During the COVID-19 pandemic, Canadian provincial governments and American state governments enacted emergency orders which prevented in-person dining at restaurants (“the Orders”). The appellants (“SIR”) owned and operated approximately 60 restaurants, which suffered approximately $27,000,000.00 in inventory and business losses as a result of the Orders. Consequently, SIR claimed coverage under an insurance policy it held with the respondent (“Aviva”). Aviva denied coverage. SIR commenced an action.
The Binder – An Extricable Legal Error
In 2017, SIR’s former insurer left the Canadian property market, so SIR’s insurance broker invited Aviva to provide a quote on a commercial property policy. In September 2017, the broker prepared a Binder for Aviva’s signature, which signed and returned the Binder in October 2017. The Binder was eventually replaced by an insurance policy (“the Policy”), which was renewed until the pandemic.
On the first page, under the heading “Perils Insured”, the Binder specifies “All Risks of Direct Physical Loss or Damage (except as excluded)”. At trial, the application judge concluded coverage was not granted, in part because she interpreted the Policy as if the Binder formed part of the Policy.
Contractual interpretation is a question of mixed fact and law, subject to the correctness standard of review. The ONCA held that treating the Binder as part of the Policy was an extricable legal error. The Binder, by its own terms, was effective only until replaced by Aviva’s written Policy. As such, the ONCA interpreted the policy afresh to determine whether it covered the loss sustained by SIR.
The Policy was structured into four sections, and the relevant clauses included the following:
Section I – Policy General Conditions
1. This Policy, subject to the terms, conditions and limitations hereinafter set forth insures:
Direct Damage as provided under Section II
Business Interruption (Profits) as provided under Section III
Business Interruption Extra Expense as provided under Section IV[…]
14. CIVIL OR MILITARY AUTHORITY
This Policy insures loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil or military authority to retard or prevent a conflagration or other catastrophe.[…]
This policy is extended to include the loss sustained by the Insured during the period of time when as a result of a peril insured or threat thereof, ingress to or egress from any part of premises of the Insured or of others is prevented or impaired, including prevention or impairment of such access by any civil or military authority. Maximum 8 weeks.[…]
48. wherever the word Policy appears, it shall be read as ‘Section’ if the context so indicates.
Section II – Direct Damage Section
1. This Policy, subject to the conditions and limitations as herein set forth, insures the property described herein against All Risks of direct physical loss or damage occurring during the term of this Policy except as hereinafter excluded.
Section III – Business Interruption Insurance Including Contingent Business Interruption (Profits)
Section IV – Extra Expense Insurance Including Contingent Extra Expense
Principles of Insurance Contract Interpretation
The ONCA reviewed the principles by which contracts must be interpreted. Insurance policies, as a special category of contracts, are subject to a unique three-step interpretive approach.
First, when the policy is unambiguous, the court should give effect to its clear language, reading the policy as a whole. As with all contracts, the ONCA reminds that the terms of the policy must be examined in light of the surrounding circumstances.
Second, if ambiguities do exist, the general rules of contractual interpretation provide guidance. For example, effect should be given to the reasonable expectations of the parties, so long as those expectations are supported by the text. These rules should be used to resolve ambiguities, not create them.
Third, where ambiguity remains, the contra proferentem rule applies to construe the policy against the maker. Relatedly, coverage provisions should be interpreted broadly, while exclusion clauses should be interpreted narrowly.
SIR sought to establish coverage pursuant to Section I Clause 14 and Section I Clause 16.
14. CIVIL OR MILITARY AUTHORITY
This Policy insures loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil or military authority to retard or prevent a conflagration or other catastrophe.
The Policy did not define “catastrophe”. SIR argued that coverage was granted because it suffered a loss as a result of damage caused by a civil order to prevent a catastrophe, namely the spread of COVID-19. The Court rejected this interpretation of the clause.
While the Court accepted that under its ordinary meaning, the COVID pandemic was a “catastrophe”, it was not a catastrophe within the meaning of the Policy. That “catastrophe” was preceded by the words “conflagration or other” could not be overlooked. “Conflagration” primarily means a large destructive fire, a physical phenomenon.
