Court Awards Commercial Prejudgment Interest Rates On Successful Coverage Claim

The Ontario Superior Court of Justice recently held that an insurer who wrongfully denied a US$121 million claim must pay prejudgment interest based on the actual cost of borrowing, and not the rates stipulated in the Courts of Justice Act.

The case, MDS Inc v Factory Mutual Insurance Company, arose out of a leak at a nuclear reactor in Chalk River, Ontario. The business of MDS Inc. involved purchasing the radioisotopes produced at that reactor and processing them for eventual sale. When the reactor shut down for fifteen months following the leak, MDS turned to its insurer to cover its business interruption losses. The Court held in favour of the insured on all coverage issues, finding that all the exclusions and exceptions at issue should be interpreted in MDS’s favour. While a lot of digital ink has been spilled on the Court’s handling of those coverage issues, the Court’s decision regarding prejudgment interest has received relatively little attention.

MDS argued that, to be fairly compensated for its loss, it should be entitled to prejudgment interest based on the actual cost of borrowing from the date of loss to judgment (around five to six per cent), not the simple interest rate contained in the Courts of Justice Act. MDS maintained that had the insurer paid the loss promptly, it would not have had to borrow the funds in the amount of the policy limits. Further, it argued that it would be unfair for the insurer to realize a profit from its refusal to pay. On the other hand, the insurer’s position was that the Court should not award the actual cost of borrowing because “there is not a single insurance case in Canada” where that was done.

Finding for the insured, the Court took into account the following points in support:

  1. the history of the concept of prejudgment interest and case law on the issue, such as the concept that prejudgment interest is compensatory, not punitive;
  2. the discretion conferred on judges by the Courts of Justice Act to award higher interest rates;
  3. the relationship between the insurer and its insured, particularly given that the insurer was MDS’s long-time insurer, so it knew that the supply of isotopes from the reactor constituted a substantial proportion of MDS’s income, and thus it knew that MDS was seriously vulnerable and could not mitigate its damages;
  4. the insurer’s conduct, including its decision to deny the claim before the parties knew all the facts, and its refusal to change its coverage position in light of the developing evidence. While the insurer’s denial letter stated that it would consider any additional information that might affect coverage, the Court held that this assertion rang “hollow in light of the history. The battle lines were drawn early before the facts were known”. According to the Court, the denial letter read more like a pleading than an adjuster’s letter;
  5. the claim for commercial interest was reasonably foreseeable, because MDS put the insurer on notice from the date the proof of loss was filed that MDS was seeking “all losses, damages and expenses flowing from the Insurer’s refusal to pay in accordance with the Policy” as well as pre and post judgment interest “as appropriate”. Moreover, it was reasonably foreseeable that MDS would have to borrow at market rates to compensate for its losses;
  6. MDS filed undisputed expert evidence that estimated the insured’s actual cost to borrow the funds it would have received but for the insurer’s denial, and the insurer’s profits it earned because it failed to pay MDS;
  7. the Court stated that paying commercial rates was a Pareto-efficient result where both parties benefited, because the insured’s $12 million prejudgment interest award was less than the $17 million in profits the insurer realized from its delayed payment; and
  8. that the risk of being liable to pay commercial interest would prompt insurers to work quickly to resolve claims, which supports the public policy consideration of encouraging early and fair settlement by insurers.
  9. Counsel and adjusters would be wise to carefully consider this case in any future insurance coverage dispute, as it sets out a number of factors that a Court could consider in deciding whether to award commercial interest rates. In particular, the Court focused on the conduct of the insurer in coming to its decision, such as early denials, pleading-like adjusters’ letters and refusals to change a coverage position, which are not uncommon. An insured seeking commercial interest would have to ensure that it could present evidence on the insured’s cost of borrowing and the insurer’s profit on the unpaid funds, which will allow the Court to weigh the benefits to both sides if commercial interest were awarded.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: Mondaq

What insurers do – and don’t – owe restaurants during COVID-19

The excerpted article was written by Corey Mintz

Buying insurance is placing a bet you’d rather not have to collect on. It’s hoping for the best but planning for the worst. We pay monthly fees to a company just in case something terrible happens. If it does, the company agrees to cover our financial loss. Then COVID-19 hit, and something terrible happened to all of us.

