As the worldwide pandemic continues to rage on, losses faced by businesses increase without any certainty as to when they might end. Such expansive loss has raised many questions for insurers facing potential claims for coverage. One such question is whether “all peril” or “all-risk” policies extend to provide pandemic coverage?
Typically, business interruption insurance is part of a policy issued on either an “all perils” basis or a “named perils” basis. An all perils policy covers every fortuitous risk to an insured, subject to the conditions and exclusions contained in the policy. A named perils policy contains a list of specifically insured events, thereby excluding any peril not listed.
In short, COVID-19 will likely fall within coverage of an all perils policy, subject to conditions and exclusions contained in the policy. Many all perils policies contain exclusions for contagious diseases or viruses, which could exclude the COVID-19 pandemic.
All Perils Coverage
Generally all perils coverage contains wording similar to the following: “This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.”
Fortuity Requirement
All perils coverage does not encompass every conceivable type of loss. To be considered a covered peril pursuant to standard all perils policy language, the loss must be fortuitous.[1] A fortuitous loss is one that is not expected or intended by the insured, such as losses by theft,[2] fire and flood.
All perils policies have been held to cover environmental contamination where the policy did not include contamination as peril specifically excluded from the policy.[3] In this situation, it remains open to the insurer to take the position that the other conditions of the policy, such as fortuity are not satisfied, but the starting point may be that contamination is a covered peril.
If a pandemic is considered fortuitous, it will likely be a covered peril. Prior to the first case of COVID-19 in Wuhan, China in late December 2019, there was no indication that a pandemic was expected. For policies incepting after COVID-19 became a known condition, there may be an argument about whether the pandemic can be considered fortuitous. This is particularly true for any policy that incepted after the World Health Organization declared a pandemic on January 30, 2020.
Physical Damage Requirement
Where a policy does not contain any exclusions relating to pandemics, viruses or contagious diseases, whether or not coverage for a COVID-19 related loss exists may depend upon whether there has been physical damage to insured property.
There is limited guidance in the case law as to whether losses caused by COVID-19 constitute “physical loss” or “physical damage”.
MDS Inc. v. Factory Mutual Insurance Company (FM Global),[4] a recent case of the Ontario Superior Court, mentioned in previous Communiques, dealt specifically with an all risks policy and what constituted resultant physical damage in the context of that policy. It is important to note that the definition of physical damage under consideration was not in relation to the insuring agreement, but rather to an exception for an exclusion that dealt with “resulting physical damage.”
In MDS, FM issued an “All Risks” policy to MDS covering against losses from all risks of physical loss or damage except as excluded. This policy covered loss of profits to MDS flowing from physical damage directly resulting from physical loss or damage of the type insured by the policy. The court considered the case law in Canada regarding the meaning of resulting physical damage and determined there is no “bright line of single case” that determines the meaning. Rather, there is a range of factual circumstances and a variety of policy language that may be determinative.
The court’s determination in MDS was guided by the particular facts of the case, including the possibility of a nuclear meltdown if the leak of water, which caused the shut down, had continued. The court held that the order to shut down the plant until its safety protocol was met was a declaration of inhabitability amounting to direct physical loss until the safety conditions could be satisfied.
A Nova Scotia court held that a vandalized oil line, creating an oil spill under the plaintiff’s business, which caused an overpowering smell of oil in the business constituted physical damage to both the land and the restaurant in the context of an all risks policy.[5] The fumes “physically damaged the contents of the business” as the continued operation of the restaurant was impossible.
Courts in the United States have found gasoline leaks to constitute physical damage based on the loss of use.[6] The threat of the destruction caused by the gasoline was a factor in the court’s consideration.
Another US decision found that the presence of E.coli bacteria within a well, causing the house inhabitants to become ill, could constitute physical loss or damage to a structure.[7] The court found that the key issue was whether the functionality of the property was nearly eliminated or destroyed, or whether the property was made useless or uninhabitable.
Similarly, a New Jersey court noted that non-structural property damage cases have held that buildings rendered uninhabitable by dangerous gases or bacteria have suffered direct physical loss or damage.[8] The New Jersey courts have held that an ammonia discharge in a building was direct physical loss or damage because the ammonia made the facility unfit for occupancy until the ammonia dissipated.[9]
Whether these decisions will be determinative in the context of a COVID-19 contamination remains to be seen. Cases involving gasoline and nuclear contamination are arguably distinguishable from COVID-19 as the virus does not have the ability to physically injure a building’s structure. Further, when interpreting an all-perils policy in the context of contamination, the courts have specifically cautioned that the determination of coverage is a factual analysis that may differ depending on the unique circumstances of each case.
Conclusion
If an all perils policy does not contain an exception for contagious diseases or viruses, COVID-19 is likely to constitute a covered peril. Whether indemnity is required under the policy may fall to a determination of whether contamination by the virus can be considered physical damage within the meaning of the policy.
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[1] British & Foreign Marine Insurance Co. v. Gaunt, [1921] 2 A.C. 41.
[2] Fandasia Restaurant Ltd. v. Strathcona General Insurance Co., 1984 CarswellBC 796.
[3] United Technologies Corp. v. American Home Assurance Co., 989 F.Supp. 128
[4] 2020 ONSC 1924.
[5] Jessy’s Pizza v. Economic Mutual Insurance Co, 2008 NSSM 38.
[6] Western Fire Insurance Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo. 1968).
[7] Motorist Mutual Insurance Co. v. Hardinger, 131 F. App’x 823, 824-26 (3d Cir. 2005).
[8] Gregory Packaging Inc. v. Travelers Property Casualty Co. of America, 2014 WL 667 5934.
[9] Ibid.
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.
