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In a democracy there is a presumption of freedom of action within the framework of the law. For those who run businesses, the option to stay open at the opening times they chose was a given. However, the advent of COVID-19 has disrupted that assumption significantly. On March 23, 2020, the Ontario government announced that all non-essential businesses will have to close their physical workplaces effective March 24, 2020 at 11:59 a.m. Since then, many have closed their doors in accordance with that mandate. This article focuses on some of the controversial issues small businesses faced during this pandemic, particularly the business interruption insurance (BI) controversy.
For the reader’s clarity, most small businesses are required to purchase commercial insurance. BI coverage is often part of commercial property insurance, and coverage is typically triggered when a company is unable due to property damage to insured property, such as a damaged building, equipment, or inventory. Given that many companies suffered significant income losses during the COVID-19 pandemic, it is not surprising that many are trying to collect their coverage by filing BI claims.
While mass vaccinations have promised a return to normal, most companies have already suffered catastrophic losses caused by business interruptions from the lockdown, staff illnesses, or the loss of customers or suppliers. Small businesses have also faced inconsistent and sometimes confusing government decisions about what to reopen and for how long. each reopening will only be closed a short time later if COVID cases increase. This has put many small businesses at risk as they are bleeding their funds and savings and trying to stay afloat.
Unfortunately, many companies find that BI insurance is an addition to an existing business insurance that they have not taken out and have never been advised or warned by their agent of the consequences of not having it. In other situations, owners find that BI insurance does not cover the interruptions caused by COVID-19 as the damage is not considered “physical”. This means that even those who are insured with BI insurance are not necessarily insured for interruptions due to the pandemic. As a result, small business owners across the country and around the world are grappling with rejected claims that collectively are worth billions of dollars. Given that small businesses are a huge part of the economy, especially in places like Ontario, one must wonder what the future of recovery will be if they don’t get support.
Such rejection of policies has generated tremendous backlash against insurance companies from customers demanding payment. Many consider it unfair to be denied coverage because of COVID-19, which does not cause physical harm. Many assumed, out of pure common sense or in fairness, that their insurance policy would naturally cover them for these types of disasters. Those who specifically purchased the BI Insurance Add-Ons were shocked to find out that they were not insured based on the phrase “physical damage”. It is precisely this type of formulation that will soon be the focus of many courtrooms and legislatures as the coverage available depends on the policy formulation and there are many different formulations available in the Canadian market. The legal arguments will likely revolve around the damages associated with the word “physical” as this is the most controversial. The question of whether or not COVID-19 is causing physical harm is complex because of its ambiguity, which revolves around the fact that it is in the air but also rests on physical surfaces. Even if it is physical damage, only some policies cover “potential†physical damage, which could mean owners have to overcome another legal hurdle by proving that COVID-19 was present in their establishment.
Other legal terms that will be at the center of the debate are what is called a “named hazard” or what is called a “loss”. Some insurance companies also claim the pandemic was a “force majeure” act to limit the huge payout that resulted. This is a term used to refer to an otherwise unexpected external circumstance, such as force majeure or a hurricane, that excuses a party to pay a contract and meet its obligations. These examples are just a few questions that will take the time of lawyers and politicians around the world for the foreseeable future, and the results will have a significant impact on both individuals and insurance companies.
In Canada, the United States and many other countries, the number of lawsuits against insurance companies is increasing rapidly. In Canada, the law firm Merchant-Law has already started collecting names ahead of a class action lawsuit against more than a dozen insurers in Canada. A lawsuit is clearly one possible approach to solving the problem. If this were indeed the case, the already enormous backlog of the courts would make access to justice unsustainable. An alternative to this is the Ontario Association of Optometrists’ approach, which is launching a petition asking their insurers to approve claims based on COVID. The Canadian government has also been urged to take action. This is not an uncommon approach as US politicians are proposing laws to force insurance companies to pay. While Canada has not seen such government intervention at this point, it would not be unprecedented for them to get involved because of the public outcry. The idea for this stems from the precedent following the 2016 Fort McMurray forest fire when the Albertan government asked the insurance industry to extend the deadline for filing claims. To further level the playing field between insurers and customers, the government threatened to change the law to ensure residents are treated fairly if the insurance company does not participate.
Regarding the global response required for COVID-19, insurance companies are not simply going to toggle because they themselves are concerned about the potential payout. Each insurance is unique, but the principle is the same: the premiums of many pay for the losses of the few. The 2016 Fort McMurray wildfires were the most expensive insurance claims in Canadian history, but only affected the people of northern Alberta, so insurance customers in other parts of the country had to use their premiums to cover damage at Fort McMurray. Insurance companies fear that even if they increased premiums, they would not be enough to cover the billions of dollars in claims it would take to reward every claimant. Insurance companies warn that the entire industry could be paralyzed if they are forced to pay BI claims.
Most of us instinctively would side with small businesses. Misleading small print usually doesn’t spark much sympathy, nor is the idea that giant insurance companies responsible for limiting the damage of this very type of disaster are somehow unprepared. But from a legal point of view, the outcome is not clear and, depending on the size of the lawsuit, courts and governments will fight it for a long time. Even assuming that the small businesses won, the time it would take to go through the judicial process, as well as the attorney fees associated with it, can make victory meaningless, as many are no longer in business by the time the result is issued.
To alleviate the problem, we need to find an alternative approach that can produce effective and efficient results. The first answer to such a problem is mediation. Those making a BI claim do not want to get embittered into a contentious 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 procedures and techniques that serve as a means for disagreed parties to reach an agreement without litigation; Mediation is particularly beneficial in the BI insurance debacle for several reasons.
First, it keeps the process and solutions in the hands of those involved. It empowers all parties to find a solution that meets their individual needs and is not based specifically on the law. This is especially important as neither the insurer nor the insured knows which side can support the lawsuit or government action, so there is motivation for both sides to work together.
Second, mediation is much more efficient and affordable, which can save many small businesses and enable them to urgently stimulate economic growth after the pandemic is over. This is in stark contrast to large civil litigation and government decisions that cost time and money that many people do not have.
Third, mediation is voluntary and non-binding. So if the process doesn’t work, the parties can still revert to the adversarial court system, but if it works they can find a very comprehensive settlement.
The economic pressures COVID-19 is putting on small businesses and insurance companies is unprecedented, and it could take a long time for lawsuits and government interference to become final or effective. Since mediation offers the parties the opportunity to find an amicable solution inexpensively, at short notice and with little risk, in my opinion mediation is a good alternative to legal proceedings in a BI dispute.
I want to thank Mr. Bruce Ally for his time proofreading this article and for his suggestions.
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