In the past two months, the issue of insurance has come up repeatedly for restaurateurs, who pay for a specific type called business interruption. It can cover closure due to such events as municipal construction, burst water pipes, and riots. I spoke with two restaurateurs who have successfully claimed coverage after broken pipes forced their closure, in one case for five days and in the other for four months (although she is still waiting on a cheque). Neither has attempted to file a claim based on the pandemic. Most believe, or have been told, that the widespread shutdown of restaurants is not covered under interruption insurance.

Then I spoke with Hemant Bhagwani. The founder of the Amaya restaurant chain, plus a few other dining concepts, he has 29 restaurants in Ontario and more than 600 employees.

Bhagwani is availing himself of the Canada Emergency Wage Subsidy, which covers 75 per cent of payroll and requires employers to take care of the rest. Most of his restaurants are shuttered. A couple are doing takeout. And while he says some of his landlords are being reasonable (and currently exploring the possibility of the Canada Emergency Commercial Rent Assistance for small businesses), the total rent for these properties is about $700,000 a month.

“In 22 years of business, I have not taken a single penny from the insurance companies,” Bhagwani told me on April 24, just as the federal government was announcing the CECRA. “They keep increasing their premiums every year. So this is the time for them to support us a little bit. And they’re just washing their hands.”

“Government is doing so much,” said Bhagwani, as we both paused to listen to the prime minister’s live address. “Landlords are trying their best to help us. The only people who are not coming out are the insurance companies. I feel it’s very wrong. I’m ready to take them to court.”

On May 5, Bhagwani followed through, filing a claim for damages against his insurer, Allianz Global Risk, for $500,000 in combined revenues, $200,000 in punitive damages, and 90-days’ worth of payroll expenses.

“I think he’s wise to bring the action,” says Lawrence Swartz, a professor at Osgoode Hall Law School.

“It’s very rare that people claim insurance. Typically, you pay the premiums, and you don’t make a claim,” says Swartz, who has worked extensively in the financial and insurance sectors. “The reason you buy insurance is to get the coverage for these types of situations. Your typical person who is a restaurateur should think that an interruption includes a pandemic.”

A spokesperson for Allianz told via email that the company is “unable to comment on individual claims settlements or pending legal matters” and that, as a result of the pandemic, it “has been notified of a large volume of claims from businesses around the world which we evaluate on a case by case basis to determine coverage.” They added, “We will certainly honor COVID-19-related claims where they are part of our policies and cover is clear. However, many businesses will not have purchased cover that will enable them to claim on their insurance for COVID-19 pandemic losses.”

Swartz can’t speak to the specific merits of Bhagwani’s case without examining his policy. But, in general, he sees the court leaning in favour of the restaurateur.

“If the company wanted to exclude a pandemic, they have to say so in the insurance contract. And if they didn’t, the presumption I think, by the courts, would be that the restaurant should be covered,” he says. “Because courts tend to interpret exclusions narrowly, they give somewhat of a benefit of the doubt to the purchaser of the insurance policy. And they tend to interpret coverage broadly.”

Another factor on Bhagwani’s side, Swartz says, is a legal principle that tends to apply in the case of insurance contracts. Known as contra proferentem, it means that, when the intention is ambiguous, the preferred meaning is the one that works in favour of the party that didn’t draft the contract.

Whatever happens with Bhagwani, Swartz sees this lawsuit as a good example for others in the industry to follow. “Every restaurant should presume that they have coverage,” he says. “This is a situation where they need help. And that’s what insurance is for. It’s for unforeseen disasters.”

