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.
