The COVID-19 Virus Does Not Trigger Business Interruption Insurance Coverage

August 22, 2024

Written By Joseph Blinick, Thomas Feore and Peter Douglas

In 2023, the Ontario Superior Court of Justice (Commercial List) released its highly anticipated decision in Workman Optometry Professional Corporation v Certas Home and Auto Insurance Company (Workman). The Court’s decision, which followed a three-week long common issues trial that included the testimony of representative plaintiffs and expert witnesses, was the first Canadian trial decision of its kind to consider the application of insurance contract interpretation principles to COVID-19 pandemic-related claims. While these issues have been subject to extensive litigation in the United States,¹ this case marked the first judicial consideration of these issues in Canada in the context of a trial involving extensive fact and expert evidence.

This class action was brought against fifteen large Canadian insurance companies and sought a multi-billion-dollar damages award for alleged business interruption losses resulting from COVID-19-related business closures. The plaintiffs’ main allegation was that the presence of the SARS-CoV-2 virus in commercial properties caused physical loss or damage to property within the meaning of the business interruption insurance contracts such that business interruption coverage should have been provided by insurers for the period that businesses were interrupted.

In 2021, the action was certified, on consent, on behalf of a broad class comprised of businesses across the country (excluding Quebec) that purchased business interruption insurance and claimed for pandemic-related losses under their policies.

The case required co-ordination amongst virtually every major insurer in Canada that underwrote business interruption coverage. Each of the defendant insurer’s business interruption policies were structured differently, but as the Court observed, each policy only applied if there was direct “physical loss of or damage to property”. The policies covered “all risks” of “direct physical loss or damage to property”, unless expressly excluded.

The insurers consented to the certification of three central common issues going to the core of the coverage dispute:

1. Can the presence of the SARS-CoV-2 virus or its variants cause physical loss or damage to property (within the meaning of the business interruption provisions of each defendant’s property insurance wordings)?
2. Can an order of a civil authority in respect of business activities that was made due to the SARS-CoV-2 virus or its variants cause physical loss or damage to property within the meaning of the business interruption provisions of each defendant’s property insurance wordings?
3. If the answer to either of the first two questions is “yes”, are there any exclusions in any of the defendants’ property insurance wordings that would result in coverage for such loss or damage being excluded?

The common issues trial was heard before the Ontario Superior Court of Justice’s Commercial List in Toronto and included the examination of four experts and seven representative plaintiffs. The trial evidence dealt with the nature of the SARS-CoV-2 virus, how it is transmitted and how it interacts with physical surfaces, as well as evidence relating to the purpose of the government orders. Despite all of this testimony, the Court noted that the issues for determination “were essentially all questions of contract interpretation.” Moreover, none of the plaintiff fact witnesses offered any evidence that the virus caused actual physical loss or damage to their property; or that they were ever denied access to the insured property; or that they were prevented from using any tools and equipment that were insured; or that the insured property required any kind of repair or replacement as a result of the virus’ presence.

The plaintiffs’ primary theories of coverage were: (1) that the SARS-CoV-2 virus entered the plaintiffs’ businesses and risked infecting healthy people inside as it sat upon surfaces, “such that there is a ‘physical dimension’ of some kind to the event”, which caused “damage”; and (2) the SARS-CoV-2 virus, and the associated governmental orders restricting business operations, caused “damage” by preventing the plaintiffs from using their insured property. The Court rejected both of these submissions, in part on the basis of the expert evidence at trial, but principally in applying well-established principles of contractual interpretation.

Despite the extensive expert evidence put before the Court, and the multiple days of cross-examination, the Court ultimately found that, “[o]n most [of the] fundamental points”, both the plaintiffs’ and the defendants’ experts agreed. There was no dispute that the SARS-CoV-2 virus spreads primarily through the air and can settle on surfaces. While transmission of the virus from surfaces is theoretically possible, it was “unlikely”. Where the experts disagreed, the Court accepted the evidence of the defendants’ experts, agreeing that viruses do not alter inanimate surfaces in any way (tangible or intangible; physical or chemical).

On the basis of well-established principles of insurance contract interpretation, the Court determined that “physical loss or damage to property” required tangible physical loss or damage (contrary to the plaintiffs’ submission that “physical loss or damage” meant “physical loss” and “damage” of any kind), and that the virus had no effect on tangible property as “[v]iruses affect people, not inanimate surfaces.” The Court concluded that the SARS-CoV-2 virus could not itself cause “physical loss or damage to property” within the meaning of the insurance policies. Specifically, the Court held that “the phrase ‘physical loss or damage to property’ requires that the property have been altered, harmed, lost or destroyed in a tangible or concrete way”—which the presence of the SARS-CoV-2 virus could not do.

As for the plaintiffs’ alternative theory of coverage—that the governmental orders restricting business operations caused “physical loss or damage” by preventing the plaintiffs from using their “property”—the Court rejected this submission on several grounds. First, as a matter of contractual interpretation, interpreting “physical loss or damage” to include “loss of use” would be inconsistent with how the ordinary policyholder would understand the policy. More fundamentally, though, the Court observed that such an interpretation “result[ed] in a nonsensical circularity” as, on the plaintiffs’ interpretation, the business interruption insurance would cover losses suffered due to the inability to use property, resulting from the inability to use property (i.e., a covered peril resulting in a covered peril, rather than an effect on the insured property). The Court rejected this interpretation as absurd. Further, even if the plaintiffs’ interpretation was correct, the plaintiffs’ evidence—almost all of which was found to be otherwise irrelevant to the certified common issues—made clear that they had not, in fact, lost the use of their property. During the trial, each of the representative plaintiffs gave testimony that acknowledged that they were able to access their business premises throughout the pandemic, were able to use their tools and equipment (and all other tangible property) and were ultimately able to continue operating (albeit at a reduced level) during the pandemic.

In conclusion, the Court answered the first two certified common issues in the negative, finding that the SARS-CoV-2 virus could not cause physical loss or damage to property within the meaning of the insurance policies and that the civil authority orders also could not cause physical loss or damage to the insured property. As the first two common issues were answered in the negative, it was not necessary for the Court to consider the third common issue and the Court declined to do so.

The plaintiffs elected to appeal the Court’s decision to the Ontario Court of Appeal. The plaintiffs’ appeal was dismissed by the Ontario Court of Appeal in June 2024.

Looking Forward

The Workman decision has delivered much needed certainty to the insurance industry—including insurers and policy holders nation-wide—on the central issues impacting COVID-19 pandemic business interruption claims filed in Canada.

It followed an expedited common issues trial that occurred less than two years after the negotiation of a consent certification order, which focused exclusively on the central coverage issues. The parties agreed to an expedited trial schedule, and the fifteen defendants presented an entirely coordinated defence of fact and law which both accelerated the trial process and secured a clean and emphatic win for insurers. The decision, and the process through which the case was litigated, illustrates the efficacy with which class proceedings can be leveraged to secure the timely adjudication of time-sensitive industry-wide issues.

Bennett Jones and its client, the Dominion of Canada General Insurance Company (Travelers), played a critical role in the successful defence of this matter.

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