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Bulletin | Covid-19

Insurance Coverage During A Pandemic And Force Majeure

Fasken
Reading Time 11 minute read
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Litigation and Dispute Resolution Bulletin

The recommended self-isolation of citizens as well as border closures are among the draconian measures taken by government authorities in order to stop the spread of the coronavirus (COVID-19). Faced with these public health measures, all economic sectors are experiencing profound upheaval. While a considerable number of businesses were forced to reduce their service points, others instead opted to close their businesses given the drastic drop in sales. Subsequently, this choice became academic for a large number of companies due to the Québec government's decision by ministerial decree to force the closure of all non-essential or non-priority activities and services. It is clear that this business interruption imposed by the government is causing significant income loss for most businesses affected by this measure.

These companies are now wondering whether they have insurance coverage to protect them from the impacts of this business interruption. While there may be a wide variety of types of insurance coverage on the market, many contain specific provisions regarding business interruption. As such, this article will discuss the essence of an insurance policy covering business interruption and the insurer's obligation to indemnify in the event of force majeure and pandemics.

Business Interruption Insurance Coverage

It should be noted that the essence of insurance coverage for business interruption is primarily intended to compensate for income loss, payroll expenses, fixed costs that must be paid (rent, interest on loans, heating costs, etc.) and additional expenses that a business must incur following an interruption, reduction or complete cessation of its activities as a result of a covered event. It allows, to a certain extent, to return the company to the financial state it was in before the event[2].

At first glance, this type of insurance seems to be the appropriate solution for many companies that are facing business interruptions resulting, in particular, from government measures taken in response to the COVID-19 pandemic.

However, it is important to note that business interruption insurance policies are, in most cases, linked to those covering the property of a business[3]. Moreover, standard business interruption insurance covers loss of business income  to the extent that the loss is a result of physical damage to business property[4]. It is therefore precisely this physical damage that must be the cause of the decrease of activities. The usual endorsements protecting against business interruptions are often worded in a manner similar to the following: 

"This insurance covers to the extent indicated below losses resulting directly from the interruption of the insured's business operations which became unavoidable due to a covered peril, while this insurance is in force, affecting the buildings, machinery, material or inventory located on the designated premises." [5]

Guillet v. Federated (La), compagnie d'assurance du Canada[6] is a good example of the need, in this type of contractual provision, to connect the covered peril to the insured's property damages. In the case at hand, the insured was claiming compensation from their insurance company for income loss resulting from the 1998 ice storm. The Superior Court of Québec found that  the terms of the contract required more than income loss resulting from an interruption of business operations caused by an insured risk, namely the ice storm. In addition, the insurance policy also makes it a condition that the cessation of activities must be due to damage to the company's property. It appears that the interruption of operations was caused by a power outage. Admittedly, the power outage was caused by the ice storm, but the ice storm itself did not cause damage to the insured's property. As for the electricity, while it is moveable property, it did not belong to the insured and was not damaged: it simply ceased to be supplied. Accordingly, the Court determined that the insurer was entitled to reject the insured's claim.

Similarly, in 3296008 Canada Inc. c. Compagnie d'assurance Le Groupe Commerce[7], the Superior Court of Québec held that it was necessary to link the covered peril to the insured's property damage. In this case, the insured, who operated a billiard hall and restaurant-bar, had an all-risk insurance policy. Following the 1998 ice storm, it lost all of its perishable food items, namely the insured property, as a result of a power outage, which prevented its refrigerators from functioning. In addition to claiming the amount of the loss of these food items, the insured claimed coverage for damages resulting from the interruption of activities as a result of the power outage, which was caused by the ice storm. In this matter, the Court ordered the insurer to indemnify the insured for the property damage, the food items, following the power outage caused by the ice storm, but dismissed the insured's claim for income loss caused by business interruption. The Court's findings were based on the fact that under the insurance contract, the business interruption must be caused by the destruction or damage of insured property in order to benefit from insurance coverage for income loss, which differs from the coverage terms for property damage, namely, in this case, the food items.

As such, although catastrophic situations and cases comparable to a force majeure event may constitute insurable risks and cause interruptions to business operations, they do not necessarily create physical damage to insured property. Moreover, insured persons may not assert against their insurers that damage resulting from the deprivation of the property in itself constitutes damage, a claim which has been declared erroneous by the Court[8].

As a result, insurance for business interruption linked to physical damage resulting from force majeure is, in general, of little use to a considerable number of businesses whose operations are interrupted because of the government order preventing them from operating or as a result of a substantial drop in sales.