Swartz urges owners to contact their lawyer or insurance broker, to look at their contracts to see whether the policy specifically excludes a pandemic, and to ask for claim forms.

“Restaurant owners should be in touch with their insurers and brokers. They should be asserting their rights,” he says. “They should assume that they have coverage, and they should proceed as if they do. It should be on the insurers to explain to them that they don’t if they don’t and to be very specific in why they don’t. Insurance companies shouldn’t be trying to wiggle out of their responsibilities.”

If a court rules in favour of Bhagwani, other suits will likely follow. What would that mean for the insurance industry? The business is predicated on the odds that disasters don’t usually happen every day and to everyone at once. If every restaurant in Canada claims interruption insurance, and the courts support them, could this bankrupt insurers?

“The insurance industry, going into this, was fairly strong,” explains Swartz. Insurance companies are sometimes part of big conglomerates that back them up, and they cede part of their risk to reinsurance companies. “So insurers have insurance themselves.”

However, that doesn’t mean that they’re bulletproof.

“This is a cataclysmic even,” Swartz says. “It wouldn’t be impossible for a number of insurance companies to go bankrupt.”

Corey Mintz is a Toronto-based food writer.



Economical Insurance highlights community-driven initiatives in 2019 Public Accountability Statement

Economical contributed nearly $1 million towards making a difference in Canadian communities

WATERLOO, ONMay 25, 2020 /CNW/ – Economical Insurance released its 2019 Public Accountability Statement, which is online and available for download. The report outlines the ongoing corporate commitment to social responsibility initiatives implemented in 2019, including community involvement, environmental programs, employee engagement and broker support.

“As we continue to put our customers at the centre of everything we do, bringing our best every day, and understanding that we’re stronger together, we have deepened the resilience of our organization, at a time when we – and our customers – need it most,” said Rowan Saunders, President & CEO of Economical. “Our 2019 Public Accountability Statement is a reflection of our commitment to charitable giving, supporting our stakeholders, and delivering value to Canadians.”

Economical continued to deliver value to Canadians over the course of 2019 through its community-focused programs:

  • The Economical team contributed approximately $855,000 towards making a difference in Canadian communities; over $90,000 of which was to charities chosen by its valued broker partners
  • From coast to coast, employees made personal donations to 90 charities that led to matching donations from Economical, and they also generously donated almost 3,000 hours of volunteer time throughout the workweek to help not-for-profit organizations important to them and their families
  • By offering $85,000 annually for students in scholarships at select post-secondary institutions, Economical helped to equip the next generation with access to specialized education programs across Canada
  • With environmental protection and stewardship remaining a priority, Economical raised awareness of environmental sus­tainability within the company nationally, while also identifying, investigating and acting to reduce pollution, waste, and consumption of resources – resulting in year over year CO2 reductions

The 2019 Public Accountability Statement demonstrates the inherent commitment Economical has for its neighbouring communities.

For almost 150 years, Economical and its workforce have maintained a strong tradition of giving back to communities across Canada through corporate giving and volunteerism – especially to provide relief for Canadian’s when they need it most. Currently, the company is focused on balancing COVID-19 relief measures for customers with efforts designed to impact the health and resiliency of communities across Canada.

“The impact of COVID-19 cannot be overstated. We remain committed to moving the business forward while meeting the needs of our customers, broker partners, and communities.” said Rowan Saunders.

Looking forward, Economical is proud to solidify its commitment to a socially responsible future through supporting the Economical Insurance Heritage Foundation, a new charitable foundation established as part of the company’s anticipated demutualization.  The Foundation, which is expected to receive a $100 million donation from the proceeds of a successful demutualization, will honour Economical policyholders and employees – past and present – by working to have the greatest impact on Canadian communities.

About Economical Insurance
Economical Mutual Insurance Company (“Economical” or “Economical Insurance”, which includes its subsidiaries where the context so requires) is a leading property and casualty insurer in Canada, with approximately $2.6 billion in annualized gross written premiums and over $5.8 billion in assets as at March 31, 2020. Economical is a Canadian-owned and operated company that services the insurance needs of more than one million customers.

