In SIR Corp et al v Aviva Insurance Company of Canada, 2023 ONCA 778, the Ontario Court of Appeal affirmed that restaurants’ loss of food and beer inventories as a result of government mandated COVID-19 lockdowns were not losses covered by the insureds’ business interruption policies (the Policy).
The Court of Appeal dismissed the insureds’ appeal of the Ontario Superior Court decision denying coverage.[1]
This decision is the first appellate decision in Canada considering business interruption damages arising from the COVID-19 pandemic.
The facts
The appellants, SIR Corp. and related entities (collectively SIR), own and operate approximately 60 restaurants, which were ordered to close for in-person dining during the COVID-19 pandemic, as a result of provincial emergency orders (the Orders).
SIR brought an application for a declaration that it was entitled to coverage under the Policy for damage to its food and beer stock, and for business losses allegedly suffered as a result of the Orders.
The underlying Policy was a “manuscript policy” (meaning it was not a standard form policy) provided by the respondent, Aviva Insurance Company of Canada (Aviva).
The Policy provided, among other things, coverage to the insured property against all risks of direct physical loss or damage.
SIR relied on two sections of the Policy, which provided coverage for: (i) damage caused by order of civil or military authority to retard or prevent a conflagration or other catastrophe (Civil or Military Authority Clause); and (ii) loss sustained as a result of a peril insured, ingress to or egress to the insured property is prevented (Ingress/Egress Clause).
SIR argued that it was entitled to coverage under Civil or Military Authority Clause because:
- The Orders caused damage to its food and beer stock,
- The COVID-19 pandemic was a “catastrophe,” and
- The Orders were an “order of civil…authority to retard or prevent a…catastrophe.”
SIR also claimed coverage under Ingress/Egress Clause because (i) the Orders were a “peril insured” and (ii) the Orders prevented or impaired the public’s ingress to or egress from its restaurant.
The Superior Court Decision
In the Court below, the application judge found coverage was unavailable under both clauses as a result of the Policy’s overriding requirement that loss must be a result of “direct physical loss or damage”.
- Civil and Military Clause: There was no coverage because neither COVID-19 virus nor the Orders resulted in “direct physical loss or damage” to SIR’s property. There was also no order “to retard or prevent a conflagration or other catastrophe”.
- Ingress/Egress Clause: This clause clearly required loss to be “as a result of a peril insured”. The Orders were not a peril insured because they were not “a risk of direct physical loss or damage” as defined in the Policy.
Finally, the Superior Court rejected SIR’s alternative argument that Aviva was estopped from denying coverage because it had covered a similar claim by a SIR restaurant in January 2020. In that case, the Newfoundland provincial government declared a state of emergency due to hurricane-force winds and extreme snowfall, which forced the closure of SIR’s restaurant for nine days. The application judge found that there was a factual dispute about this claim and that it did not provide a basis to estop Aviva from denying coverage in the present claim.
The Court of Appeal’s decision
On appeal, the Ontario Court of Appeal upheld the Superior Court’s finding that coverage was unavailable. In reaching this decision, the Ontario Court of Appeal affirmed the unique three-step approach to interpreting insurance policies:
- If the language of the policy is unambiguous, the court should give effect to the policy’s clear language and read the policy as a whole;
- If there is ambiguity, the Court should consider the reasonable expectations of the parties and construe it consistently with similar policies; and
- If any ambiguity remains after considering steps 1 and 2, contra proferentem applies against the insurer, meaning that coverage provisions are interpreted broadly and exclusion clauses are interpreted narrowly.
In considering the Policy, the Court of Appeal further held that a foundational requirement of the Policy was a risk of direct physical loss or damage to trigger coverage. If the parties had intended to extend the Policy to include what SIR described as “non-damage business interruption coverage”, much clearer language would have been used.
In reviewing the Ingress / Egress Clause, the Court of Appeal agreed with the insurer, Aviva, that “perils insured” under the Policy were risks of direct physical loss or damage, except as excluded. Further, while a civil order may be a peril insured as set out in the Civil and Military Clause, any peril insured under the Policy required a risk of direct physical loss or damage to the insured’s property.
Additionally, the Court of Appeal found that there was no coverage under the Civil and Military Clause because the COVID-19 pandemic was not an “other catastrophe” within the meaning of this provision and the damage incurred by SIR was not a direct cause of the damage sustained (i.e. the direct cause of the food and beer spoilage).
The Court of Appeal clarified that a “catastrophe” under the Policy requires a risk of direct physical loss or damage to property. Similarly, the Orders were not a direct cause of the damage sustained because any food and beer spoilage suffered was an indirect consequence of the Orders. The direct cause of the spoilage was a reduced market, the passage of time, and SIR’s inability to use the stock as initially intended.
Finally, the Court of Appeal agreed with the Superior Court’s dismissal of SIR’s estoppel argument. The Court found in that case, the business was closed as a result of a snowstorm, which constituted a direct cause of physical damage to an insured property. Additionally, the safety concerns underlying the snowfall emergency order and the Orders were different. Further, even if Aviva had made a prior representation that it would cover SIR for food spoilage and business losses any time closure of its business was mandated by an order of a civil authority, SIR had not established on the record that it was made with the intention that SIR should act on it.
Conclusion
The Court of Appeal’s decision in SIR Corp provides clarity to insurers and insureds on the coverage of COVID-19 losses under all-risks’ policies. SIR Corp affirms that direct physical loss or damage is required to trigger coverage under such policies and that losses flowing from the issuance of COVID-19 orders are not covered under business interruption policies.
For more information on this topic, please reach out to the authors, Neil Rabinovitch, Doug Stewart and Rabita Sharfuddin.
[1] SIR Corp. v. Aviva Insurance Company of Canada, 2023 ONCA 778
