Introduction
To combat the spread of COVID-19, many governments and public authorities issued orders mandating the closure of, or restrictions upon, businesses. One common order restricted mass gatherings of people in excess of a certain number, which may not have resulted in a complete cessation of business, but rather a partial reduction or shutdown. The question arises as to what extent such orders will trigger the “inability to use” clause in business interruption policies.
Typical Policy Language
Policy language may provide the following coverage for business interruption loss arising from the “inability to use your premises”:
We agree to reimburse you up to the amount insured shown in the Declarations for your loss of income, extra expense and accounts receivable resulting solely and directly from an interruption to your business activities caused by:
…
your inability to use your premises due to restrictions imposed by a public authority following:
…
ii) an occurrence of a notifiable human disease; or
…
[Emphasis added]
What is Required to Constitute an “Inability to Use Your Premises”?
Meaning of “Inability to Use Your Premises”
When coverage for business interruption begins and ends under the policy depends upon the interpretation given to the phrase “your inability to use your premises due to restrictions imposed by a public authority.” Does this phrase require a complete shutdown of the insured’s business activities in order to trigger coverage or is it sufficient that the insured’s operations have been partially restricted and subject to limitations? Put another way, is a complete cessation of operations necessary to constitute an “inability” to “use” the “premises”?
“Your inability to use your premises” is not defined in the policy language, and there does not appear to be any Canadian case law expressly considering the meaning of this particular phrase in the context of a business interruption claim. Pursuant to the first principles of interpretation, the contract of insurance must be considered in its entirety and the interpretation based upon the plain language of the policy. The Court of Appeal in Sumitomo Canada Ltd. v. Canadian Indemnity Company stated[1]:
In my opinion, the question must be decided by an interpretation of the language used in the policy, and that interpretation must be based upon the plain language used in the context. When I speak of the context, I mean the direct context between the two clauses which I have read and the policy as a whole.
With respect to a consideration of “plain language”, The Dictionary of Canadian Law defines “inability” as “[t]he condition of being unable; lack of ability, power or means.”[2] The dictionary definition suggests that a complete cessation of operations is required to fall within the policy language regarding “inability to use” the premises.
The courts have considered other phrases such as “interruption” and “interference”. In EFP Holdings Ltd. v. Boiler Inspection and Insurance Co. of Canada, the British Columbia Supreme Court considered a policy which provided coverage where a business is “interrupted or interfered with solely as the result of an accident.”[3] The Court held that “interrupted” and “interfered with” should be read disjunctively as they have different meanings. “Interruption” contemplates a breach in the continuity of a business while “interference” contemplates a lesser event, which may not interrupt the business but impedes or interferes with the profit-making capability of the business resulting in a diminution in gross profit. In the recent case of Le Treport Wedding & Convention Centre Ltd. v. Co-Operators General Insurance Company,[4] the Court of Appeal for Ontario provided obiter dicta commentary on EFP Holdings Ltd. and the potential differing interpretations to be given to these two terms.
American Jurisprudence
American jurisprudence may provide some guidance to answer this question, although it is not binding on Canadian courts. American case law has considered whether the business “suspension” due to physical damage must be total or whether a partial suspension is sufficient to trigger coverage for business interruption coverage. While some authority exists for the proposition that a partial shutdown of operations is sufficient to trigger coverage, American authority tends to indicate that a complete cessation of operations is required.
The following policy wording has been considered by American courts:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the period of restoration. The suspension must be caused by direct physical loss of or damage to property … described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations.
Obviously, there are differences in the meaning of “inability” and “suspension”, which will limit the applicability of American case law to policies incorporating the former language.
The common dictionary definition of “suspension” is temporary stoppage. Black’s Law Dictionary defines “suspension” as “the act of temporarily delaying, interrupting, or terminating something.”[5] A literal, or plain meaning, reading of suspension would require that the insured’s business operations cease completely.
Critics have argued that a literal interpretation of “suspension” does not fulfill the intent of business interruption insurance, stating[6]:
A more reasonable interpretation would be to include in the meaning of “suspension” the inability of any part of the described property to carry on the function to which it had been dedicated by the Insured. Such an interpretation would consider the shutting down of a single department in a department store as a suspension under the terms of the contract.
While several American cases concerning business interruption insurance interpret “necessary suspension” as requiring a complete cessation of business operations,[7] a contrary position is set out in American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co.,[8] where the court accepted the premise that the suspension need not be total or complete.
