The current COVID-19 pandemic has interrupted society in a myriad of ways. While many of us have experienced loss of income due to the pandemic, businesses have suffered in unique ways. Whether or not a business remains open depends greatly, at least in Canada, on the type of business it is and the geographic location of its operations. While the tourism and hospitality industries have taken a particularly hard hit, logistics providers and construction companies have remained largely open and perhaps busier than ever. Where businesses are forced to close or reduce their sales due to the pandemic, the natural inclination of any business owner would be to seek compensation through their business interruption insurance. However, as the below sampling of American jurisprudence demonstrates, whether an insurer is obligated to provide coverage is largely a matter of contractual interpretation. Underwriters are well-advised to ensure that their policies contain clear and unambiguous language of what is insurable and what is not.
In Sunstone Hotel Investors Inc. v Endurance American Specialty Insurance Company[1] a California Federal Judge denied an insurer’s motion to dismiss a lawsuit brought by the plaintiff hotel investment trust. The action related to a denied insurance claim for business interruption coverage resulting from the hotel’s closure to remediate a COVID-19 outbreak. The court employed the “ordinary rules” of contractual interpretation and found that the policy was ambiguous. As such, the court interpreted the contract with a view to protecting the reasonable expectations of the insured. The court ultimately found that if the insurer wished to impose conditions on an insured’s ability to obtain coverage, it should have done so in a clear and unambiguous way. Read more in our related blog article on business interruption coverage.
Similarly, in Derek Scott Williams LLC et al v The Cincinnati Insurance Co.[2] an Illinois Federal Judge flatly rejected an insurer’s motion to dismiss an action related to denied insurance claims. The proposed class action was brought by a dentist who filed for business loss coverage when their clinic was closed due to a government-issued order to slow the spread of COVID-19. The court noted weaknesses in the policy’s language regarding the types of loss that were covered. Notably, the court found that the word “loss” was used to define itself. While the insurer tried to construe the term ‘loss’ as requiring physical damage to the dental office, the plaintiff successfully argued that loss need not only be physical. In employing contractual interpretation, the court found that the insurer’s argument defied the very language in the policy.
Conversely, in Town Kitchen LLC v Certain Underwriters at Lloyd’s,[3] a Miami restaurant claimed business interruption losses arising from its closure due to the COVID-19 pandemic. Here, a Florida Federal Judge granted the insurer’s motion to dismiss the claim on the basis that the restaurant had suffered no physical damage. The insurance policy stated that a business suspension must be caused by direct physical loss of, or damage to, the property in question. Ultimately, the court drew upon the various considerations of this issue in other courts and found that the weight of previous federal court rulings were against the insured. In so finding, the court stated that a direct physical loss should not be conflated with a loss caused by something, such as a virus. The court found that the restaurant had not changed, the world around it did and that this was outside the ambit of the policy coverage, akin to a city implementing a zoning change or street closure.
The insurer was also successful in 7th Inning Stretch LLC, et al v Arch Insurance Co., et al.[4] In this case, the owner of a Michigan minor league baseball team filed an insurance claim when a state-wide emergency order prevented the baseball season from proceeding. The owner’s claim was denied. In a very brief decision, U.S. District Judge Wigenton granted the insurer’s motion for judgement based only on the written pleadings. Similar to Town Kitchen, above, the court found that the plaintiff’s insurance policy was unambiguous and only covered business losses to the extent that there was physical loss or damage to the plaintiff’s property. The court took a very practical approach in its view that the presence of a virus which harms humans, but does not physically alter structures, does not constitute insurable property loss or damage. The court cited a variety of case law to support its position and expressed sympathy for the losses that businesses have suffered due to the pandemic.
In light of the foregoing, it seems clear that litigation arising from denied business interruption insurance coverage will be determined based on contractual interpretation principles. While the American approach to contract interpretation seems to focus on the plain language meaning of the terms, the Canadian approach permits context, the factual matrix, and sound commercial principles to be considered as well to the extent they can assist the court in understanding the objective intentions of the parties.[5]
The foregoing highlight the need for unambiguous language related to business interruption coverage. The uncertainties caused by the COVID-19 pandemic to businesses and insurers is likely to remain an issue for the foreseeable future. Insurance underwriters should craft detailed and clearly-worded exclusion and business interruption clauses contemplating factors such as outbreaks, government lock-downs, or capacity restrictions. Including policy exclusions for these circumstances may ensure that insurers are not unexpectedly held liable for events that they were not prepared to cover.
[1] Sunstone Hotel Investors Inc. v Endurance American Specialty Insurance Company, SACV 20-02185-CJC.
[2] Derek Scott Williams PLLC et al v The Cincinnati Insurance Co., 20 C 2806.
[3] Town Kitchen LLC v Certain Underwriters at Lloyd’s, 20-22832-CIV-MORENO.
[4] 7th Inning Stretch LLC, et al v Arch Insurance Co., et al., 20-8161
[5] Creston Moly Corp. v Sattva Capital Corp., 2014 SCC 53. See also Resolute FP Canada Inc. v Ontario (Attorney General), 2019 SCC 60. These cases remind us that the factual matrix cannot overwhelm the words of the contract or support an interpretation that deviates from the text.