SOURCE Economical Insurance

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With COVID-19, Business Interruption Claims Will Not Be The Only Claims

The excerpted article was written by Mikel Pearce

There has been a lot of coverage, and a lot of ink spilled (does that expression even have meaning any more?) about the potential and actual business interruption claims that may be made by insureds arising out of the COVID-19 pandemic.

However, very little attention has been paid, at least so far, to the other potential claims that may arise, and the other classes of business that may be impacted as a result.

Personal Injury and Wrongful Dismissal

First, the pandemic and the resulting lockdown/quarantine have resulted in markedly decreased traffic of all kinds. People aren’t driving, going shopping, or going to movie theatres, concerts, plays, musicals, bars or restaurants. Some estimates indicate that automobile traffic has decreased by 80%.

This will result in a significant reduction in personal injury claims, just based on the math of fewer trips (pedestrian, vehicular or otherwise) resulting in fewer accidents.

This means that the plaintiff personal injury bar will be looking for something to fill the hole left by that lack of personal injury claims. Plaintiff counsel are nothing if not creative.

There is a distinct possibility that at least in part, they may attempt to bring claims against property occupiers on behalf of COVID-19 sufferers, alleging that their clients contracted COVID-19 in a given location, as a result of unsafe conditions at that location. Obviously this sort of claim will place a high burden on the plaintiff to establish that they actually contracted the disease at the alleged location, and not elsewhere, but I think it highly likely that some enterprising plaintiff’s counsel will attempt to bring such claims.

The other claim that plaintiff’s counsel may turn to in order to make up for the lack of personal injury claims is wrongful dismissal claims. At present, everyone who can work from home is working from home. However, at some point businesses will re-open, including those that are currently shut, and employers will tell their employees that they are required to return to work. Some will refuse, citing safety concerns, and they are likely to be dismissed, unless they call upon the Ministry of Labour to do a safety audit of their workplace, which finds it to be unsafe. Given the pervasiveness of the pandemic and the response to it, it is quite likely that the number of wrongful dismissal claims will easily outnumber the “missing” personal injury claims.

The one advantage to wrongful dismissal claims from an insurer perspective is that the indemnity portion of the claim (the claim for “pay in lieu of notice”) is not often insured, and the average spend on defence costs for a wrongful dismissal claim is in the range of $15,000 to $20,000. Even if indemnity is taken into account, the average indemnity payment for a wrongful dismissal lawsuit in Canada is $18,000 to $20,000.

Bankruptcy and Insolvency Claims

The next wave of insurance claims will be driven by the surge in bankruptcies that is likely to result from the prolonged shutdown of the economy.

There are several industries that come to mind that are likely to be affected in this manner.

First, the hospitality industry. There have been rumors that 40-50% of hospitality businesses could go bankrupt as a result of the COVID-19 pandemic and the resulting shutdown.

Hotels, restaurants, bars and other associated businesses have limited or zero revenue at present, and even if parts of the economy start to open up in the next 30-60 days, in my opinion the hospitality industry will be one of the last portions of the economy to restart, and will have a difficult time attracting patrons at anything like pre-COVID levels, until a vaccine is widely available.

It comes down to a simple question: Even if the restrictions are lifted and restaurants and bars are permitted to open again, how likely are YOU to go to one? Do you really want to be in a crowded bar, or even a restaurant, prior to a vaccine being available? I certainly do not, and most hospitality businesses need a certain level of “occupancy” in order to break even or be profitable.

In my opinion most are unlikely to be able to be profitable for some time, unless they revamp their business model and/or their pricing in a significant manner.

Bankruptcies (or CCAA proposals) in the hospitality sector will lead to a variety of claims against the Directors and Officers of those organizations. These may include claims for unpaid wages, unremitted source deductions, and a variety of other claims from bond or debt holders.

