The closing of businesses ordered by the Quebec government has caused a major interruption of economic activity and has resulted in significant financial losses for many Quebec businesses.
Affected businesses should look into whether they have an insurance policy that covers losses suffered as a result of a pandemic. In this article, we will consider business interruption insurance and the legal principles that apply to the interpretation of insurance policies that can allow businesses to benefit from the protections found therein.
Business Interruption Insurance
This type of insurance allows the insured to be put back into the situation it was in before it suffered a loss. Thus, it can compensate loss of revenue, salaries, a business’ fixed costs (taxes, rent, cost of upkeep of goods and vehicles not affected by the damage, interests on loans and hypothecs, et cetera). It can also cover certain expenses that the insured incurred after the damage.
Business interruption insurance and property insurance are distinct types of coverage. For example, after a major fire, property insurance will cover loss of physical property, including the premises and the goods found thereon (such as merchandise, furniture, equipment, et cetera). Business interruption insurance, on the other hand, covers lost or reduced production, reduced earnings, and fixed costs that a business must continue to pay.
Although they are distinct, whether an insured is covered by business interruption insurance often depends on the occurrence of a claim covered by property insurance. For business interruption insurance to apply, certain insurance policies require that there be a direct loss (or direct damage) that is covered by the property insurance policy. In this context, business interruption insurance will cover interruptions that flow directly from the loss or damage to the goods in question.
However, there are policies in which business interruption insurance is not a tributary of damage to (or loss of) the insured’s property. Businesses can purchase coverage for special risks, including for diseases and epidemics, cancellations of events, inability to access their premises following a natural disaster or government orders restricting access to their premises. It is therefore important to carefully read one’s insurance policy in order to ascertain whether this kind of special coverage is included.
Important Principles of Insurance Policy Interpretation
When the text of an insurance policy is ambiguous and must therefore be interpreted, the courts will rely, first and foremost, on general principles of contractual interpretation. Among other things, they must decide what the common intention of the parties was when the contract (i.e., the insurance policy) was formed. The circumstances surrounding the formation of the contract can be telling in this regard. The parties’ intention may be gleaned from correspondence exchanged prior to the formation of the contract, in their previous agreements, or in the documents that accompany the contract. The courts will favour an interpretation that is in line with the parties’ reasonable expectations and thereby avoid a result that the parties would not have envisaged at the time the policy was agreed to.
Should there be any ambiguity once general principles of interpretation are accounted for, the courts will interpret the policy in the insured’s favour. Clauses that protect the insured must be interpreted widely and clauses that create exceptions to such protections must be interpreted narrowly. These principles are a reflection of the unequal bargaining power of the insurer and the insured. In fact, in the majority of cases, the insurer drafts the policy, which the insured must adhere to. This inequality of bargaining power exists whether or not a broker was involved, and whether or not that broker negotiated the policy in order to adapt it to the insured’s needs.
In MDS Inc. v. Factory Mutual Insurance Company (FM Global), a decision of the Ontario Superior Court of Justice rendered on March 30, 2020, the Court adopted a wide interpretation of what qualifies as physical damage, thereby including loss of the function or use of a building. If such an interpretation were adopted by Quebec courts, this would allow claims for businesses having suffered operating losses resulting from a loss of function or use of the insured premises.
Superior Force (Also Known as Force Majeure)
Several authors in the legal sphere have recently considered the question of whether the COVID-19 pandemic can be considered a case of superior force and, if this is the case, what the impact of this would be on businesses’ contractual obligations.
Superior force is a concept set out in article 1470 of the Civil Code of Quebec. It is described as an irresistible and unforeseeable event. This definition can include external causes with these characteristics. In principle, article 1470 of the Civil Code of Quebec allows a debtor to avoid liability when the execution of its obligation has been made impossible by an event that it could not foresee and could not guard against.
In insurance law, article 2464 of the Civil Code of Quebec provides that the insurer is bound to make reparation for the injury suffered by the insured as a result of superior force. However, the parties can contract out of this obligation. Thus, whether or not an event qualifies as a superior force, an insured should always verify its policy in order to properly understand what warranties and exclusions apply to a loss that could stem from force majeure.
Businesses that have insurance coverage that applies in pandemics can rely on such coverage in order to minimize their losses. To determine whether a given business can do so, its policy will have to be examined in order to determine what warranties, exclusions, and exceptions apply.
As for claims made to insurers, it is important to abide by the notice requirements provided in the insurance policy and the deadlines applicable to sending and receipt. Moreover, insurance policies contain provisions obliging the insured to take steps to minimize its losses. These steps should be taken as soon as possible and documented. Financial repercussions suffered by businesses should also be documented diligently in their books and records. Differential and abnormal costs, as well as all commercial impacts should be documented separately from normal operating costs.
The authors wish to thank Émilie St-Pierre for her precious contribution to this text.
3 Ibidat 267; Sean L. Gosnell, Bruce J. Webster & John S. Siegel, Business Interruption Insurance, 2nd ed (Aurora (ON): Canada Law Book, 2006) at 37-38; Patrick Davison & David Powell, “Fire and Wire: Canadian Business Interruption Insurance in the Age of Cyber-Risk and Climate Change” in The International Comparative Legal Guide to: Insurance & Reinsurance 2018, 7th ed (London: Global Legal Group, 2018) 14 at 16.
4 Supranote 1 at 276, 281; “Fire and Wire: Canadian Business Interruption Insurance in the Age of Cyber-Risk and Climate Change”, supra note 3 at 16; Douglas Berry, “Business Interruption for Denial of Access to Insured Property” (2001), online : International Risk Management Institute
5Arts 1425-1432 CCQ; Progressive Homes Ltd. v Compagnie canadienne d’assurances générales Lombard, 2 SCR 245 at para 23 [Progressive Homes]; Exportations Consolidated Bathurst Ltée v Mutual Boiler and Machinery Insurance Co.,  1 SCR 888 at paras 900-902 [Consolidated Bathurst].
9Art 1425 CCQ ; Progressive Homes, supra note 5; Co-operators Compagnie d’assurance-vie v Gibbens,  3 SCR 605 at para 26 [Gibbens]; Non-Marine Underwriters, Lloyd’s of Londonc. Scalera,  1 SCR 551 at para 71 [Scalera]; Consolidated Bathurst, supra note 5 at 901.