It must be emphasized that there are certain business interruption insurance policies that are not subject to a physical damage requirement. In fact, special risk policies exist, such as against infectious diseases, but these are offered and subscribed on a case-by-case basis. Some may cover many events, such as natural disasters, government orders, acts of terrorism and even cancellations of events.[9]

On a similar note, we can think of businesses in the tourist industry that were seriously affected by the spread of SARS in 2002 and 2003. It is therefore possible that certain businesses planned ahead by subscribing to insurance covering business interruption said to be "without damage" [10]. However, even in the presence of such insurance policy,  coverage by the insurer remains to be analyzed and interpreted, since such insurance policies are rather rare and sometimes provide an exclusion provision specifically for epidemics and pandemics. Where an insurance policy covers business interruption due to an epidemic/pandemic, it will generally require the insured to send a notice to the insurer and to take the necessary measures to mitigate its damages[11].

Force Majeure in Insurance

In Québec civil law, the concept of force majeure or "superior force" is defined by article 1470 of the Civil Code of Québec ("CCQ") as an "unforeseeable and irresistible event, including external causes with the same characteristics". Force majeure (officially translated as "superior force") is understood as an event that the debtor could not anticipate or resist and that has made performance of his obligation impossible.

Force majeure allows a party, in certain circumstances, to be released of its liability for any prejudice caused. Insofar as the present pandemic could qualify as a force majeure, should we anticipate that insurers, with policies at risk, will rely on the notion of force majeure to escape their responsibilities?

It is important to clarify that the concept of force majeure is not of public order. In fact, the parties to a contract remain free to define this concept differently and to modify or even to waive its application and effects altogether. It is also important to specify that under article 2464 paragraph 1 of the CCQ, an insurer must repair the damage suffered by an insured, even if caused by force majeure, unless an exclusion is expressly and restrictively stipulated in the contract between the parties[12]. It must be noted that case law pertaining to exclusion clauses holds that a restrictive interpretation is recommended and that any doubt must favour insurance coverage.[13] In other words, if there is any doubt, the courts will adopt an interpretation favouring the insured.

For example, in Howor v. Compagnie Mutuelle Wawanesa[14], the Superior Court of Québec examined the obligation to indemnify in the event of force majeure. In this case, the insured benefited from an "all-risk" insurance policy. The insured suffered damage to their roof during the 1998 ice storm and their insurance company refused to indemnify them on the grounds that the event at the source of the loss was excluded by the insurance policy. The Court determined that the ice storm did indeed represent a force majeure event for which the insured should be indemnified, unless they demonstrate that an exclusion clause was expressly and restrictively stipulated in the insurance contract. In fact, the Court stated that, in an "all-risk" insurance policy, it is necessary to favour the coverage rather than the exclusion. The insurer asserted that the damage did not result from the ice storm, but rather from a water leakage. This argument was ultimately rejected and the Court found that the insurer had to honour the insured's claim because the water damage resulted from the ice storm and the insurer's contractual exclusion was only applicable if the building was affected by a latent defect. In case of doubt, the insurance contract should be interpreted in favour of the insured.

d3296008 Canada Inc. c. Compagnie d'assurance Le Groupe Commerce[15], mentioned herein above, is also a good example of the rule that exclusion clause in an insurance contract must be interpreted restrictively. In this case, we recall that the insured was claiming coverage for food items in its refrigerators that perished due to a power outage following the 1998 ice storm. However, the insurance contract stipulated that losses caused by power outages were excluded. The Court determined that this part of the insured's claim was valid since the true cause of the loss was the ice storm. The insurer, having omitted to exclude damage resulting from an ice storm, therefore found itself obliged to indemnify its insured for the loss of perishable food items.

Accordingly, it can be ascertained that in cases where the insured had the foresight to purchase an insurance product covering losses related to business interruption that are not connected to physical damage to its property, this policy must be broadly interpreted and will therefore be likely to cover the current situation. If there are potentially applicable exclusions, but these are ambiguous or inconsistent with the application of another provision of the insurance contract, the Court's analysis will opt for an interpretation that favours the coverage.

