COVID-19 Fails to Constitute “Direct Physical Loss or Damage” at Court of Appeal

  • November 30, 2023
  • Thomas Russell

Background

As the world struggles to recover from the effects of the COVID-19 pandemic, one question that has been gaining some attention in the world of insurance is: in what circumstances did COVID-19 trigger coverage for business interruption under property policies?

In the United States and Australia, courts have previously found that COVID-19 would not trigger coverage under a property policy where there was a “physical” requirement included in the definition of “property damage”.[1]

In SIR Corp v Aviva Insurance Company of Canada[2], released by the Ontario Court of Appeal earlier this month, Canadian courts are ruling in the same direction.

Background Facts

During the COVID-19 pandemic, many small businesses saw their operations suspended by emergency orders from the provincial government. The Appellant in this case, SIR Corp. and related entities (“SIR”), own and operate approximately 60 restaurants.[3] As a result of an emergency order by the Ontario Government during the pandemic, SIR was unable to offer in-person dining in its restaurants, resulting in damage to its food and beer stock and otherwise causing business losses.[4]

SIR sought coverage from their insurer, Aviva, under an all-risk insurance policy, but was denied.[5] SIR took the matter to court and subsequently lost at the Superior Court of Justice in 2022.[6]

The Appeal

SIR appealed the matter to the Ontario Court of Appeal, arguing that the judge made an extricable legal error in interpreting the Policy. Although the Ontario Court of Appeal agreed that the judge had erred, the court still ultimately found against SIR.[7]

The court found that coverage would depend upon the interpretation of two clauses in the policy.

  • Clause 16. INGRESS/ EGRESS: [8]
  •  This policy is extended to include the loss sustained by the Insured during the period of time when as a result of a peril insured or threat thereof, ingress to or egress from any part of premises of the Insured or of others is prevented or impaired, including prevention or impairment of such access by any civil or military authority. Maximum 8 weeks. [Emphasis added.]

 

  • Clause 14. CIVIL OR MILITARY AUTHORITY:[9]
  • This Policy insures loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil military authority to retard or prevent a conflagration or other catastrophe. [Emphasis added.]

The question for Clause 16 was whether the term “a peril insured or threat thereof” could be interpreted to include an order from the Ontario Government.[10] First, the Court considered the Policy as a whole, as well as the “factual matrix” surrounding the Policy, and concluded that the Policy was intended to protect against risks of direct physical loss or damage.[11] Thus, the court found that a “peril insured or threat thereof” must satisfy the foundational requirement of the Policy of being related to “a risk of direct physical loss or damage”. [12]

The question for Clause 14 was whether the COVID-19 pandemic, and resulting orders by the Ontario Government, could constitute an “other catastrophe”.[13] The Court of Appeal found that the interpretation of the word “catastrophe” had to be informed by the context in which the word was used.[14] In this case, the Court found that the use of the word “conflagration” immediately before the term “other catastrophes” was meant to denote disasters similar to a fire, namely, causing large-scale destruction to property.[15]

In the alternative, the Court found that Clause 14 would have required the Government Order to be the direct cause of the damage sustained.[16] In this case, the Court felt that the damage sustained, namely the food and beer spoilage, was an indirect result of the Government Order, and would not be viable under Clause 14 regardless.[17]

The Court concluded by considering one final argument presented by SIR. SIR argued that Aviva should be estopped from denying coverage in this instance, because the company had provided similar coverage to SIR for a Jack Astor’s restaurant it owned in St. John’s.[18] The St. John’s claim had involved a government order to shut down restaurants for nine days as a result of hurricane-force winds and extreme snowfalls.[19] In that case, SIR had successfully recouped their business losses from Aviva as a result of the Government Order.[20]

The Court rejected this argument by pointing out that the Government Order in St. John’s was related to strong winds and extreme snowfalls, which can cause physical damage to property.[21] Further, the Court held previous coverage by Aviva for government orders related to extreme weather could not otherwise be the basis for an estoppel argument for Aviva denying coverage for government orders related to public safety.[22]

Take Away

This case signals that, similar to other jurisdictions, Ontario will be reluctant to enforce coverage under property insurance policies, which include extensive reference to “physical damage” to property, for COVID-19 business losses.

However, there are two things to note. First, it is unclear at this point whether this case will be heading to the Supreme Court of Canada. Second, this case dealt with a policy negotiated between the parties, and does necessarily dictate the rule for standard form policies.[23] Time will tell what the position of Ontario Courts are for these policies.

 

[2] SIR Corp. v. Aviva Insurance Company of Canada, 2023 ONCA 778 (CanLII), <https://canlii.ca/t/k196x> [“SIR”].

[3] Ibid at para 1.

[4] Ibid at para 2.

[5] Ibid. i

[6] Ibid at paras 24 – 32.

[7] Ibid at paras 36.

[8] SIR supra note 2 at para 43.

[9] SIR supra note 2 at para 77.

[10] Ibid at para 43- 48.

[11] Ibid at paras 49 – 60.

[12] Ibid at para 60, 76.

[13] Ibid at para 82.

[14] Ibid at para 89.

[15] Ibid at para 87 – 88.

[16] Ibid at para 96.

[17] Ibid at para 101 – 102.

[18] Ibid at para 105 – 107.

[19] SIR supra note 2 at para 105.

[20] Ibid.

[21] Ibid at para 15.

[22] Ibid at para 112 – 115.

[23] Ibid at para 12.

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