In our previous edition of Cover to Cover, we discussed the various jurisdictions in which insurers’ approaches to business interruption cover following COVID-19 were being scrutinised.
In the UK, the Financial Conduct Authority (FCA) initially worked together with insurance companies to aim to provide transparency and clarity in their existing policies for their insureds. It was soon clear that there was a growing problem in the market, largely due to the multiple action groups arising, especially with policies affecting SMEs.
The FCA therefore collected 21 sample policy wordings from eight insurers and sought declarations as to how certain extension wording in each of them would respond to COVID-19 interruptions. This case was known as the ‘test case’, with judgment delivered with significant speed on 15 September 2020. The case involved the FCA, eight insurers and two class action groups (Hiscox Action Group and the Hospitality Insurance Group Action) as interveners. The judgment was complex and meticulous.
In a judgment sure to cause concern in the industry, the Court largely sided with the FCA on many of the key issues. Example policy extensions concerning disease and prevention of access, as well as causation, were all given considerable legal analysis.
The FCA and various of the other parties have received certificates from the High Court allowing them to apply to the Supreme Court for a “leapfrog” appeal. We understand that appeals are likely to be pursued if agreement cannot be reached with the eight insurers and two interveners on how to treat claims going forward.
Most disease clauses examined followed the general structure of: interruption or interference with a business that was “following”, “arising from,” or “as a result of” any “notifiable disease”, “occurrence of a notifiable disease”, or arising from any human infection or human contagious disease “manifested” by any person. Some policies contained geographic boundaries, mostly being within 25 miles of the “vicinity” of the insured premises.
The insurers’ argument was that cover was provided only for a local occurrence of a notifiable disease, where they could be distinguished from wider effects. In other words, discrete instances of COVID-19 cases, if necessary within the stated boundary.The FCA argued that the causation requirement was less than “proximate”, and cover should be provided because COVID-19 was an outbreak that had multiple indivisible parts. The outbreak itself was the ‘occurrence’, rather than separate diagnoses in certain areas. “Following” indicated that the proximity required was indirect, and therefore a nation-wide response to the COVID-19 outbreak would fulfil the causal nexus required.
Although cover was dependent on the policy terms in each instance, the Court found in favour of the FCA on many of the disease extensions.
Prevention of access clauses
In general, the Court afforded these clauses a much narrower construction than disease clauses. Cover was limited only to certain circumstances under certain clauses.
In particular, the Court held that these clauses required specified events to have occurred within the relevant area at a certain time. The policy wordings included phrases such as “emergency in the vicinity”, “injury in the vicinity” and “incident within 1 mile/the vicinity”, which was intended to provide narrow, localised cover. Therefore, for the prevention of access clause to apply to a business, the relevant action of the authority must have been a response to a localised occurrence of the disease within the relevant distance of the premises – not simply a country-wide response to the pandemic, as in the disease clauses.
An “action” to “prevent” access must have the power of law, such as imposed orders. Mere government advice or guidelines were not deemed mandatory and would not suffice. Notably, the Court did not consider “interruption” to mean a full cessation of business, but to also include disruption, as the word “interference” would suggest.
This analysis shows that prevention of access clauses will turn more closely upon the insured’s specific policy wording, as well as their own position before the interruption. For example, a restaurant that regularly offers take-away services would be unlikely to be deemed to have its business impaired enough by a stay-at-home order. A restaurant that offered only dine-in however, would likely need to have its premises shut for the purpose of its business operations.
Causation and the Orient Express
Causation was found to pertain mostly to the construction of the words before it, focusing on an insured peril, rather than a broad analysis of a causation test overall.
Therefore, the Court readily distinguished the causation analysis in Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm), a case that the eight insurer defendants relied upon. The Court also considered the case to have been wrongly decided. Orient Express followed Hurricane Katrina, which damaged the insured’s hotel and also devastated New Orleans. The court in Orient Express held that there was no cover because even if the hotel itself was not damaged, the surrounding area was so damaged that business interruption losses would have been suffered regardless. Therefore, the “but for” test of causation could not be met because the insured peril was not damage alone. This narrow construction was quickly dismissed by the Court in the FCA test case, which highlighted the decision’s absurdity: if the hurricane damaged the hotel alone, and not its surrounding premises, there would have been a full recovery under the policy.
This judgment is key reading for insurers with policy wordings similar to those in issue in the case. However, it is almost certain that the decision will be appealed if the parties cannot reach agreement on its application. So, it is a case of “watch this space”.
We are yet to hear anything new directly from the Financial Markets Authority on business interruption policies here in New Zealand. However, the Insurance Council of Australia has brought a similar case to that brought in the UK, which has been elevated to the New South Wales Court of Appeal. It was being heard at the time of production of this article.
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