Whither Direct Physical Loss Or Damage In Canada

• Published date: 23 March 2021
• Subject Matter: Insurance, Coronavirus (COVID-19), Insurance Laws and Products, Insurance Claims
• Law Firm: Blaney McMurtry LLP
• Author: Mr Dominic Clarke and Anthony H. Gatensby

Introduction

The level of disruption unleashed by the COVID-19 pandemic on commerce worldwide has been, indisputably, unprecedented. Canada is no exception. The Canadian Federation of Independent Businesses recently estimated that more than "200,000 Canadian Business could close permanently during the COVID-19 crisis",¹ a figure which could grow in the event that restrictive shutdown orders continue to be issued by Canada's provincial and municipal governments.

There is no doubt that, by design, the insurance industry is better placed than many other business sectors to weather major loss events, including a pandemic such as COVID-19. That being said, insurers face varying levels of exposure from jurisdiction to jurisdiction depending on the legal framework underlying property and casualty insurance. Unfortunately, some of the most critical legal issues which will help define that exposure have yet to be finally determined by Canadian courts, leaving insurers, and the insurance bar generally, attempting to anticipate how the bench will respond.

With an onslaught of both individual and class actions stemming from the COVID-19 pandemic, this chapter aims to provide some insight into how Canadian courts may interpret certain insuring agreements in relation to COVID-19 losses. Specifically, we have analysed one of the recent decisions from the trial court in Ontario which has been and continues to be cited by policyholder counsel as representing a significant extension of coverage: MDS Inc. v. Factory Mutual Insurance Company (FM Global) (hereinafter, "MDS").²

The Concept of Direct Physical Loss or Damage

One of the most prominent issues facing insurers with Canadian risks is whether or not a property policy, which is commonly triggered upon the occurrence of direct physical loss or damage, ought to respond to a claim of losses due to COVID-19. In approaching this question, insurers need to understand what facts the claim for coverage arises out of - what is the "loss" complained of?

At the outset, a distinction must be drawn between those insureds who have presented claims due to the presence of the virus that causes COVID-19 (SARS-CoV-2) itself on their premises and those who have presented claims based on the indirect effects of the pandemic generally. The majority of claims being presented are on the basis that the insured's premises were closed, often in response to a government order, for the purpose of stemming community transmissions and enforcing social distancing protocols. These claims do not arise out of an actual incident involving the presence of the SARS-CoV-2 virus on insured premises.

The closing of businesses because of an event occurring off-premises, or for reasons based in social responsibility, have traditionally been accepted as pure economic losses that do not fulfil the "direct physical loss or damage" requirement. These scenarios are more appropriately classified as simple "loss of use" cases, which are also frequently excluded out of an abundance of caution, rather than cases of "physical loss or damage"

For example, in Source Food Technolog y, Inc. v. United States Fidelity & Guaranty Co., ³ a decision from the US Court of Appeals, Eighth Circuit, the insured could not import beef products from a Canadian supplier due to the general scare regarding mad cow disease. The insured argued that the product had lost its utility and was therefore physically useless. The Court disagreed, suggesting that this proposition went too far and conflated "loss of use" with "physical loss". The majority of recent American jurisprudence which has been generated in the past year has similarly concluded there is no access to coverage in relation to general shutdown orders or the corresponding economic downturn.

Adopting this reasoning, and while always deferring to the wording of the specific policy at issue, Canadian insurers have generally denied claims for simple loss of use where the policy at issue requires a physical element to trigger coverage.

The question therefore remains...