Over four years after the COVID-19 lockdowns, business interruption (BI) insurance claims against insurers are still pending in Canada’s courts.
In the latest decision, the Supreme Court of Canada affirmed an Ontario court’s decision that Aviva Canada’s BI policy doesn’t cover a restaurant group for losses due to government-ordered pandemic shutdowns.
In December 2023, Ontario’s appeal court found that the commercial insurance policy only covered SIR Corp for “direct physical loss” to its outlet’s premises and that the pandemic didn’t constitute a “catastrophe,” as outlined in the policy wording.
The restaurant group, which runs 60 restaurants across Canada, sought to claim on its Aviva policy for damage to food and beer stock, in addition to business losses, during COVID-19.
Canadian courts have so far ruled largely in insurers’ favour in business interruption insurance-related cases brought on by the pandemic.
While the shutdowns led to considerable financial losses for Canadian businesses and unprecedented claims for BI, they also left the insurance industry with essential lessons on managing and pricing business interruption risk.
“The pandemic taught us what a business interruption (BI) might look like, as many businesses faced impacts similar to a major [physical] loss,” said Nick Roper (pictured), founder and CEO of Roper Valuation, an insurance advisory firm specializing in business interruption.
“Businesses had to maintain operating costs and payroll without the usual sales, highlighting that BI is important for survival. BI supports a business through significant losses by ensuring cash flow and income, which are essential for recovery.
One of the key issues in the COVID-19 BI legal cases was whether the presence of the coronavirus constituted damage. For Roper, it’s clear that BI can do much more for businesses when viewed beyond the scope of physical damage. “Traditional BI insurance started with fire policies, but businesses today face broader risks, like cyber incidents and non-damage events,” he said. “The pandemic underscores the need to consider these broader risks in BI coverage. We need to think beyond physical damage when considering BI, given the diverse ways businesses can be impacted today.”
The pandemic also highlighted underinsurance, especially for property and business interruption, as a significant issue for commercial insureds.
With the price of goods and services increasing due to inflation, values for property and equipment from years past may be long overdue for an update. Similarly, calculations for gross profit for business interruption cover based on pre-pandemic sales and prices may also be far from today’s reality.
Many Canadian businesses are heavily underinsured for business interruption, by as much as 40-60%. Roper named several factors contributing to underinsurance: “Firstly, profit form worksheets, do not adequately support the process. The standard BI policy form indicates the necessary calculations, but this math, which represents the business size rather than potential loss, is often misunderstood.
“Generally, the calculation is revenue minus variable expenses, insured to 100% with coinsurance. However, many people misunderstand coinsurance and policy nuances.
“Second, there is a lack of understanding of what the calculations represent and how strictly they need to be followed according to the policy.
“Third, the coverage length is often insufficient, with 12 months usually being inadequate.
“Fourth, there are extra areas of coverage like ordinary payroll, contingent BI, equipment breakdown, and cyber, which are often overlooked. These issues combined lead to underfunded businesses and [BI] programs.”
Roper added that the lack of education and understanding between clients, brokers, and underwriters creates a “disconnect” between the perceived value of coverage and the premium.
In the wake of the COVID-19 BI claims, brokers must step up to educate their clients about adequate coverage and recognize that BI must be treated as a critical primary exposure. “Understanding a business’s BI risk means understanding the business itself—how and why it operates, its true risks. It requires a deep knowledge of the business,” said Roper. “This understanding leads to better coverage and risk management.”
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