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Nearly three years after the onset of COVID-19 pandemic in Canada, an Ontario court has released the first substantive decision addressing a claim for business interruption loss coverage under the terms of a commercial property policy. In SIR Corp v. Aviva Insurance Company of Canada, 2022 ONSC 6929, the Ontario Superior Court dismissed the application of a policyholder for COVID-19 related business interruption losses on the basis that such losses were outside the ambit of the policy. The decision – though the first of its kind in Canada – is consistent with a long line of American authorities finding that such losses, absent extraordinary language, are not covered under commercial property policies.
SIR Corp is a Canadian owner and operator of restaurant chains. In March 2020, SIR Corp was required to close its restaurants and shift to providing take-out services where possible as a result of various government closure orders issued to slow the spread of COVID-19.
SIR Corp was insured under an “all-risks” commercial property policy. The policy contained three principal insuring agreements which provided coverage for: (i) direct loss or physical damage to property, except as excluded; (ii) lost business income incurred where property is destroyed or damage by perils insured; and (iii) necessary extra expense incurred to continue normal business following damage or destruction of property by perils insured the Policy.
The Policy also contained three endorsements which provided coverage as follows:
14. CIVIL OR MILITARY AUTHORITY
This Policy insures loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil or military authority to retard or prevent a conflagration or other catastrophe.
15. INTERRUPTION BY CIVIL OR MILITARY AUTHORITY
This Policy is extended to include the loss sustained by the Insured during the period of time while business is affected as a result of order of civil or military authority, but only when such order is given as a direct result of loss or damage of the type insured by this policy, or threat thereof. Maximum 8 weeks.
This Policy is extended to include the loss sustained by the Insured during the period of time when as a result of a peril insured or threat thereof, ingress to or egress from any part of premises of the Insured or of others is prevented or impaired, including prevention or impairment of such access by any civil or military authority. Maximum 8 weeks.
Neither COVID-19 nor the government closure orders caused any damage to SIR Corp’s property and, on that basis alone, the claim must fail.
In the wake of the government closure orders, SIR Corp made a claim under its property policy for lost business income as well as for some food spoilage costs said to have occurred as a result of the government closure orders. SIR Corp argued that the claim was covered under the endorsements as the coverage provided was broader than, and independent of, the coverage provided under the main insuring agreements in the policy. In particular, SIR Corp argued that it did not need to show that it had sustained any direct physical loss or damage to property to engage coverage.
The Court rejected SIR Corp’s interpretation by applying well-settled principles of policy interpretation that the endorsements were to be interpreted in connection with the policy documents as a whole. In this case, the binder made clear that “perils insured” was to mean “All Risks of Direct Physical Loss or Damage – except as Excluded”. The endorsements each incorporated that requirement such that physical loss or damage was a necessary element to establish coverage for any loss.
In this case, the Court concluded that SIR Corp’s claim failed on the causation analysis. Neither COVID-19 nor the government closure orders caused any damage to SIR Corp’s property and, on that basis alone, the claim must fail.
The Court further held that, for the purposes of Endorsement 14, there was good reason to doubt that the government closure orders were an order to prevent or retard an “other catastrophe”. While in some contexts COVID-19 may be viewed as a catastrophe, the use of the term in the policy in conjunction with the word “conflagration”, required that the order in issue to be one directed at preventing or retarding large scale destruction of property.
In result, there was no coverage for SIR Corp’s claim under the policy and the Application was dismissed.
The SIR Corp decision is not the last word in Canada on coverage for business interruption loss under commercial property policies. The decision itself is currently under appeal and a host of other class proceedings raising similar claims against a number of insurers remain pending before the courts. Nevertheless, the decision in SIR Corp is welcome guidance from the Ontario courts regarding how COVID-19 related losses will be approached from a policy interpretation standpoint.
Ellen Snow. Editor in Chief in The Legal Industry Reviews Canada. Partner at Clyde & Co in the Toronto Commercial Litigation group. She has a Juris Doctor from the University of Toronto. Ellen focuses on cyber security and privacy issues, considering immediate containment and remediation, notification of affected parties, and defending any subsequent regulatory proceedings. She has experience in both domestic and international arbitration.
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