Conclusion

The question of determining whether the current situation of the COVID-19 pandemic will give rise to an insured risk will depend on the conditions of the insurance policy and will require a case-by-case analysis. Companies seeking to be indemnified for business interruption resulting from such an event will have to verify if their insurance policy requires beforehand the occurrence of physical damage to the company's property, in which case such insurance will likely be of no avail. It will also be necessary to ensure that the event in question has not been specifically excluded from the insurance coverage. In the latter case, it is important to recall that in case of doubt, the Court will favour insurance coverage rather than exclusion.


[1] The authors would like to thank Elizabeth Gagné-Larose for her research and collaboration.

[2] Rémi Moreau, Assurances et gestions des risques, L'assurance des pertes d'exploitation, cette méconnue, vol. 76(2), 2008, p. 264.

[3] Rémi Moreau, Assurances et gestions des risques, L'assurance des pertes d'exploitation, cette méconnue, vol. 76(2), 2008, p. 266.

[4] Rémi Moreau, Assurances et gestions des risques, L'assurance des pertes d'exploitation, cette méconnue, vol. 76(2), 2008, p. 267, 268 and 269; Guillet v. Federated (La), compagnie d'assurances du Canada, SOQUIJ AZ-50100771, par. 23 and 24; Général Accident, compagnie d'assurances du Canada v. Machineries Tenco (C.D.N.) ltée, SOQUIJ AZ-03019030, par. 4; 3296008 Canada inc. v. Groupe Commerce (Le), compagnie d'assurances, SOQUIJ AZ-50130186, par. 31, 36 and 37; Soprema inc. v. Gerling globale (La), compagnie d'assurances générales, SOQUIJ AZ-50112871 (appeal dismissed), par. 21, 24 and 25.

[5] 3296008 Canada inc. v. Groupe Commerce (Le), compagnie d'assurances, SOQUIJ AZ-50130186, par. 14; and S.P.G. International inc. v. Compagnie canadienne d'assurances générales Lombard, SOQUIJ AZ-00021703, p. 11 (appeal allowed).

[6] Guillet v. Federated (La), compagnie d'assurances du Canada, SOQUIJ AZ-50100771 (see par. 5 and 14 to 21).

Note: The Court referred to the decisions Machineries Tenco (C.D.N.) ltée v. Général Accident compagnie d'assurances du Canada, SOQUIJ AZ-01026356 and S.P.G. International inc. v. Compagnie canadienne d'assurances générales Lombard, SOQUIJ AZ-00021703 and stated that they were distinguished from the case at bar because the insurance policies did not clearly state the necessity of the business interruption to be connected to damage to the insured's property. However, both decisions were overturned by the Québec Court of Appeal. See also: Général Accident, compagnie d'assurances du Canada v. Machineries Tenco (C.D.N.) ltée, SOQUIJ AZ-03019030, par. 4; 3296008 Canada inc. v. Groupe Commerce (Le), compagnie d'assurances, SOQUIJ AZ-50130186, par. 31, 36 and 37; Soprema inc. v. Gerling globale (La), compagnie d'assurances générales, SOQUIJ AZ-50112871 (appeal dismissed), par. 21, 24 and 25.

[7] 3296008 Canada Inc v. Compagnie d'assurance Le Groupe Commerce, J.E. 2002-1373.

[8] Guillet v. Federated (La), compagnie d'assurances du Canada, SOQUIJ AZ-50100771, par. 21.

[9]Rémi Moreau, Assurances et gestions des risques, L'assurance des pertes d'exploitation, cette méconnue, vol. 76(2), 2008, p. 281.

[10] Commercial and Contract Law Implications of the Covid-19 Epidemic, p. 5 and 6.

[11] Commercial and Contract Law Implications of the Covid-19 Epidemic, p. 5 and 6.

[12] Civil Code of Québec, SQ, 1991 ch. 64, art. 2464 al. 1; Sécurité Nationale v. Éthier, CanLII 15908, par. 11, 15 and 17; and Jean Louis BAUDOUIN, Patrice DESLAURIERS et Benoît MOORE, La responsabilité civile, 8e éd., vol. 2 - Responsabilité professionnelle, Cowansville, Éditions Yvon Blais, 2014, par. 2-532.

[13] Montcap Financial Corp. v. Boréal assurances inc., SOQUIJ AZ-50187568, par. 29; Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 R.C.S. 252, p. 22; and Howor v. Compagnie Mutuelle Wawanesa, 2001 CanLII 25133, par. 35.

[14] Howor v. Compagnie Mutuelle Wawanesa, 2001 CanLII 25133.

[15] 3296008 Canada Inc v. Compagnie d'assurance Le Groupe Commerce, J.E. 2002-1373.

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