Second, the construction industry. In my view it is quite likely that many employers will look to downsize their physical space as they have been forced to recognize that a good percentage of their employees can be just as effective if they work from home. The second largest expense for many companies, after employee wages, is rent. Many organizations will be looking to cut costs following the pandemic, in order to recover from the economic impact of the shut down. If that happens, the construction of new office towers and new office space in general will grind to a halt, and this will have a ripple effect throughout the construction industry.

Construction tends to be a “cash flow” business. When business is good, everyone gets paid, jobs get done, and most disputes are resolved without resort to expensive and protracted litigation. However, when the economy contracts and contractors encounter financial problems, they are often faced with “breach of trust” claims from sub-contractors and suppliers, who allege that funds from a given project were not used to pay subcontractors and suppliers on that project. These breach of trust claims survive bankruptcy, and so can haunt contractors (and the insurers who end up defending them) long after everything else has been dealt with. The resultant litigation is often messy and expensive.

Third, oil and gas and mining. The price of a barrel of oil is at an historic low. For a brief period, some oil futures traded at negative values. Given the current cost per barrel of oil extraction in Canada, it may be a long time until oil production is profitable in Canada again. This will lead many producers to mothball wells, or to declare bankruptcy and abandon wells instead. Provincial governments (especially in Alberta) will be faced with huge remediation and clean up costs as a result of orphaned wells, and will likely seek to recoup those costs from the Directors and Officers of the former owners of orphaned wells.

This may lead to a resurgence of what is known as the “North Star” problem. In the case of North Star, the Ontario Ministry of the Environment issued remediation orders to the Directors and Officers of North Star following CCAA proceedings. As North Star had exhausted its D&O policy, the Directors and Officers were personally exposed for the clean up costs. While the case was eventually settled (for some $4,750,000), it highlighted a gap in coverage that some insurers and MGAs attempted to fill. Should this issue resurface, some of the impugned organizations will have “North Star” coverage, but many will not, and this could lead to years of litigation against insurers and brokers as a result.

Fourth, the retail industry. It was announced on May 7, 2020, that both Aldo Shoes and Neiman Marcus had begun bankruptcy proceedings. In addition, in the months leading up to the pandemic, a number of significant Canadian retailers had also succumbed to market forces. These included the Nygard Group, FHC Enterprises, Louis Garneau Sports, Le Cordée, Pier 1 Imports, Stokes, and SFP Canada. The retail industry has faced significant challenges from online retailers, and the pandemic will only serve to exacerbate those issues. The resulting bankruptcies or CCAA filings will no doubt lead to a multitude of litigation and insurance claims.

Fifth, the airline industry. No one knows how long it will be before international travel (including travel to the U.S.) is opened up again. Even once it is “allowed”, the number of people willing to travel internationally is likely to be a fraction of what it was prior to the pandemic. The airline industry will face similar challenges to the hospitality industry, in addition to massive class action claims for refunds on cancelled flights, rather than credits toward future flights, which are currently being offered.

Securities Class Actions or Derivative Claims

The final potential claim that I will mention are securities class action claims against corporations, and their Directors and Officers, arising from the massive share price drops caused by the pandemic and the resulting lockdown. Many corporations are now incurring business interruption losses for which they may be uninsured. However, both Marsh and Berkshire Hathaway have publicly stated that they were offering so-called “pandemic coverage” to certain insureds prior to the COVID-19 crisis, but that very few corporations could be convinced to purchase the coverage.

Plaintiffs counsel may commence securities class actions alleging that the corporation would not have sustained such heavy losses (and the resulting share price drop) had the board of directors agreed to purchase the offered “pandemic coverage”.

The All England Tennis Club may be used as an example, given reports that it received a $200,000,000 (CAN) payout from its pandemic coverage policy, as a result of the cancellation of the Wimbledon tennis tournament.

Alternatively, this type of claim could be brought by shareholders as a derivative action on behalf of a given corporation, against the Directors and Officers, alleging that they failed in their duty to protect the corporation by failing or refusing to purchase pandemic coverage.

