Introduction
As the coronavirus pandemic (COVID-19) continues to impact businesses, insurance companies continue to face business interruption claims. As most commercial property policies typically insure against “direct physical loss to the property”, an inquiry into causation is required to determine coverage. Determining causation and coverage can become more complicated where there are multiple potential causes of the loss.
Take, for example, the following scenario: Business A owns a piece of machinery, which is part of the insured premises. Prior to the pandemic, that machinery suffered direct physical damage, necessitating temporary closure of the business. Business A is awaiting completion of the repairs, which are scheduled to take two to three weeks. The losses associated with the equipment downtime and business closure are not COVID-19 related and fall within the scope of business interruption coverage. However, within the original two to three week timeframe, COVID-19 occurs and the repairs can no longer be completed on time due to closure of the equipment repair shop. The two to three week period of business interruption is extended to six months. Business A claims for business interruption losses for the six month period, claiming a COVID-19 related loss.
This scenario raises an interesting question of potential concurrent causation and the extent of business interruption coverage available for this loss.
Concurrent causation
Unlike tort causation, in insurance law, causation is used to signify when a payout is triggered under an insurance policy.[1] Concurrent causation occurs when a loss is brought about through a combination of two or more potential causes.[2]
In the leading case of Derksen v. 539938 Ontario Ltd.,[3] the Supreme Court of Canada addressed concurrent causation in insurance claims. The court considered a scenario where the loss was caused by the combination of a worker’s negligent site cleanup (covered under a commercial general liability policy) and that worker’s negligent operation of an automobile (covered under an automobile liability policy).
The court held that the end loss was the result of two concurrent causes. Both policies provided coverage and had to respond to the loss because both causes acted together concurrently to produce the loss.
The court reiterated the principles of policy interpretation, namely that coverage clauses are interpreted broadly while exclusion clauses are interpreted narrowly. A presumption that coverage is excluded in situations of multiple independent concurrent causes is inconsistent with this interpretive rule and creates an ambiguity in the policy to be interpreted in favour of the insured (contra proferentem). As a result, without clear exculpatory language to deny coverage in a situation involving concurrent causes, if one cause is a covered cause and the other cause is excluded, the insurance policy must still respond to the loss and provide coverage.
Identifying concurrent causes
Given the decision in Derksen, insureds will be motivated to characterize their loss as a concurrent causation situation in order to take advantage of the liberal approach to coverage – i.e. as long as one cause is covered, the insurance policy must respond.
In the context of property claims, for causes to be concurrent, insurers should examine the “temporal and sufficiency dimensions” of the various alleged concurrent causes in order to “assess whether the causes have some relationship between them such that they are truly concurrent and not merely totally unrelated causes occurring in a series.”[4]
For the temporal dimension, the causes can be serial or parallel. Serial causes occur in a sequence over time (i.e. lightening and then flood) while parallel causes occur at the same time (i.e. fire and smoke).[5] The sufficiency dimension involves examining the alleged concurrent causes to ensure that each must be somehow necessarily involved in bringing about some of the end result loss.[6]
Policy terms and contracting out of concurrent causation
Pursuant to Derksen, where the policy language does not oust coverage, the insurer may be liable for the entirety of a loss when the covered peril operates concurrently with an excluded peril.
In Lowe v. Security National Insurance Company,[7] the court dealt with a loss resulting from the escape of water from a plumbing system (an insured peril), which caused damage from water below the surface of the ground (an excluded peril). The causes were equally necessary for the damage to have occurred and the loss could not be apportioned. The court noted there was no language in the policy expressly stating that there is no coverage for otherwise insured perils where the loss is caused “directly or indirectly” or “caused by, resulting from, contributed to or aggravated by” the excluded perils.
Given the decision in Derksen, many insurers now incorporate wording in their policies to oust coverage where an excluded cause is one of the a concurrent causes. The following wording has been accepted by the courts:
We do not cover the following things if they happen at the same time as an excluded peril or cause of loss above or elsewhere in this policy or contribute with an excluded peril or cause of loss to produce a loss.
There shall in no event be any liability hereunder in respect to loss due to physical damage to the property insured caused by (cessation of work or by interruption to process or business operations or by change in temperature) whether liability with respect thereto is specifically assumed now or hereafter in relation to any peril or not.
Caused directly or indirectly …
We do not insure for such loss regardless of the cause of the excluded event, other causes of the loss, or whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.
Conclusion
Returning to the example above, Business A’s claim for business interruption could raise the spectre of concurrent causes, one being the direct physical loss to the equipment resulting in temporary closure of the business and one being the COVID-19-related repair delays. From a temporal perspective, these causes are serial. However, whether the latter cause meets the test of causal sufficiency to constitute a true concurrent cause is questionable. The repair shop delays are a subsidiary cause, totally reliant upon the covered cause (i.e. the initial direct damage to the equipment). Business A’s claim of concurrent causes could fail on this ground.
Further, as discussed in previous communiques, as the COVID-19 repair shop delays did not result in “direct physical loss” to the insured premises, there is no business interruption coverage under the typical policy wording. The rule in Derksen applies in the context of cases where covered perils operate concurrently with excluded perils. For this reason, Business A is unlikely to obtain the benefit of the liberal approach to coverage set out in Derksen.
Finally, if Business A has a policy that somehow provides coverage but contains an exclusion clause for pandemics, to avoid the Derksen situation, the insurer of Business A will have to refer to appropriate exclusionary language in the policy to circumvent what could otherwise be a grant of coverage in Business A’s favour in those particular circumstances.
[1] Erik S. Knutsen, “Causation in Canadian Insurance Law” (2013) 50:30 Alta LR 631 at 632.
[2] Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277.
[3] 2001 SCC 72.
[4] Supra note 1 at 649.
[5] Supra note 1 at 649 – 650.
[6] Supra note 1 at 650.
[7] 2006 ABPC 249.
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