Insurance
English High Court pronounced judgement in FCA non-damage business interruption insurance test case
Abstract
On the 15 of September 2020, the High Court has proclaimed the judgment in the COVID-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others.
The FCA has advanced the claim for policyholders in the case, which considered 21 lead sample wordings from eight insurers.
The aim of the judgement was to bring guidance on the proper operation of cover under certain non-damage business interruption insurance extensions.
Also if the insurers relied heavily on Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) in their submissions on causation,the Court found in favour of the FCA on the majority of the key issues.
However, It will be very important for insurers as well as policyholders to closely consider their wordings by reference to the detailed findings in the judgement to assess whether they respond or not.
1. Facts
2. the business interruption insurance
3. the most relevant fact for the judgement
4 the policing wording
5. The Court’s reasoning
6. What this judgement means
1. Facts
The court case were brought by the FCA, the regulator of the defendant insurers, as a test case.
The purpose was to determine issues of principle on policy coverage and causation under sample insurance wordings.
The proceedings, commenced on 9 June 2020, were heard in July 2020 on an expedited basis under the Financial Market Test Case Scheme set out at Practice Direction 51M of the Civil Procedure Rules.
The Scheme may be used for certain claims which raise issues of general importance in relation to which immediately relevant authoritative English law guidance is needed.
Eight insurer participate as defendant in the test case.
The FCA represented the interests of the policyholders, many of which were small to medium sized enterprises.
There were 21 sample wordings considered, but FCA estimates that 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the test case.
The case was determined without live factual or expert evidence and on the basis of certain agreed facts.
The trial was heard through Skype with members of the public able to watch via livestream.
Two action groups – the Hiscox Action Group and the Hospitality Insurance Group Action – were given permission to intervene on behalf of certain policyholders and present arguments in addition to those presented by the FCA.
2. The business interruption insurance
Business interruption insurance will potentially cover loss of profits and additional expenses that an insured suffers as a result of insured damage to physical property such as following a fire or flood, but with the present case it is this non-damage business interruption cover that was directly the issue here.
Business interruption policies will include wording that sets out how the insured’s losses should be quantified by reference to matters such as the loss of profit / additional expenses incurred. They also typically contain “trends” clauses to allow for business trends that would have impacted the business.
Precisely how these operate was the pivotal point in the case.
3. the most relevant facts for the judgement
The courts, evaluating the events occurred during the pandemic Covid-19 and the government reaction, have focusing from a legal perspective on the key facts below:
- 3 March 2020: UK Government announces the UK COVID-19 action plan
- 5 March 2020: COVID-19 becomes a notifiable disease in England/Wales
- 11 March 2020: WHO declares COVID-19 to be a pandemic
- 16 March 2020: UK Government directs people to stay at home, stop non-essential contact and unnecessary travel, work from home where possible, and avoid social venues
- 20 March 2020: UK Government directs various categories of business to close, such as pubs, restaurants, gyms etc (given legal effect by Regulations coming into force on 21 March)
- 23 March 2020: UK Government announces lock-down involving closure of further businesses including all non-essential shops and restrictions on individual movement (given legal effect by Regulations coming into force on 26 March),
and has considered that the steps taken by the UK Government did not impact all policyholders equally.
As consequences, the F.C.A. and Insurers agreed to categorise the policyholder businesses by reference to how they were impacted by the Regulations.
4. The policy wordings
The parties agreed in the divided a sample of standard form "business interruption policies" in three categories, for an easier evaluation:
- Disease wordings: provisions which provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
- Prevention of access / public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
- Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.
