Battle over claims heats up between small businesses and insurance providers

COVID-19 is not the first crisis to hit Krystal Churcher's private preschool, a business she managed to grow substantially after surviving the 2016 wildfire in Fort McMurray, Alta.

What's different this time, compared to several years ago, is that her claim for business interruption insurance got nowhere.

Churcher's insurance company told her the pandemic is not a "named peril," meaning it doesn't fall into the same category as threats typically covered by insurance, such as windstorm, fire or even a plane falling from the sky.

"What are we paying for with these insurance premiums?" said Churcher, who owns the Early Start Learning Centre in Fort McMurray. "It just makes no sense to me."

Across the country — and indeed around the world — small business owners are grappling with denied claims which are collectively worth billions of dollars. And they're fighting back in the courts, with lawsuits popping up in Canada, the US, Britain and other countries.

I'm sitting here with no coverage and not really any explanation as to why.- Krystal Churcher, owner of Early Start Learning Centre

In Churcher's case, she was paying extra to have viruses included in her coverage, but since none of her seven staff members got sick from the coronavirus, that part of her policy was not triggered. 

"After the fire, I increased my insurance policies as much as they would allow," she said.

"My premiums have gone up over 300 per cent since the fire, and I'm sitting here with no coverage and not really any explanation as to why."

Pandemic not part of insurance calculation

Every insurance policy is unique, and while here is no such thing as a one-size-fits-all contract, the principle of insurance is the same.

"The premiums of many are paying for the losses of the few," according to the Insurance Bureau of Canada.

Tragic as the 2016 wildfires were, making up the priciest insurance claims in Canadian history, the disaster only affected people in Northern Alberta.

Insurance customers in other parts of the country were fine, so their premiums were used to help pay for losses in Fort McMurray.

How can an insurance company afford and price to pay for something that is not temporal in time and is not in a geographic scope?- Laurie LaPalme, partner in the Insurance & Reinsurance Group at Cassels Brock & Blackwell.

What's different about a pandemic like COVID-19 is that it absolutely affects everyone from coast to coast to coast, according to Laurie LaPalme, partner at law firm Cassels, Brock and Blackwell in Toronto, whose clients include insurance companies.  

That kind of universal scenario was never baked into the insurance formula.

"Always go back to the contract to see what it says," said LaPalme.  

"Most contracts exclude viruses of that nature so they are not a peril that is covered. and it's not meant to be, because pandemics by their nature are not temporal and they are not geographically scoped. So how can an insurance company afford and price to pay for something that is not temporal in time and is not in a geographic scope?"

Battle over fine print

Enough people disagree over the issue that firm Merchant Law has started collecting names for its class action lawsuit against more than a dozen insurers in Canada.

A legal battle is also heating up south of the border, where politicians in several states are proposing legislation to force insurance companies to pay out business interruption claims. 

American lawyer Chip Merlin, author of the book "Pay Up! Preventing a Disaster with Your Own Insurance Company," argues insurance contracts are written in a way that is full of contradictions which aren't always fair to small businesses. 

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"if you were a small business owner, as you read down they have a provision for business interruption, loss of business income, and then a specific part in bold letter that says, 'we cover you for orders of a loss of income caused by civil authority,'" explained Merlin.

According to Merlin, many insurance companies are saying businesses must be shut down due to a direct infection by the COVID-19 virus before they will pay out on a claim.

"Most people read that and go, 'Hey look I got coverage because a civil authority shut me down.' But it's in the fine print that insurance companies are coming back and making the argument saying, 'Wait a minute! You know in order to collect for this you have to prove that a business closed by you or some property closed by you actually had the coronavirus before you're able to collect on that.'"

Court battles, according to Merlin, will come down to the one thing that he says  "nobody ever reads or thinks about in advance."

In other words, the fine print.

"Even if you were to try to read it, would you really understand or do you have to be somebody like me that does this for a living?" said Merlin. 

The lawyer says we should get ready for a whole lot of arguments over what qualifies as a "named peril," whether COVID-19 causes "physical damage," and what constitutes "loss" as defined in the contract language of an insurance policy.

Potential losses could far outstrip collected premiums

The stakes are high for both insurers and the insured in this situation. For Krystal Churcher and her Alberta business, it's the difference between being able to pay her bills, or go into heavy debt.

Her insurance company has pegged her loss at $55,000 a month. As she's unable to collect money through an insurance claim, she's had to apply for a federal loan instead. 

"It's just a huge bill that's sitting there when you have insurance policies that are supposed to help you during these kind of things," said Churcher.

But for the insurance company, the financial consequences are stark too. Multiply Churcher's scenario across the country, and the potential liabilities are so potentially big they could cripple the entire insurance industry.

Canadian insurers have yet to put up an estimate, but the American Property Casualty Insurance Association published an alarming report in April, pegging small business losses in the United States ranging from $255 billion to $431 billion per month. 

That is substantially higher than the total pool of premiums available for commercial property risks, which that report put at only $6 billion per month.

Written and produced by Falice Chin.
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