The Ontario Court of Appeal affirmed in SIR Corp. v. Aviva, 2023 ONCA 778 that a commercial all-risks policy did not provide coverage for business interruption during the COVID-19 pandemic. Clark Wilson previously summarized the lower court's decision. Insurers should welcome SIR Corp as consistent with the law in Canada: property policies covering "direct physical loss or damage" generally require actual physical alteration to the property insured.
Trial Decision: No Physical Damage, No Coverage
SIR Corp made a business interruption claim under its all-risks property policy for the closure of its restaurants and loss of inventory during the pandemic. The policy provided coverage against "all risks of direct physical loss or damage" to insured property, "loss resulting from interruption or interference with the insured's business as a consequence of the property of the insured or others being destroyed or damaged by the perils insured under the Policy", as well as loss resulting from civil orders to prevent a conflagration or other catastrophe.
SIR Corp argued that government orders shut down non-essential businesses, which prevented ingress and egress from its restaurants, resulting in the loss of their inventory. Thus, the orders were insured perils.
The insurer denied coverage on the basis that the COVID-19 virus did not cause direct physical damage to any insured property. The Ontario Superior Court agreed with the insurer: there was no physical damage to SIR Corp's property. Neither the COVID-19 virus nor the government orders resulted in direct physical loss or damage to SIR Corp's property. No coverage was triggered.
Appeal: No Physical Damage, No Coverage
On appeal, the Ontario Court of Appeal conducted its own analysis of the policy and arrived at the same conclusion as the Superior Court – coverage was not triggered. The COVID-19 virus did not result in direct physical loss or damage to SIR Corp's property. The government orders did not cause destruction to SIR Corp's property, nor did they require SIR Corp to destroy or alter its premises or property. For example, the government orders did not restrict food delivery, so the orders did not cause property to be destroyed.
And while COVID-19 could be characterized as a catastrophe in ordinary parlance, it was not a "catastrophe" within the meaning of the policy. The word "catastrophe" had to be read in the context of the word preceding it, "conflagration", which means an extensive fire destroying property. Thus, catastrophe as used in the policy meant a "physical event" involving large-scale destruction to property. COVID-19 did not fall within this definition.
Takeaway: Property Policies Generally Require Actual Alteration to Property to Trigger Coverage
SIR Corp is consistent with the law in Canada: property policies will generally require actual physical alteration to the insured property to trigger coverage. Loss of use of property, alone, will generally not suffice. As Clark Wilson previously reported, other common law jurisdictions including the U.S. and Australia have come to similar conclusions.1
Insurers and insureds should welcome the clarity provided by the Court of Appeal in Sir Corp. The pandemic was unprecedented. However, it did not change how Canadian courts interpret property policies. As the Ontario Court of Appeal said of the policy in this case: property policies have as their "foundation a requirement of a risk of direct physical loss or damage to property", and if the parties want to cover "non-damage business interruption coverage", much clearer language was required than that seen in SIR Corp.
1 https://uk.practicallaw.thomsonreuters.com/w-034-1939?transitionType=Default&contextData=(sc.Default)&firstPage=true.
2 LCA Marrickville Pty Limited v. Swiss Re International SE, [2022] FCAFC 17 and Star Entertainment Group Limited v. Chubb Insurance Australia Ltd, [2022] FCAFC 16.
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