5. The Court’s reasoning
The Court's reasoning has been focus on six main points:
- The Disease Wordings
- The Prevention of Access and the Public Authority Wordings
- The Hybrid Wordings
- Trends Clauses
- Causation and Orient Express
- The concept of prevalence
1. The Disease Wordings
The policies in this category were written by RSA, Argenta, MS Amlin and QBE., in a form that provided cover for loss resulting from:
- interruption or interference with the business
- following / arising from / as a result of
- any notifiable disease / occurrence of a notifiable diseases / arising from any human infectious or human contagious disease manifested by any person
- within 25 miles / 1 mile / the “vicinity” of the premises / insured location
Insurers argued that the cover provided was for a local occurrence of a notifiable disease, and so, only the effects of the local outbreak of COVID-19 were covered.
The FCA argued this was incorrect.
The FCA’s case was that the correct causal test (that of proximate cause) would be satisfied where, as here, the COVID-19 outbreak in the relevant policy area was an indivisible part of the disease.
On the point, the Court agreed with the FCA’s analysis, concluding that the proximate cause of the business interruption was the notifiable disease of which the individual outbreaks form indivisible parts, alternatively each of the individual occurrences was a separate but effective cause of the national actions.
In conclusion, diseases which are notifiable include those capable of widespread dissemination, such as SARS and of a nature which will engage a response by national, not just local, bodies.
This was on the basis that, when COVID-19 occurred, it was of such a nature that any occurrence in England and Wales would reasonably be expected to have an impact on insureds and their businesses, and therefore that all occurrences of COVID-19 in England and Wales were within the relevant “Vicinity”.
The Court’s conclusion was said to avoid the “anomalous” results that would follow from Insurers’ position, namely that “there would be no effective cover if the local occurrence were a part of a wider outbreak and where, precisely because of the wider outbreak, it would be difficult or impossible to show that the local occurrence(s) made a difference to the response of the authorities and/or public.”
The Court took a different approach, and reference was made to the interpretation of “event” in other insurance cases such as in the aggregation case of Axa Reinsurance v Field [1996] 1 WLR 1026 in support of this reasoning.
Insureds would only be able to recover if they could show that the case(s) of disease within the relevant policy area, as opposed to elsewhere, were the cause of the business interruption.
This may be relevant for some of the local lock-downs.
2. The Prevention of Access and the Public Authority Wordings
The wordings in this category were written by Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich.
The wordings provide cover for loss resulting from:
- Prevention/denial/hindrance of access to the Premises
- Due to actions/advice/restrictions of/imposed by order of
- A government /local authority/police/other body
- Due to an emergency likely to endanger life/neighbouring property/incident within a specified area
The Court concluded that, generally speaking, these clauses were to be construed more restrictively than the majority of the Disease Clauses, although their findings provide for cover for some insureds under some wordings.
The key factors considered by the court can be summarised as follows:
- The location and nature of the emergency/incident and the causal relationship between it and the relevant authority’s action, the Court considered “emergency in the vicinity”, “danger or disturbance in the vicinity”, “injury in the vicinity” and “incident within 1 mile/the Vicinity” were all requirements that connoted something specific which happens at a particular time and in the local area.
- The nature of the actions/advice/order of the authority: the announcements by the Government on 16, 20 and 23 March were characterised as advice, rather than mandatory instructions, thus potentially engaging clauses with “advice” wordings. An “action” by an authority, which “prevents” access, requires steps which have the force of law, since only steps which have the force of law will prevent access.
- The required effect of the authority’s action on access to the premises: A number of policies required there to have been “prevention” of access (as opposed to, for example, “hindrance” of “use”). Where that was the case, although physical prevention was not required, there had to have been a closure of the premises for the purposes of carrying on the business.
- The required effect on the business:The Court considered that “interruption” did not require a complete cessation of the business but was intended to mean “business interruption” generally, including disruption and interference with the business.
- The exception to this general rule was in relation to MS Amlin 2, where interruption was given its strict meaning of cessation. This is because the reference to “interruption” was within the Prevention of Access clause (“We will pay you for… your financial losses and other items specified in the schedule, resulting solely and directly from an interruption to your business…”) rather than in stem wording covering a number of insuring clauses which point to “interruption” including “disruption”.
