Canadian Insurers Hit with Lawsuit on Refusal to Pay COVID-19 Biz Income Claims

A class action lawsuit has been filed against Canada’s top indemnity insurers for breach of contract in their refusal to pay business interruption claims from the COVID-19 crisis.

“Indemnity insurers are wrongfully refusing to honor their contracts,” said E.F. Anthony Merchant, a solicitor who works for Merchant Law, a Victoria, British Columbia-based law firm. “Business owners intended their insurance to cover against this. Insurance companies should pay.”

Insurance companies are claiming “force majeure” and refusing to pay, said Merchant, noting, however, that the insurance recovery for BI claims will be trillions worldwide. (Force majeure is invoked when unexpected external events prevent a party to a contract from meeting its obligations and therefore protect it against liability for nonperformance).

Merchant cited the example of the Canadian restaurant industry, “which has sales of C$60 billion each year.” Estimating that the industry could be shut down for two months, or one-sixth of the year, he said, insurers could be liable for BI claims reaching $10 billion, just for that one industry.

The COVID-19 crisis was a foreseeable event and it’s not force majeure, said Merchant in a statement, citing the examples of SARS, MERS and Avian flu, which all caused business interruptions. “The business interruption may be worse than the insurance industry expected, but it is not an excuse justifying a refusal to pay. Business is interrupted! Pay!”

Named defendants in the suit are: Aviva Canada, Co-Operators General Insurance Co., Desjardins Financial Security Life Assurance Co., Economical Insurance, Intact Financial Corp., Lloyd’s Canada, Lloyd’s Underwriters, Northbridge General Insurance Corp., Royal & Sun Alliance, TD General Insurance Co., Wawanesa Mutual Insurance Co., Wynward Holdings and Wynward Insurance Group.

In an interview, Merchant said, the top 10-plus insurers were selected. “When you go to war, you want to pick a manageable number of enemies.”

The class action suit describes business interruption insurance as permitting a business owner to collect from the insurer income that the business would have generated were it not for the unexpected event.

The claim said relevant business interruptions from the COVID-19 pandemic include:

• Loss of revenue caused by a decrease or elimination of customers after social distancing advisories
• Loss of revenue caused by federal, provincial and municipal orders that restrict operation or entirely close businesses
• Loss of revenue caused by “the costs of addressing physical damage to business premises due to the presence, release, discharge or contamination of COVID-19 at the business premises…”

Merchant explained that many business interruption policies use language that excludes airborne viruses. However, the COVID-19 virus can be transferred via handrails and keyboards, for example, so the virus should be part of BI property damage coverage.

“This is really the key to the claims,” he emphasized. “They are property restricted claims.”

In addition, he said, many BI policies he has examined don’t actually exclude pandemic viruses and therefore should pay the claims as policyholders expect, rather than trying to escape the claims by declaring force majeure.

Insurers are beginning to express concern that the industry could be destabilized if forced to pay losses from the COVID-19 crisis, which were meant to be excluded and, as a result, were not priced into the premiums charged.

Merchant said the insurance industry “will be able to borrow and make up the losses with higher premiums.”

“Governments and courts are less than sympathetic to the complaints of a multi-billion dollar industry, such as insurance, which is meant to provide a social backstop,” said Merchant.

The class action was filed in the Canadian provinces of Quebec and Saskatchewan, with filing numbers of “500-06001056-205” in Quebec and “QBG797 of 2020” in Saskatchewan.

Merchant expects a lot of litigation in the U.S., Europe and Australia as policyholders seek “massive, legitimate insurance claims.” “Lots of companies in the United States will launch proceedings within the next year and others will follow along in their wake.”

Photograph: A runner makes his way through the empty streets of Old Montreal, as residents shelter in place due to the coronavirus Wednesday, April 1, 2020. Photo credit: Ryan Remiorz/The Canadian Press via AP.

Related:

• Insurers Say Forced Payouts for Excluded Virus Losses Risk Destabilizing Industry