In a previous article, we discussed why most business interruption policies will not cover business interruption losses caused by COVID-19. Since then, however, the Ontario Superior Court of Justice (the "Court") rendered a decision that may improve the possibility of coverage for such losses.
Our original analysis was based on cases in which Canadian courts interpreted the term "physical damage" to mean tangible physical damage to the insured property (e.g. fire damage). However, in MDS Inc. v Factory Mutual Insurance Company, the Court concluded that "physical damage" includes impairment of function or use of the insured property. In short, the Court concluded that coverage extended to a loss of use of the property, notwithstanding the absence of tangible damage.
The Court's decision is significant in the context of the COVID-19 pandemic because of the business interruptions that have been caused without the occurrence of tangible damage. Namely, the broader interpretation of "physical damage" can, in the same way, arguably apply to interruptions caused by the pandemic. Returning to the discussion from our previous article, a tenant in a commercial lease may be able to successfully claim coverage based on the delays of a supplier, or even closure of its own premises, resulting from the pandemic.
It is important to note that the Court's decision was based on the particular facts of the case and the wording of the particular insurance policy. It is also important to note that there is a likelihood that the Court's decision will be appealed. Accordingly, the decision is not determinative of similar coverage under all forms of business interruption insurance policies.
Conclusion
The Court has provided a new decision that may comfort commercial tenants holding business interruption insurance, but the scope of coverage under such policies will continue to be the subject of judicial scrutiny. Parties who intend to rely on such policies in relation to COVID-19-related claims would be well-advised to review their coverage with legal counsel and their brokers, as well as to stay abreast of the ongoing developments on this dynamic issue.
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