Summarising on the point, whether cover is available to an insured under a Prevention of Access clause will therefore turn very closely upon the precise terms of the policy and the application of the government advice and Regulations to the insured’s particular business, such as whether their business was directly mandated to close or was affected by the more general “stay at home” requirements. Example, the 26 March Regulations required restaurants to close but permitted them to continue to offer takeaway services.
3. The Hybrid Wordings
The policies in this category were wordings from Hiscox and RSA.
Those clauses are a blend of a disease wording and prevention of access/public authority wording and provided cover for losses resulting from:
- An interruption to the business
- Due to an inability to use the premises
- Due to restrictions imposed by a public authority
- Following an occurrence of disease
The Court took a similar approach to the “disease” part of the clause to that set out above, rejecting Insurers’ argument that the only cover was in respect of losses flowing from a local outbreak.
However, as with the prevention of access wordings, the Court construed the meanings of “restrictions imposed” and “inability to use” narrowly, finding that “restrictions imposed” requires something mandatory, such as the mandatory requirements of the regulations, and “inability to use” requires something more than just an impairment of normal use.
In any circumstances a close examination of the particular terms of the clause is required to determine policy application.
4. Trends Clauses
The operation of trends clauses was a critical issue in the case because, if construed in line with Insurers’ arguments to include components of the insured peril itself, the application of the trends clause could effectively negate the value of any insurance cover available to the insured.
The starting point of the Court was that the trends clause is intended simply to put the insured in the same position as the insured peril would had not occurred.
Where the policyholder has therefore on the face of it established a loss caused by an insured peril, it would be contrary to principle, unless the policy wording so requires, for that loss to be limited by the inclusion of any part of the insured peril in the assessment of what the position would have been if the insured peril had not occurred.
Therefore the extent of the insured peril becomes critical, Insurers contended that the insured peril should be narrowly defined with the result in practice that the insured’s indemnity is maybe negligible.
The Court contrasted this argument, stating in relation to a hybrid Hiscox wording:
“… the FCA effectively illustrated the fallacy and unreality of the insurers’ case in relation to the counterfactual, with particular reference to the Hiscox “public authorities” clauses, by focusing on the provision of cover in respect of an inability to use an insured’s premises, assumed to be a restaurant, due to restrictions imposed on them by the local authority following the discovery of vermin dislodged from a nearby building site. On the insurers’ case, the counterfactual involved stripping out the restrictions, but assuming the vermin were in the premises throughout, with whatever other consequences on the business the presence of vermin would have had. Thus, on insurers’ case the insured could not recover in respect of the period after the imposition of the restrictions, unless it could show that customers not coming to the restaurant was due to the restriction imposed rather than due to the vermin, and that if the insured could not demonstrate that customers would have come despite the presence of vermin, it could not recover. As the FCA submitted, this would render the cover largely illusory, as insurers would argue that, as no one is likely to want to eat at a restaurant infested by vermin, all or most of the business interruption loss would have been suffered in any event. Such illusory cover cannot have been intended and is not what we consider would reasonably be understood to be what the parties had agreed to.”
The Court provided the following guidance as to the ‘in principle’ operation of the trends clauses in respect of each category of wording:
- Disease wordings: The insured peril is the interruption or interference with the Business following the occurrence of the disease including via the authorities’ or public’s response.
- Prevention of access/public authority wordings: the insured peril is a composite one involving three interconnected elements: (i) prevention or hindrance of access to or use of the premises; (ii) by any action of an authority; (iii) due to an emergency/incident which could endanger human life.
- Hybrid wordings: The insured peril is also a composite peril involving (i) inability to use the insured premises; (ii) due to restrictions imposed by a public authority; (iii) following the occurrence of a human infectious or contagious disease.
The wordings in issue insured the effects of COVID-19 both within the specified radius and outside it, with the result that the whole of the disease both inside and outside the relevant area has to be stripped out in the counterfactual, in practice court suggested that each of these interconnected elements should be removed from the counterfactual.
