Business interruption insurance fallout could be far-reaching

By LegalMatters Staff • The ensuing legal battle over business interruption insurance could end in financial ruin for thousands of small and medium businesses, and is also a serious threat to their insurers, says Barrie-area litigator Steve Rastin.

Rastin, who was recently named Canadian co-chair of the American Association of Justice’s Business Interruption Litigation Task Force, says when the COVID-19 response led to a mass business shutdown a vast number of businesses discovered they were not covered for their losses despite having business interruption insurance.

As a result, lawsuits are ramping up.  

‘Defining insurance issue’

“This might be the defining insurance issue of our time,” says Rastin, managing partner with Rastin Law. “When you look at claims in North America, they are approaching half a trillion dollars. It’s could very well be a make or break issue for insurance companies.”

He tells LegalMattersCanada.ca that most companies have business interruption provisions as part of their commercial policies.

“These business interruption policies are, for the most part, intended to cover you if your business is unable to open for a period of time and you can’t bring money in,” Rastin says. “You would be insured for the income you would have generated during the period you were closed.

“A lot of companies have been paying for this insurance as part of their policies for years. What’s happened now is these businesses, through no fault of their own, are being forced to shut down and they are going to their insurers who are telling them they are not covered. For a lot of people, this is kind of shocking because, by definition, isn’t COVID-19 a business interruption?”

Policy exclusion

He says many business owners are finding out their insurance policies exclude coverage for pandemics.

“Many of the policies are requiring physical damage,” Rastin says. “People didn’t realize this when they bought their coverage so there might be broker negligence claims there. However, there’s also an argument as to whether this is physical damage or not. If your business is potentially contaminated by a virus is that not physical damage? This is one of the battlegrounds that we’re going to be fighting on.”

Rastin says another argument being advanced is that some policies have civil authority provisions that cover a government-mandated shutdown.

“What the insurers are arguing is that if you wanted to be covered for a virus you should have bought specific insurance for it,” he says.

‘Not how insurance should work’

Rastin says it can be argued “that this not how insurance should work.”

“Insurance is supposed to give you peace of mind. You are supposed to be covered. It shouldn’t be your job as a small business owner to think of every possible thing that can close you down,” he says.

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The stakes are high for insurance companies, Rastin says. In April the American Property Casualty Insurance Association (APCIA) estimated that closure losses for small businesses in the U.S. are between $255 billion to $431 billion per month.

“What the insurance companies are saying is they can’t afford to pay,” Rastin says. “Part of their argument is they will go under. Well, a third of businesses are going to go under. Why should the insurer get the benefit of your premium money for 20 or 30 years and then, when you need it, not pay out?

“It appears to me a lot of the process, a lot of the argument is focusing on the fact that this is so big, that it is going to be so expensive.”

Sharing the risk

He says it’s important to realize that insurance companies are not necessarily taking on all the risk themselves when issuing a policy, as they typically retain re-insurers that pay part of a claim.

“Even if they didn’t have all the resources to pay out all the claims we’re faced with a situation where perhaps an insurance company or two goes under or 50,000 businesses go bankrupt,” Rastin says. “If paying out on these claims could keep thousands of businesses open and hundreds of thousands of Canadians employed how could the insurance companies in good faith refuse to pay these claims?”

He notes in France, the courts have ruled that one insurer must pay a restaurant owner two months’ worth of coronavirus-related revenue losses.

Rastin says class-action lawsuits are in the works and going to court might be the only recourse for some business owners but wonders how long it will take to get a case before a judge.

Urgent matters first

“There is talk about a limited reopening of a small number of courtrooms across the province, but they are not going to deal with cases like this right away,” he says. “They are going to be dealing with urgent family and criminal matters.”

Rastin says Ontario’s chief justice told the province’s lawyers that courts won’t return to normal operation until a vaccine to prevent COVID-19 “is readily available.”

“How long will it take to develop a vaccine? How many months will it take to distribute it when it’s ready? It might be six months, a year or two years before the courts are beginning to do trials,” he says. “In the meantime, existing cases were already piling up in an overburdened court system and all these COVID cases are going to be behind them. Many small entrepreneurs may be out of business before they get their day in court.”

In the meantime, many will suffer before it can be determined if business owners have a viable claim, Rastin says.

“If you ask 10 people on the street, all 10 would say this is a significant business interruption,” he says. “The question is if this isn’t covered then what is?”