BI is not the end of the Story

While it may be the case that the vast majority of business interruption losses are not covered (pending various U.S. state legislatures passing laws to the contrary), that is not the end of the story for the insurance implications of the current pandemic. We will be seeing the repercussions of this event for a number of years, and the current pandemic may also contribute to what commentators were already saying was a coming “hard market” where insurance premiums increase, and coverage is narrowed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


Cash-flow challenges and debt levels increase risk of insolvencies

By Jordan Press


OTTAWA _ The Bank of Canada says there are signs in the country’s financial markets that suggest concern about the ability of companies to weather the COVID-19 economic crisis.

The central bank has spent the last two months making a flurry of policy decisions that has seen it slash its target interest rate and embark on an unprecedented bond-buying program to ease the flow of credit.

The report suggests these measures have helped ease liquidity strains and provide easy access to short-term credit for companies and households.

But it is warning this morning that a cash-flow problem for businesses seeing sharp revenue declines during the crisis could soon develop into a solvency issue.

The Bank of Canada’s review of the country’s financial system says market prices point to a concern that defaults are likely to rise.

The report also raises concerns that household debt levels are likely to rise and become acute for households whose incomes don’t fully recover from the pandemic.

“We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery,” bank governor Stephen Poloz is quoted as saying in the review.

“But we know that debt levels are going to rise, so the right combination of economic policies will be important too.”

Aside from what is now approaching $150 billion in direct federal aid, the central bank over the course of March alone slashed its target interest rate to 0.25 per cent from 1.75 per cent.

It has also snapped up federal bonds to effectively provide low-cost financing to Ottawa to cover a massive spike in spending.

The bank’s balance sheet has more than tripled to $392 billion since early March, as part of an expansion larger and faster than during the financial crisis of 2008 and 2009 when its balance sheet increased by 50 per cent.

But the longer the economic shock from COVID-19 lasts, the more it drives the risks of consumer insolvencies, the central bank says.

The number of vulnerable households that putting more than 40 per cent of their income to cover debt payments  “is likely to rise,” the bank says, and fall behind on loan payments even with deferrals to some 700,000 households so far.

The central bank’s review also suggests financial institutions may be much less capable of responding to and containing a cyber security incident while many employees work from home.

“There is evidence of increased phishing and malware attacks designed to take advantage of the growth in remote work and the public appetite for information related to COVID-19,” the report said.

“Cyber criminals are also using public interest in new government support programs to lure users to malicious websites.”

This report by The Canadian Press was first published May 14, 2020.

Pandemic crisis forecast to hit insurers for $200 billion

LONDON _ The pandemic will cost the insurance industry over $200 billion, according to Lloyds of London, who estimated that its own payouts are now on a par with the Sept. 11, 2001 attacks or the combined impact of hurricanes Harvey, Maria and Irma in 2017.

Lloyds, which as an insurance market pays out to insurers affected by disasters, said it expects to pay between $3 billion and $4.3 billion to insurance companies to help them cope with the COVID-19 pandemic.

Losses could widen if lockdowns continue into the next quarter, which would push the overall cost to the insurance industry to $203 billion. Unlike the storms, for example, the pandemic’s impact is global, systemic and long term.

“Lloyd’s believes that once the scale and complexity of the social and economic impact of COVID-19 is fully understood, the overall cost to the global insurance non-life industry is likely to be far in excess of those historical events,” the London-based insurance market said.

The study undertaken by Lloyds assumed social distancing and lockdown measures through 2020, as well as the forecasts for the drop in gross domestic product globally.

“What makes COVID-19 unique is not just the devastating continuing human and social impact, but also the economic shock.” Lloyd’s Chief Executive John Neal said.  “Taking all those factors together will challenge the industry as never before, but we will keep focused on supporting our customers and continuing to pay claims over the weeks and months ahead.”


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