Business Interruption (BI) insurance policies are normally triggered by physical damage/loss. A test case brought by the FCA explored whether such cover could be triggered by non-physical damage/loss linked with COVID-19.
On 15 September 2020 the High Court delivered its much awaited judgment on the potential impact of COVID-19 on Business Interruption (BI) policies, which are insurance policies designed to provide cover for loss of income during periods where a business cannot carry on its activities as usual owing to an unexpected event. Proceedings were commenced by the Financial Conduct Authority (FCA), representing the interests of BI policyholders, under the Financial Market Test Case Scheme. This scheme does not require a present cause of action, and is designed to facilitate the resolution of market issues to which immediately relevant English law guidance is needed. Eight insurers agreed to be part of the test case as defendants, namely Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office Plc, MS Amlin Underwriting Ltd, Hiscox Insurance Company Ltd, QBE UK Ltd, Royal & Sun Alliance Insurance Plc, and Zurich Insurance Plc. The High Court on balance found in favour of the policyholders, and the judgment is legally binding on the eight insurers, bearing potential for much wider application, as some three hundred seventy thousand policyholders may be affected. On 2 October 2020, both the FCA and the defendants were granted leapfrog certificates to appeal to the Supreme Court (appeal pending).
BI insurance potentially covers loss of profits and additional expenses resulting from insured damage to physical property. Though policyholders and insurers continue to argue whether COVID-19 in fact causes physical loss or damage, the test case explored a different facet of certain BI policies, which extend cover to non-physical damage. Specifically, the High Court was asked to address (i) issues of coverage in relation to ‘disease’ and ‘denial of access’ clauses (including any relevant exclusions); and (ii) causation (including any relevant ‘trends clause’ or equivalent wording). Twenty-one different types of policy wording were considered, which were allocated by the Court into three large categories: (a) disease clauses; (b) hybrid clauses; and (c) prevention of access and similar wordings. In broad terms, the Court construed disease clauses widely and in favour of the policyholders, prevention of access and similar wordings narrowly and in favour of the insurers, and hybrid clauses widely in terms of their disease element, and narrowly in terms of their prevention of access element. Certain key findings underpin the Court’s analysis, and facilitate the reading of this complex and extensive judgment. Firstly, that the insured peril is ‘composite’, in other words includes everything that the clause requires to occur in order to trigger cover. Secondly, that COVID-19 is ‘one indivisible cause of loss’, in other words the pandemic consists of the sum of its localised manifestations.
Such clauses were featured in RSA, Argenta, M Amlin and QBE policies. They referred to business interruption, following or arising from or as a result of, (occurrence of) a notifiable disease, within twenty-five (or 1) miles or in the vicinity of the premises. The insurers argued that cover was reserved for localised occurrences of a notifiable disease, and in cases where ‘but for’ the localised occurrence, BI would not have occurred. They claimed this was not the case with COVID-19, since BI would have occurred owing to the wider pandemic. These arguments were dismissed in light of a ‘one indivisible cause’ finding, and in favour of proximate causation between the loss claimed and the ‘composite’ insured peril. ‘Vicinity’ was construed widely, potentially encompassing the entire UK, and, critically, the occurrence of the notifiable disease was deemed a point in time when COVID-19 was diagnosable within the policy area. In broad terms, BI losses could be claimed, from the date a local occurrence was identified, or from 5 Mach 2020 when COVID-19 was declared a notifiable disease (whichever came first), and losses included those resulting from Government restrictions, directives and/or guidance.
Prevention of access and similar wordings
Such clauses were featured in Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich policies. They referred to prevention/denial/hindrance of access, due to actions/advice/restrictions/orders of government/local authorities/other bodies, due to an emergency within the vicinity of the insured premises. In a position reversal, ‘vicinity’ here was construed narrowly, in terms of an emergency occurring at a particular time in a local area. Moreover, ‘action’ required force of law, and ‘restriction’ was mandatory and did not include Government advice. As for ‘prevention of access’, this did not necessitate physical closure, but it did require significant change in the modus operandi of the business in question. As such, a restaurant that closed down and had to establish food delivery de novo, and/or was running a delivery service that was not a fundamental part of its business, would be covered under ‘prevention of access’ BI insurance. In practical terms, BI cover hinged on nuanced differences between terms, such as prevention/hindrance, advice/restriction, and government/local authority/other bodies.
Causation was one of the areas the Court was asked to review, and featured in all three of the categories mentioned above. The insurers argued that, since the purpose of contractual damages was to put the claimant in the position it would have been had the contract (insurance policy) properly been performed, factual (‘but for’) causation was required, measuring the insureds’ actual position against a counterfactual scenario in which the insured peril did not operate. They further argued that, where concurrent proximate causes existed, some insured and others not, such as the localised occurrence and the Government response to the wider pandemic, under English law the policy was not triggered. Finally, they argued that in line with ‘trends clauses’ which prevent policyholders from claiming losses which would have occurred had the insured peril not occurred, any loss suffered by policyholders owing to a localised manifestation of the disease and/or local application of national restrictions would have happened regardless.
Insurers relied heavily on Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm), a case featuring a BI claim on losses suffered by a hotel in New Orleans caused by hurricanes Katrina and Rita. The BI claim did not succeed in Orient Express Hotels Ltd, as the Court found BI losses would have occurred anyway in light of the wider area devastation. The High Court did not accept their arguments, and was highly critical of Orient Express Hotels Ltd, which was distinguished on the facts, stating obiter that the Court failed to recognise the insured peril’ s construction, and that the judges would have declined to follow it if required. The Court reiterated this case centred on proximate causation and a composite peril, and that factual causation would have yielded similar results, since “The correct answer to the question it poses “but for what?” is “but for the insured peril”, which is the composite one…” The Court did however concede trends clauses could in principle apply to ‘non-damage’ extensions as a quantification mechanism.
Proving the claim
Finally, given individual policyholders will have to prove ‘occurrence’ or ‘manifestation’ of COVID-19 within an area described by their respective policies in order to trigger cover, the Court was asked to consider (i) what type of proof would suffice and (ii) whether the evidence put forward by the FCA was sufficient to discharge the burden of proof. Insurers conceded that the latter, which included specific evidence, NHS & ONS Deaths Data, and reported cases, as well as distribution and/or undercounting analytics, were in principle capable of discharging the burden of proof.
This case, brought under the Financial Market Test Case Scheme, tested the waters as to whether BI insurance would be triggered by non-physical damage/loss in respect of COVID-19. Twenty one different policy wordings originating from eight different insurers were selected, as a representative sample potentially affecting some three hundred seventy thousand policyholders. The judgment largely shows BI insurance will be triggered in notifiable disease-specific clauses, and may be triggered in clauses relating to prevention of access from an emergency, depending on the specific wording, which is narrowly construed. This means insurers now need to carefully examine under which, if any, of the two above mentioned categories their BI policies fall. Meanwhile, insureds should not struggle under causation, subject to the specific case facts, and may rely on a variety of data to prove their claims.
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