Financial Conduct Authority Test Case
The recent test case[9] from the High Court of Justice brought by the Financial Conduct Authority (“FCA”) provides some guidance on this issue. The Court’s comments indicate that whether complete cessation is required to constitute an “inability to use” will be dependant upon the policy language in issue and the particular facts giving rise to the insured’s inability to use the premises.
The FCA argued that “your inability to use” meant an inability to utilize or employ the premises for or with their intended aim or purpose, which might be partial or total. The insured’s inability to use the premises could be caused by restrictions imposed on customers or other people who would be needed to attend the premises if it was to function for its intended purpose. Further, the FCA argued that the “restrictions imposed by a public authority” did not have to involve mandatory requirements having the force of law. It would be sufficient if an authority promulgated something that it “requires or expects” to be followed.
The Court rejected the FCA’s argument that “restrictions imposed” by a public authority did not require a mandatory order. The natural meaning of “imposed” is mandatory in nature. With respect to the interpretation of the phrase “inability to use”, the Court held that it plainly does not embrace any and every impairment of normal use. “Unable to use” means something significantly different from “hindered in using” or similar. The Court accepted Hiscox’s submission that there will not be an “inability to use” premises merely because the insured cannot use all of them; and, equally, there will not be an “inability to use” premises by reason of any and every departure from their normal use. Hiscox accepted, correctly in the Court’s view, that partial use might be sufficiently nugatory or vestigial as to amount to an “inability to use” the premises. Whether that was so would depend on the facts of a particular case.
In a summary of the Court’s decision, the solicitors for the FCA illustrated the importance of the factual inquiry with the following “two restaurants” hypothetical[10]:
Whether cover is available to an insured under a Prevention of Access clause will therefore turn very closely upon the precise terms of the policy and the application of the government advice and Regulations to the insured’s particular business, such as whether their business was directly mandated to close or was affected by the more general “stay at home” requirements. By way of example, the 26 March Regulations required restaurants to close but permitted them to continue to offer takeaway services. For restaurants that only offered sit-in food prior to the 26 March Regulations, the order could amount to a “prevention of access” because it closed the premises for the purposes of its existing business. By contrast, a restaurant that offered sit-in and (more than de minimis) takeaway services prior to the 26 March Regulations would only have its business partially impaired by the 26 March Regulations. As such, there may not be a “prevention of access”. Two restaurants with the same “prevention of access” wording insurance cover, both of which have had to close their premises to sit in customers, could therefore find themselves with different coverage positions.
Conclusion
Depending upon the cause of the “inability to use” and the particular policy language, a partial restriction of usage may not be sufficient to entitle an insured to coverage under the “inability to use your premises” clause. Consideration of the nature of the restrictions imposed, i.e. whether they are mandatory or permissive, and the effect of the order upon the conduct of the business is required. By their nature, these will be fact-specific inquiries to the coverage situation at hand.
[1] 1982 CanLII 249 (B.C.C.A.).
[2] Third Edition, Thomson Carswell, 2004 at p. 610.
[3] 2001 BCSC 1580 at para. 16.
[4] 2020 ONCA 487
[5] 7th ed. 1999 at p. 1748.
[6] Business Interruption Insurance: Its Theory and Practice, Robert M. Morrison, Alan G. Miller, and Stephen J. Paris, Natl. Underwriter Co. (1986) at p. 331.
[7] Madison Maidens Inc. v. American Manufacturers Mutual Insurance Co., No. 05-4585, 2006 U.S. Dist. LEXIS 39633 (S.D.N.Y. June 14, 2006); Howard Stores Corp. v. Foremost Ins. Co., 82 AD2d 398, 401 (NY App 1981); Royal Indemnity Ins. Co. v. Mikob Properties, Inc., 940 F Supp 155, 160 (SD Tex 1996); and Quality Oilfield Products, Inc. v. Michigan Mutual Ins. Co., 971 SW2d 635 (Tex App 1998).
[8] 949 F2d 690 (3rd Cir 1991).
[9] The Financial Conduct Authority v. Arch Insurance (UK) Limited et al., [2020] EWHC 2448.
[10] https://hsfnotes.com/insurance/2020/09/15/judgment-handed-down-in-fcas-covid-19-business-interruption-insurance-test-case
