A recent UK Supreme Court judgment in the FCA test case indicates Covid-19 related extended BI cover claims not requiring physical damage may succeed, whereas US statistics suggest claims under basic BI cover mandating physical damage are likely to fail.
On 15 January 2021 the UK Supreme Court (SC) upheld the High Court (HC) judgment in Financial Conduct Authority (Appellant) -v- Arch Insurance (UK) Ltd and others (Respondents) on the COVID-19 Business Interruption (BI) policy claims test case following a leapfrog appeal (the ‘FCA Test Case’). The FCA Test Case considered 21 policy wordings triggered by non-physical damage, including infectious/notifiable disease and denial of access, as well as public authority closures/restrictions. The SC ruled that 14 out of the 21 wordings did provide cover (increasing the HC tally by 2), that cover may be available for partial closures and result from non-legally binding closure orders, and that valid claims were not set-off by pandemic related damage that would have occurred regardless. The judgment was hailed as a victory for the policyholders (please refer to our detailed analysis of the judgments of the SC and HC).
At the same time however, worrying statistics from across the USA show insurers are winning the vast majority of Covid-19 related insurance claims brought to Court. In fact, insurers won 76% of 187 cases before the Federal Court where they petitioned for dismissal and a bar on future related action. Moreover, the trend holds true irrespective of the presence of express virus-related exclusion clauses in the insurance policies. Insureds have fared slightly better in State Courts, though 70% of their claims have ultimately ended up in the Federal Court. Can these opposing UK/US tendencies be compromised?
BI Cover
The default position is that BI insurance potentially covers loss of profits and additional expenses resulting from insured damage to physical property. It is commonly purchased in a commercial insurance package, which contains other types of business insurance such as property damage and warehouse insurance, and may be combined with public liability insurance. In the US it is usually included within commercial property policies, and commonly requires direct physical loss or damage to the insured property.
While physical loss/damage is the default prerequisite, there are BI cover extensions which may be triggered by non-physical loss/damage. In the UK for instance such extensions may include denial of access cover triggered by an event occurring in the vicinity of the insured property. Such extensions were the subject matter of the FCA Test Case, which did not examine physical damage/loss BI triggers. Moreover the FCA itself in a letter addressed to insurance CEOs following judgment admits that most small to medium businesses have taken out basic BI cover which requires property damage, and is therefore unlikely to pay out in relation to the Covid-19 pandemic and its effects.
Physical Damage/Loss
The legal position on physical damage/loss is just as interesting both in the US and in the UK. Some case law should illustrate the point.
Starting with the US, in Mastellone v. Lightning Rod Mut. Ins.Co[1], the Court in Ohio held the not contested existence of mold did not trigger a homeowner policy because it did not affect the structural integrity of the property, and could be removed without compromising the latter. By contrast, in Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am [2], a New Jersey Court held the policy requiring direct physical damage/loss was triggered by ammonia released inside the property, as it rendered the property unusable.
In similar vein to Gregory Packaging, UK case law also suggests that physical damage/loss may not necessarily require physical change and that impairment of the property’s value and/or usefulness may suffice. In Quorum A/S v Schramm[3] for instance, sub-molecular change in a painting following a fire owing to extreme heat/humidity was held to constitute ‘damage’.
US Court Judgments in BI Claims
In Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London[4],Lloyd’s underwriters won a February 2021 New Orleans State Court ruling not to cover financial losses of a 500-seat Grill emanating from State and local orders restricting travel and dine-in, under an ‘all-risks’ property policy. Cajun Conti LLC is significant given claimants alleged the coronavirus was on the premises and the policy in question contained no virus exclusion, and effectively constitutes a test case for over 1500 similar claims launched later. Though no reason was given in the judgment, a Bloomberg Intelligence report noted the verdict suggests neither the presence of the virus nor the shutdown orders constituted physical loss.
As already mentioned however, the vast majority of US Covid-19 BI claims fail at pre-trial stage. Most of the early claims launched were being dismissed owing to virus exclusion clauses, such as claims brought by several baseball teams. A glimmer of hope however appeared in a claim launched by an Orlando doctor who successfully argued the exclusion clause wording citing ‘the presence of fungi, wet rot, dry rot, bacteria or virus’ was not precise enough. The District judge held that denying coverage for Covid-19 losses did not logically align with the ‘other pollutants’.
As for early dismissals centering on physical damage, the default position is exemplified in the September 2020 Farmers Insurance Exchange win where a Federal judge ruled a barbershop couldn’t demonstrate a ‘distinct, demonstrable physical alteration’. In a minority case however, a Missouri Federal judge ruled jurors could decide cover under a Cincinnati Financial Corp. ‘all-risks’ policy, citing the virus made the properties ‘unsafe and unusable, resulting in direct physical loss to the premises and property’.
Our Verdict
Jurisdictional differences aside, one draws a tentative conclusion that insureds with basic BI cover are not faring well in Covid-19 related claims. Where express virus exclusion clauses exist, if the wording is unambiguous claims are highly likely to fail. Moreover, where a physical damage loss/trigger is mandated, though some UK and US case law suggests physical alteration may not be required and arguments on impairment of use/value may succeed, US statistics show otherwise.
Under extended BI cover however, the FCA Test Case indicates that non-physical damage based claims may succeed where triggered by infectious/notifiable disease and denial of access, as well as public authority closures/restrictions. The caveat is that success hinges on very specific policy wordings, which in the FCA Test Case amounted to 14/21 of the wordings reviewed.
[1] 175 Ohio App.3d 23 (2008) 2008-Ohio-311
[2] Civ. No. 2:12-cv-04418 (WHW) (CLW)
[3] [2002] 2 All E.R. (Comm) 147 (07 August 2001)
[4] La. Dist. Ct., Orleans Parish, March 16, 2020
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