could make regular business interruption policies that cover physical damage applicable to COVID-19 shutdowns.
The suit, MDS Inc. v. Factory Mutual Insurance Company, is under appeal, said Tumarkin. MDS lost out on millions in profits because a nuclear reactor from which it purchased radioisotopes was shut down by a leak for 15 months. The judge ruled in favour of MDS, which argued its business interruption insurance should cover the loss in profit, even though it wasn’t due to physical damage to the MDS facility.
Though some may think this decision could pave the way for more lawsuits concerning regular business interruption insurance, Tumarkin said he thinks the decision “really stretched the definition of physical damage,” and won’t have a significant impact on COVID-19 business interruption lawsuits.
“I don’t think this is a game changer,” he said.
Toronto lawyer Allan Rouben said the decision could pave the way for some interesting arguments about the definition of “physical damage” during COVID-19, though he thinks businesses would face an “uphill battle.”
He said a case on this exact question is currently being tested in the United Kingdom, which could change the winds for business interruption lawsuits if it plays out in favour of the insured.
“I certainly wouldn’t shut the door on it,” he said.
The U.K.’s financial watchdog, the Financial Conduct Authority, is trying to obtain a court declaration on the question of whether insurance policies focused on property damage should cover the pandemic.
For Toronto restaurant owner Andrew Carter, COVID-19 has resulted in an unprecedented situation with his insurance company.
Carter started receiving business interruption insurance payouts in November 2019 after one of his two restaurants, the Wickson Social, suffered water damage.
But after the COVID-19 business shutdown, Carter said his insurance provider told him that he would no longer be receiving the payouts because if his business had been open, it would have been closed by the shutdown, and that would not be covered by his policy.
Carter said he told them if it weren’t for the water damage, the Wickson Social would be doing takeout — to which he says they responded that in that case there would be no business interruption, and therefore would not be paying.
Carter said he’s frustrated because he pays thousands of dollars for the insurance and doesn’t see how COVID-19 should halt the payout. He is currently considering legal action.
Aspokesperson for Intact said in an email that Intact’s business interruption coverage does not cover a pandemic. They said in Carter’s specific case, they are “working with (him) to find a resolution.” They also said Intact is working to provide support to business customers during COVID-19 such as financing, flexible payment options and premium adjustments, to the tune of more than $245 million so far.
Tumarkin said while this is an unusual case, it’s an illustration of how hard insurance companies are working to avoid making payments during the pandemic.
“That’s one of the reasons why (insurance companies are) being so careful,” he said. “They see a tsunami of claims coming. They’re also afraid … that the government will potentially step in and regulate them in a way for the future that they’re not going to like.”
Tumarkin said he thinks we will continue to see more business interruption lawsuits, especially class-action suits, not just in Canada but worldwide. He believes companies will pay out many of these suits, but settle outside of court.
Rouben also thinks Canada is going to see more business interruption lawsuits, especially if what’s happening in the U.S. is any indication. He added that the courts may look to similar cases in the U.S. for precedent.
After COVID-19, Tumarkin said he thinks more businesses will opt for the extra coverage that includes pandemics, and that insurance companies will increase the cost of this type of coverage.
Barrasa said in the past, uninsured events like the pandemic are usually followed by the insurance industry reviewing and then introducing new coverage to address these events.
“For example, following the Calgary floods in 2013, residential overland flood coverage was introduced,” she said.