Managing Insurance Coverage and Claims for Losses Resulting from the Pandemic

By Andrew J. Heal, J.D., LL.M., Heal & Co. LLP[1]

On April 30, 2020, Cathy DiMarco[2] (my partner), Todd Gagnon[3] and I presented a webinar hosted by the Canadian Construction Association[4] on Managing Insurance Coverage and Claims arising from the COVID 19 Pandemic. This short newsletter article highlights some of the key points we shared in our presentation.

In this time of economic uncertainty, cash flow issues, and legitimate questions bedevil us all as to how long this COVID-19 pandemic will last.  In the context of COVID-19, the Construction Industry is experiencing force majeure project delays, potential cost overruns, and where performance is an issue, potential claims or disputes which might even result in liens, bond claims or insolvencies.

Where, because of COVID-19, a loss experienced at a construction site, there are several types of construction insurance which may respond to a claim, including “all-risk” builders risk insurance (often called broad form insurance), comprehensive general liability insurance (CGL) or professional liability insurance. Each policy, and often even the policy wording across different policy types, can be different.

There are lots of decided cases about insurance coverages for specific policy types, but many policies are “manuscript” policies, which can be uniquely written by a particular insurer.  Every word matters, and when considering whether or not an insured claim arises you must be careful with your analysis of the particular insurance policy in question.

How a construction contract defines as a “claim” is not necessarily the same as how the applicable insurance policy defines as a “claim”.

It is critical to give timely notice of a claim, setting out in detail the policy number, the coverage period, relevant dates and events, the section of the policy that is said to provide coverage, and a description of the underlying facts giving rise to the claim.  Then set out the “ask” of the insurer, whether it is a claim for coverage, defence costs, or an indemnity.  It is also good practice to preserve the narrative and relevant documents and designate a point person to manage the insurance claim while pursuing your claim for coverage.

It is also a good practice to document and all the available information on losses because even without insurance coverage you will want to understand the losses incurred, whether they can be pursued from your counter party, and risk management and mitigation for the future.

It is also important to consider the underlying allocation of risk in the contract if you are the performing contractor or trade, and whether the loss event or delay event is compensable with additional time or money, or just time from your counterparty.  And for this you should see general condition 6.5 under CCDC 2 and CCDC A1 form of contract and subcontract respectively.

In the event of a delay, you are probably also best advised to approach your contract counter party and negotiate a preferred outcome.  Where an unresolvable dispute arises, you may find yourself facing claims, liens, or other dispute resolution process.

Delay may give rise to business interruption coverage, or other expense coverage, although the usual trigger for such coverage is “direct physical loss or damage” within the meaning of the policy.

It may be difficult to meet the test for trigger of coverage of “direct physical loss” in a COVID19 situation, but not impossible depending on policy wording and the fact pattern, particularly in light of “loss of functionality” interpretation of the concept of “direct physical loss or damage” in a particular insurance policy, and all cases I have seen to date at their root seem to have some physical damage and proximity.

Coverage may be found where there is COVID19 present on construction site or in a facility (it likely amounts to direct physical loss) but coverage likely does not simply follow the threat of COVID19 but the virus appears to have a die after 3-4 days (so the science apparently tells us), so that causation of damage could be limited to a time frame. It should be noted that some US insurers apparently continue to deny coverage even where COVID19 is present based on express policy exclutsions such as a “pollution or virus” exclusion (and there are arguments both ways on this) in addition to the argument that no physical damage occurred.

In some policies, apparently in the US there may often be an express “virus” exception to an exclusion, but with relatively low sub-limits (think food facilities).

The recent public call for provinces in Canada, or US states to enact retroactive legislation to potentially impose insurance coverage terms or try to declare COVID19 “an injury to property” (to bootstrap an argument for coverage) face the potential problem that that alone cannot trigger coverage and the direct consequence of changing a bargain after the fact not likely points to a risk not allocated initially. Further, courts will likely be loathe to read in language retroactively to trigger insurance coverage. There may be coverage already, or there may not be: it will depend on the existing policy coverage grant wording, the exclusions and exceptions to exclusions rather than retroactive legislation.

We also canvassed the recent MDS v. Factory Mutual Insurance decision released April 9, 2020[5] as potentially impacting an interpretation of existing policies with a view to understanding whether a “loss of functionality” occurred, and the likelihood that one extreme of the COVID-19 pandemic may be continued economic disruption with financial difficulties for owners and performing contractors and subcontractors, particularly where they do not work cooperatively together to complete their projects.

Finally, insurers are facing increasing losses pre-COVID-19 and a hardening of the insurance market was occurring, particularly in re-insurance in late 2019.  The predictions for the Canadian economy for fiscal 2020 range from 1-2% loss in GDP to some negative predictions to 10% or more loss in GDP across Canadian economic activity.

In these uncertain times, insurers have been hesitant to issue blanket coverage statements and are assessing each claim on a case-by-case basis.

Please contact us if you wish to attend a live repeat session on May 27, 2020 @8.30am, or contact us at info@healandco.com for more details.

REGISTER AT: https://register.gotowebinar.com/register/4548573358168445454

[1] www.healandco.com.

[2] Certified Specialist in Construction Law, Heal & Co. LLP

[3] Claims Manager, Ontario, BFL Canada

[4] Thanks to Ken Leon, and the staff at the CCA, https://www.cca-acc.com.

[5] https://www.canlii.org/en/on/onsc/doc/2020/2020onsc1924/2020onsc1924.pdf

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Heal & Co. LLP is a law firm whose members are experienced in the professional liability defense of municipal, building, construction and design claims, and construction law matters more generally.

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