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Insurance coverage and COVID-19:

Legal considerations and loss quantification developments


As the COVID-19 situation is rapidly developing and changing the business landscape, so is expert guidance on how to deal with this crisis. Our team compiled the most updated information on insurance coverage considerations for COVID-19, incorporating a legal perspective and actions recommended for policyholders as they work through evaluating their insurance claims.

There are many looming concerns surrounding COVID-19 in regards to daily disruptions to personal life and business activity. Social distancing has become the norm. Changing consumer behavior, whether voluntary or regulated, and supply chain disruption will no doubt affect businesses across the board. In addition, an increasing number of governments around the world are issuing mandatory orders that non-essential businesses close their offices, most recently including Ontario and Quebec.

In this uncertain climate, businesses are looking to understand how they can manage this crisis, limit their continuing financial losses, and perhaps seek avenues for financial relief. One potential avenue for relief is insurance. All businesses should be seeking guidance as to whether their existing insurance coverage can respond to COVID-19-related financial losses.

We have outlined some key insurance coverage considerations for you to be aware of as you begin to contemplate with your insurance advisors whether initiating an insurance claim may be a viable relief option for your business. Furthermore, we have outlined the immediate measures businesses are recommend to take in order to understand and assess the impact of COVID-19—both financially and operationally. These recommendations are beneficial from an assessment of loss and insurance recovery perspective, and looking at whether your business qualifies for the more recently announced government relief measures.

Commercial property policies

Business interruption coverage is typically only triggered if the loss in income is due to physical damage to the assets of the insured, or to the assets of a key supplier to the insured. However, the definition of “physical damage” is not as clear as it might seem. Courts in various jurisdictions have held that “contamination” may amount to physical damage to property if it renders the property unusable or uninhabitable. In the context of COVID-19, it may be possible to argue that the virus has contaminated a building such that the building has sustained “physical damage.”

The specific language of each policy will be key in evaluating whether coverage applies. Some policies may contain clauses that specifically include or exclude business interruption caused by disease outbreak. Such clauses are sometimes found in riders or endorsements issues years after the main policy and can have a significant effect on its application.

When interpreting insurance policies, courts tend to interpret ambiguities in favour of the insured, meaning it is probably worthwhile filing a claim even if coverage is unclear.

Impact due to civil authority

This is a section in a typical property policy that responds to Interruption by Civil Authority, which is often defined as “actual loss as insured hereunder during the period of time, not exceeding two to four weeks, while access to the 'premises' described in the Declaration Page(s) is prohibited by order of civil authority.”

Although this coverage is sometimes limited to circumstances where there has been physical loss or damage, the definition of this coverage can vary by policy. There's a possibility that if operations of a business are restricted due to a governmental order prohibiting access, coverage may apply. This type of coverage will be particularly important in light of recent (and likely future) government directives that non-essential businesses close.

Two complications can arise, even if civil authority coverage does apply.

The first is where a business closes voluntarily as a precautionary measure and the government subsequently orders it to close in any event. While the insurer may argue that the voluntary closure means there is no coverage regardless of the subsequent order, the better view is that coverage applies at least as of the date of the mandatory closure. There may also be a public policy argument that coverage should apply where a business closes as a reasonable and responsible step to mitigate the potential harm and comply with public health recommendations before they become mandatory.

The second complication is where a business is only subject to a partial closure order (for example, restaurants only allowed to offer takeout). If coverage would apply to a full closure, then there is likely a good argument that it should apply to the partial closure as well. In other words, this is to make up the difference between ordinary operations and the business' reduced operations. If the business closes entirely because partial closure is not economically or practically viable, then there is likely a good argument that this serves to mitigate the losses sustained by the business, and therefore should be covered.

Again, whether civil authority coverage applies, the extent of that coverage (if it does apply) will depend on the particular wording of the policy. It may be worthwhile to file a claim even if coverage is unclear.

Event cancellation

Businesses hosting and organizing large events normally purchase event cancellation insurance. This type of insurance covers not only cancellation fees or other out-of-pocket expenses, but potentially lost income anticipated from the event. This type of coverage is especially common for group meetings or events that generate revenue for businesses.

Within event cancellation insurance policies, infectious or communicable diseases can either be included or excluded from coverage. If coverage is determined, the timing of when the event is cancelled can ultimately be a determining factor in whether coverage applies. This could be for precautionary measures or due to government intervention. Policyholders should be very careful in how they describe the cancellation of their event and how they describe the claims they submit. Whether an insurer—or ultimately a court—grants coverage can often turn on these points.

For example, most event cancellation insurance will not apply if the reason for the cancellation is poor attendance, regardless of the reason for that poor attendance. But it may apply if the event is cancelled for health and safety reasons. It is therefore important to be precise and accurate when outlining the reasons that lead to an event being cancelled to ensure the insurance provider has the necessary information to assess the claim on its merits.

Take measures now

In summary, there is no clear-cut answer on whether insurance coverage applies. To better understand terms and conditions, we recommend that businesses evaluate their policies—including any extensions and exclusions—with their insurance brokers, legal counsel, and claims consultants. Further, it is recommended that if you have incurred a loss due to COVID-19, you strongly consider submitting a claim or at least put your insurer on notice of an anticipated claim.

Upon confirming an understanding of your policy wording and your insurer's requirements, businesses should start to document the financial impacts of the outbreak that fit within those parameters.

All incremental and abnormal costs should be tracked, including but not limited to the following: cleaning and premise disinfecting costs; crisis management costs including media or communications campaigns to inform the public or employees; and overtime pay to make up for production losses.

The incremental costs should be easily identifiable and tracked separately from normal operating expenses. As a best practice, we recommend setting up a separate general ledger account for recording such costs. This practice should also extend to all business impacts, like order cancellations, supply chain breakage, and lost profits. It's imperative that businesses are able to separate the costs related to improvement or betterment from the necessary incremental costs, as betterment costs may not be reimbursable in an insurance claim context. You will also want to ensure they are kept track of separately from an accounting perspective to be able to properly amortize.

Keeping clear records of costs and supporting information will ensure the claim process is as efficient as possible.

A key takeaway: even if certain costs are not ultimately covered under current insurance programs, they can inform future risk mitigation and management strategies in addition to potentially being recoverable through another avenue, like governmental relief efforts.

Understanding how to determine and capture the lost revenue and income as a result of this unpredictable and far-reaching outbreak is critical in minimizing the financial implications—and is an area in which our team has deep understanding and expertise to help guide you. To discuss this further, please get in touch with us.


Chetan Sehgal, CPA, CA∙IFA, CFF, CFI, CAMS, Partner, BDO Canada LLP, Forensic Disputes & Investigations (Insurance)

Matthew Law, Partner, Lax O'Sullivan Lisus Gottlieb LLP

Crawford Smith, Partner, Lax O'Sullivan Lisus Gottlieb LLP


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