In a democracy, there exists a presumption of freedom of operate within the context of the law. For those who run businesses, the ability to stay open at the hours of operation they chose was a given. The advent of COVID-19, however, has significantly disrupted that assumption. On March 23, 2020 the Ontario government announced all non-essential businesses would have to close their physical workplaces effective March 24, 2020 at 11:59. Since then, many have kept their doors shut in compliance with said mandate. This article will focus on some of the contentious issues small businesses have had to endure during this pandemic, specifically the controversy around business interruption (BI) insurance.
For the reader’s clarity, most small businesses are required to carry some type of commercial insurance. BI insurance is often part of a commercial property policy, and coverage is typically triggered when a business is unable to operate due to physical damage to insured property like a damaged building, equipment or stock. Given that many companies have suffered significant loss of income during COVID, it is not surprising that many are trying to collect on their coverage by filing BI claims.
While mass vaccinations have offered a promise of a return to normal, the reality is most businesses have already suffered catastrophic losses caused by business interruptions from the lockdown, staff falling ill, or loss of customers or suppliers. Small businesses have also been met with challenges over inconsistent and sometimes confusing government decisions on what can reopen and for how long; each time reopening just be shut down again a short while later when COVID cases rise. This has left many small businesses in jeopardy as they haemorrhage their funds and savings trying to stay afloat.
Unfortunately, many businesses are finding out BI insurance is an add-on to an existing business insurance policy they did not purchase, and were at no time directed or warned by their agent to the consequences of its absence. In other situations, owners are discovering that BI insurance does not cover the interruptions caused by COVID-19 as the damage is not considered “physical”. That means even those who are covered for BI insurance policies are not necessarily covered for interruptions due to the pandemic. As a result, small business owners throughout the country and across the world are grappling with denied claims that are collectively worth billions of dollars. Given that small businesses are a prominent driver of the economy, especially in places like Ontario, one has to wonder what the future of recovery will look like if they do not receive any support.
Rejecting policies in such a way has led to enormous backlash against insurance companies from clients who demand to be paid. Many see denying coverage on the basis of COVID-19 not causing physical damage is unfair. Many assumed their insurance policy would naturally cover them for this type of calamity purely out of common sense or a sense of fairness. Those who specifically bought the BI insurance add-ons were shocked to find out they were not covered based on the wording around “physical damage.” It is that exact type of wording that will soon be the focus of many courtrooms and legislatures, as the coverage available will depend on the wording of the policy, and there are many different wordings sold in the Canadian marketplace. The legal arguments will likely revolve around the head of damages associated with the word “physical,” as it is the most controversial. The question of whether or not COVID-19 causes physical damage is complex because of its ambiguity, which revolves around the fact that it is airborne, but it also rests on physical surfaces. Even if it does constitute physical damage, only some policies cover “potential” physical damage, which could mean proprietors face another legal hurdle to overcome by needing to demonstrate that COVID-19 was present at their establishment.
Other legal terms that will be the focus of debate are what qualifies as “named peril”, or what constitutes “loss.” Some insurance companies, in an attempt to limit the staggering payout that would ensue, are also claiming the pandemic was a “force majeure.” This is a term that refers to otherwise unexpected external circumstances, like an act of God or a hurricane, that excuse a party’s need to payout to a contract and meet their obligations. These examples are just a few questions that will engross the time of lawyers and politicians across the world for the foreseeable future, and the results will have a significant impact on both individuals and insurance companies alike.
In Canada, the US, and many other countries, the number of lawsuits against insurance companies is rapidly rising. In Canada, the law firm Merchant-Law has already begun collecting names in anticipation of a class action lawsuit against more than a dozen insurers in Canada. Clearly, litigation is one potential approach to resolve the issue. If indeed this were the course followed, the already staggering backlog in the courts would make access to justice untenable. An alternative to this is the approach utilized by the Ontario Association of Optometrists, which starting a petition urging their insurers to approve claims resulting from COVID. The Government of Canada has been urged to take action as well. This is not an uncommon approach as US politicians are proposing legislation to force insurance companies to pay. Although Canada has not seen such government intervention at this point, it would not be unprecedented to see them engage based on the public outcry. The idea of this comes from the precedent set after the Fort McMurray wildfire in 2016 where the Albertan government urged the insurance industry to extend the time that the insured had to file claims. To provide a level playing field between the insurers and the clients even further, the government threatened to amend legislation to ensure residents were being treated fairly if the insurance company did not comply.
With respect to the global response required for COVID-19, insurance companies will not simply rollover, as they themselves are concerned about the potential payout. Every insurance policy is unique, but the principle is the same: the premiums of many are paying for the losses of the few. The 2016 wildfires in Fort McMurray were the priciest insurance claims in Canadian history, but only impacted people in Northern Alberta so insurance customers in other part of the country had their premiums used to help pay for losses in Fort McMurray. Insurance companies are worried that even if they increase the premiums it would not be sufficient to cover the billions of dollars in claims that would be required to honour every applicant. Insurance companies warn that the entire industry could be crippled if they are forced to pay BI claims.
Instinctively most of us would side with the small businesses. Misleading fine print typically does not instil much sympathy, nor does the idea that giant insurance companies responsible for mitigating the damages of exactly this type of disaster are somehow unprepared. Yet from a legal standpoint the outcome is not clear, and based on the amount of claims, the courts and governments will be battling this out for a long time. Even assuming the small businesses won, the time it would take to get through the court system, as well as the attendant legal costs, may render the victory meaningless as many may be out of business by the time the result was delivered.
In order to alleviate the problem, we must find an alternative approach that can provide effective and efficient results. The first answer to such a problem is mediation. Those who make a BI claim do not want to be embittered into a litigious war, and would likely accept alternative options such as those offered by alternative dispute resolution (ADR). While ADR denotes a wide range of dispute resolution processes and techniques that act as a means for disagreeing parties to come to an agreement short of litigation; mediation is particularly beneficial in the BI insurance debacle for a number of reasons.
First, it keeps the process and solutions in the hands of the parties involved. It empowers all of the parties to create a solution that is workable to their unique claim and not specifically based on the law. This becomes particularly important because neither the insurer nor the insured know which side the lawsuits or government action may support, so there is motivation for both sides to collaborate.
Second, mediation is far more efficient and affordable, which can save many a small business and allow them to provide a much-needed boost to economic growth as we come out of the pandemic. This contrasts markedly with big civil cases and government decisions that will take time and money many people don’t have.
Third, mediation is voluntary and non-binding, so if the process is not working, parties can still return to the adversarial court system, but if it works, they can find a very comprehensive settlement.
The economic pressure applied by COVID-19 on small businesses and insurance companies alike is unprecedented, and the lawsuits and government interventions could take a long time to conclude or come into effect. Given that mediation provides an opportunity for parties to find a mutually agreed upon solution, affordably and in short order, and with little risk, from my perspective when faced with a BI dispute, mediation is a good alternative to litigation.
I would like to thank Mr. Bruce Ally for his time proofreading this article, and for the suggestions he offered.