Mark left by post pandemic litigation surge likely similar to that after 9/11, say lawyers
Like a bank, an insurance company’s business model relies on the fact that every customer is not likely to withdraw all their money or make a claim at the same time. For certain types of insurance claims, COVID-19 may resemble that run-on-the-bank scenario, and lawyers are expecting the wide-ranging nature of the pandemic to lead to a flood of insurance litigation.
“I think insurers, generally, are going to be facing the full gamut of potential claims on policies,” says Christine Viney, a Bennett Jones LLP partner in Calgary, whose commercial litigation practice involves insurance and professional negligence matters.
Lawyers also say the pandemic will lead to a reorientation of insurance products, like the adaptation of the U.S. insurance system after 9/11, which included the emergence of terrorism insurance. But as the virus infection rate and death toll climbs, there’s a live debate on which COVID-19-related economic losses will be borne by insurance providers.
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A pandemic is known in the insurance industry as a “clash event,” says Eric Knutsen, a Queen’s law professor and insurance law and tort expert. It affects a variety of people, across borders, who will make claims against multiple lines of insurance, all at one time. In the wake of COVID-19, policy holders are likely to find that many insurance policies have exclusions for pandemics, just as they have exclusions for situations such as an earthquake or nuclear-war fallout, says Knutsen, who was former associate dean of the Queen’s law faculty and has co-authored insurance law textbooks for the U.S. and Canadian systems.
Lawyers told Canadian Lawyer that Canada’s shutdown of all non-essential businesses will lead to an avalanche of claims under certain types of commercial property policies: business interruption insurance, contingent business interruption insurance, ingress egress insurance and civil authority coverage.
With business interruption insurance, businesses can recover lost profits if an insurable event causes them to shutter operations. But because commercial property policies require a direct physical loss or damage, the key question is whether a pandemic will qualify because it lacks the tangible property damage a fire or flood would leave behind, Knutsen says.
In April, the Insurance Bureau of Canada stated that “most commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19,” reported Insurance Business Canada. The reason: The interruptions lacked “physical damage.”
On the other hand, the case law informing whether a business interruption qualifies as direct physical loss or damage is developing during the pandemic. A March 30 Ontario Superior Court decision concerning a radioactive leak from a nuclear reactor will “play a central role” in how COVID-19 business interruption claims play out, according to an article by Zoran Samac and Rohan Haté, lawyers at McPhadden Samac Tuovi Haté LLP in Toronto.
In MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, a radioactive leak forced a shutdown at the Nuclear Research Universal Reactor in Chalk River, Ont., which sold isotopes to MDS Inc. MDS had an “all-risks insurance policy” with FM Global, and it sued the insurer for lost profits. FM Global argued that “resulting physical damage” should be defined narrowly and require “actual physical damage,” while MDS argued that the definition should encompass “loss of use.” Justice Janet Wilson decided on the broader definition, “to include impairment of function or use of tangible property,” write Samac and Haté.
Apart from whether a pandemic-induced business stoppage applies as a physical loss, there is another complication with business interruption insurance, says Knutsen. Interruption means a complete halt. Having clientele radically reduced and income slowed to a dribble doesn’t cut it in most policies, he says.
“I can see business interruption claims keeping lawyers busy, but they've got those two big hurdles to get around,” he says.
Another type of claim lawyers say will skyrocket is contingent business interruption, which is when the interruption happens somewhere in the supply chain, which prevents the reliant business from functioning. Ingress and egress insurance applies to a situation where customers are physically prevented from entering the business; for example, a restaurant on a street on which the city has a long-term construction project. Knutsen notes that “very few policies” have ingress egress coverage.
Finally, civil authority coverage is designed for when a government effectively shuts down a business. “Think quarantine,” says Knutsen. “You cannot go into that store, it's quarantined. The business income stream drops, the insurance kicks in.”
Although these commercial property insurance policies will be relevant, policy holders may be out of luck for COVID-19-related losses. Knutsen notes that many of these policies have exclusions for viruses and diseases.
“But I can see lawyers grasping for coverage for their clients trying to find a way to make some of these standard commercial coverages work because people are really losing their income,” he says.
In liability insurance, the pandemic will have insurers looking closely at pollution exclusions, says Viney. Policy wording can define pollutants narrowly, such as smoke vapours, soot, noxious fumes, gases and chemicals, but other policies are broader and “might be more applicable,” she says.
“There's a very broad range of pollution exclusions and policies out there right now,” says Viney. “That'll be an interesting question when we do get into potential claims under pollution policies, whether or not something like this is going to count as a pollutant.”
The experience of the insurance industry and its customers — what’s denied and what’s covered — will lead to an evolution in product offerings, says Richard Swan, co-head of Bennett Jones’ litigation department and co-chairman of the firm’s commercial litigation practice group. After the pandemic subsides, with the understanding that another could arise in the future, businesses and organizations are going to take a closer look at their insurance policies, their coverage and terms and exclusion provisions, and a “market negotiation” will follow where insurance companies adjust their product offerings, he says.
“Insurance products do have a habit of coming forward to address a need in the market and — priced accordingly, of course — there will be new products or at least adjustments to current products that you see in the industry,” says Swan.
COVID-19’s effect on insurance has a parallel in the terrorist attacks of Sept. 11, 2001, says Knutsen. At that time, he was practising tort and insurance litigation at Paul Weiss LLP in New York, where he dealt with many 9/11 cases. Similarly, after 9/11, there was a spike in business interruption, ingress and egress, civil authority and contingent business interruption claims. The same was true following Hurricane Katrina, he says.
“If I had advice to lawyers in Canada . . . it would be look south to the various disasters there for how the insurance practice and the case law responded,” he says.
9/11 and Hurricane Katrina
Queen’s Law Professor Eric Knutsen says a preview for how COVID-19-related insurance claims will play out can be found in the aftermath of these two disasters.
Katrina
Insured losses: US$82 billion
Source: Insurance Business America
9/11
Insured losses: US$45 billion
Source: AON’s Terrorism Risk Insurance 2019 Report
9/11 and Katrina gave rise to claims that:
- were individually large, collectively massive (led to disputes and put strain on industry)
- were like other claims, causing claims handlers to be conservative, so other policy holders didn’t spot favourable claims positions and demand similar treatment
- involved newer forms, with broad coverage, with little case law to serve as guide
- made as financial markets — in which insurance companies are heavily invested — were "retrenching dramatically.”
Source: Business Income Coverage in the Post-9/11 World: How Insurance Companies Have Changed the Claims Handling Playbook Since 9/11 and Hurricane Katrina By Richard Lewis and Marshall Gilinsky
COVID-19: economic turmoil
3,100,000 – Canadians who lost job or had hours reduced
1,000,000 – Canadians no longer employed
21.6 per cent – Percentage decline in Canadian stock market in Q1
8.5 per cent – Percentage Canadian dollar depreciated against U.S. dollar in Q1
*Statistics Canada