The ONCA noted that courts have long accepted that in the construction “X or other Y”, the specific term X may limit the more general term Y by association. As such, the Court interpreted that an “other catastrophe” would similarly require large-scale destruction of property. Moreover, having regard to the policy as a whole, the Court noted that the word catastrophe was found in a policy, the foundation of which was a requirement for risk of direct physical loss.
Lastly, even if the pandemic was a catastrophe within the meaning of Clause 14, the ONCA held that the Orders must have been the direct cause of the damage sustained in order to trigger coverage. Commenting on causation in insurance law, the Court affirmed that “recovery under an insurance policy has been limited to circumstances where the ‘proximate cause’ of the loss is an insured peril, and the ‘proximate cause’ has been treated as synonymous with the ’direct cause’”.
The ONCA explained that the Orders did not prevent access to the restaurant by staff and did not prevent the businesses from operating. As such, any food and beer spoilage 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.
SIR argued that failing to interpret the clause according to their interpretation would nullify the clause, because other clauses already provided coverage for conflagrations or other catastrophes. However, the ONCA accepted Aviva’s submission that Clause 14 would, for example, provide coverage where a civil or military authority orders the destruction of an insured’s property to stop the spread of fire.
Therefore, ONCA rejected that Clause 14 entitled SIR to coverage for its sustained losses.
This policy is extended to include the loss sustained by the Insured during the period of time when as a result of a peril insured or threat thereof, ingress to or egress from any part of premises of the Insured or of others is prevented or impaired, including prevention or impairment of such access by any civil or military authority. Maximum 8 weeks.
All parties agreed that there was no coverage under this clause unless access to SIR’s premises was impaired as a result of “a peril insured or threat thereof”. Problematically, the Policy did not define “peril insured”.
Aviva argued that “peril insured” in Clause 16 meant “All Risks of direct physical loss or damage”, as established in Section II Clause 1. This mirrored the language of the Binder.
SIR argued that coverage was granted because the Orders prevented access to its premises, and those Orders were a peril insured. SIR argued the Orders became a peril insured because Clause 14 established the risk of an order of civil or military authority to retard or prevent a conflagration or other catastrophe.
SIR rejected that the words “All Risks of direct physical loss or damage” from Section II Clause 1 applied to Section I Clause 16. Rather, it argued that the words “This Policy” should be read as “this section”, because Section I Clause 48 stated that “wherever the word Policy appears, it shall be read as ‘Section’ if the context so indicates”.
The ONCA rejected SIR’s submission that “Policy” in Section II Clause 1 should be read as “Section” in conformity with Section I Clause 48. It held that “Policy” should be read as “policy” and apply to the whole policy.
The Court again applied the principles of contractual interpretation to determine the meaning of “peril insured”. It began its analysis by reminding that the parties agreed to an all-risk insurance policy, a form of property insurance. Thus, at its foundation, the Policy bore a requirement of a risk of direct physical loss or damage to property.
The Court held that Section II Clause 1 defined the perils insured as “All Risks of direct physical loss or damage…except as hereinafter excluded”. Moreover, Sections III and IV only provided coverage where there was destruction or damage of property. The Court held that the perils insured were, unambiguously, “All Risks of direct physical loss or damage”. Since the Orders did not create any direct physical loss or damage, coverage was denied.
The Court found it significant that the language used in Section II Clause I was virtually identical to the language in the Binder describing “Perils Insured”. The ONCA held that while the Binder was not part of the Policy, it was a part of the Policy’s factual matrix, which must be considered in determining the intentions of the parties and the plain language of a contract. The Court emphasized such an interpretation did not contradict s.124(1) of the Insurance Act, which protects insureds from unilateral changes to a policy, since the Binder was only used to interpret the Policy, not to modify or impair its effects.
The ONCA accepted that while Clause 16 may have overlapped with other coverage clauses, this did not nullify any coverage. The Court held that insurance policies often contain multiple, sometimes overlapping coverages, exclusions, conditions, and endorsements. Further, Clause 16 offered coverage which other clauses would not. For example, it would provide coverage where a blockade is ordered in response to the threat of flooding or where there is a threat of landslide and police cordon off the business.
Therefore, coverage was denied.
 For example, Ontario made an emergency order under the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9.
 Sher-Bett Construction (Manitoba) Inc. v The Co-Operators General Insurance Company, 2021 MBCA 10.