It is also worth noting that a number of the Trends clauses were drafted so as to apply to losses from “Damage”.
On their face they did not apply to the non-damage extensions to the policy, the Court concluded that it must have been intended that such clauses would apply to the non-damage extensions.
5. Causation and Orient Express
Insurers relied heavily upon the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) to support their case on causation and the trends clauses.
The Court found however that the issues of causation actually followed from the construction of the wordings before it and that Orient Express, were the claim was for business interruption losses caused, could be distinguished on matters of construction.
The Court nonetheless analysed the decision, given the reliance placed on it by Insurers. It was a claim under an all risks policy with a trends clause incorporating a “but for” causation test. It also had sub-limited prevention of access and loss of attraction cover, it came before the court as an appeal from an arbitration tribunal.
The premises in question were a hotel in New Orleans. There was no dispute as to cover for the physical damage to the hotel caused by the hurricanes. When it came to the business interruption losses, however, insurers argued that there was no cover because, even if the hotel had not been damaged, the devastation to the area around the hotel caused by the hurricanes was such that the business interruption losses would have been suffered in any event.
Accordingly, the necessary causal test for the business interruption losses could not be met because the insured peril was the damage alone, and the event which caused the insured physical damage (the hurricanes) could be set up as a competing cause of the business interruption.
As set out above, insurers in the test case contended for a narrow definition of the insured peril in the policy wordings (for example, on a disease clause wording, the local occurrence of disease only), in order to argue for the same result as in Orient Express i.e. by setting up the widespread nature of the disease, and government advice and restrictions as a competing cause of the loss.
The Court dismissed Insurers’ arguments and distinguished Orient Express on the basis that it was not concerned with the type of insured perils being considered in the case, in particular the “composite or compound perils” featuring in the wordings before the Court, contrasted with the “all risks” nature of the cover in Orient Express.
Notwithstanding this, the Court went on to say that they saw several problems with Orient Express,
in their view, the decision misidentified the insured peril (by treating the “Damage” as the insured peril, rather than Damage caused by a covered fortuity – hurricanes) and the proximate cause of the loss was not “Damage” but “Damage caused by hurricanes”.
Further, the decision resulted in the absurd result that the more serious the fortuity the less cover was available: if the hurricane had only damaged the hotel, there would have been a full recovery, as consequences they would have concluded that it was wrongly decided and declined to follow it.
6. The concept of prevalence
The Court did not make any findings of fact as to where COVID-19 has occurred or manifested.
Whether the insured can discharge the burden of proving that the disease occurred or manifested in a certain area will need to be determined on a case by case basis.
There are nonetheless some positive takeaways from the judgment for policyholders:
- Insurers conceded that the categories of evidence put forward by the FCA – specific evidence, NHS Deaths Data, ONS Deaths Data and reported cases – are in principle capable of demonstrating the presence of COVID-19;
- That a distribution based analysis, or an under-counting analysis (i.e. there are more cases than the reported cases), could in principle discharge the burden of proof on the Insured; and
- Insurers did not suggest that absolute precision is required and that otherwise claims will fail.
Whilst questions of fact therefore remain to be determined, the Court expressed its hope that, in the light of the concessions made by Insurers on the evident questions of prevalence of disease, insurers will be able to agree on any issues of prevalence which arise and are relevant to particular cases.
7. What this judgement means
The Judgement is a significant step in resolving the uncertainty being faced by policyholders, particularly those with Disease or Hybrid wordings similar to those considered in the Proceedings.
Those with Prevention of Access/similar wordings may also find themselves with cover if the facts of their particular circumstances satisfy the requirements of their wordings.
The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers, but next steps for insureds will include considering:
- (a) if any of the findings are directly (or indirectly) applicable to their wording; and
- (b) what additional issues will need to be considered to establish and prove a valid claim.
However, the test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers.
The judgement does not determine how much is payable under individual policies, but will provide much of the basis for doing so.
September 2020
On the basis of the Court material a summary made by