Covid-19 BI Update: Denial of Access – Access Granted?

“I doubt whether the Divisional Court could or would have taken the approach it did, had it had the benefit of the Supreme Court’s reasoning on causation.”

Lord Mance

The latest Covid-19 BI decision to arrive following the conclusion of the test case provides fresh hope for policyholders with denial of access clauses whose claims currently remain declined.

It will be recalled that the Divisional Court in the test case found that such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. Many policyholders were disappointed at the FCA’s decision not to appeal these rulings, and have subsequently argued that the Supreme Court’s ultimate conclusions on causation rendered the Divisional Court’s ruling an unsound authority for declining coverage under such clauses.

In an arbitral Award issued on 10 September 2021 by Lord Mance[1], clear support is provided for exactly that proposition.

The China Taiping Proceedings

In arbitration proceedings commenced by Fenchurch Law on behalf of a group of 183 hospitality policyholders against China Taiping Insurance[2], coverage was considered under two limbs of a Denial of Access clause which responded to:

“b – the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority for reasons other than the conduct of the Insured or any director or partner of the Insured or the condition of the Premises or the carrying out of repair or maintenance work at the Premises;

c – the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises;”

The Issues

There were three key disputed issues. First, whether the existence of Notifiable Disease cover elsewhere in the policy (which did not extend to Covid-19) negated the possibility of the Denial of Access wording responding to the pandemic. Secondly, whether the requirement for an “emergency in the vicinity of the premises” in limb (c) meant that the clause could only respond to narrow, localised events, rather than national ones, per the Divisional Court decision in the test case. Thirdly, whether the UK Government was a ‘competent local authority’ within the meaning of the clause.

On the first issue, Lord Mance found in favour of the policyholders. The existence of the express notifiable disease cover elsewhere in the policy did not limit the cover under the prevention of access extension.  It was common for the coverage provided by various insuring clauses and extensions to overlap, and if insurers intended to exclude diseases from the scope of the prevention of access clause, they should have used clear language to do so.

On the third issue, Lord Mance agreed with insurers that the UK Government was not a “competent local authority” within the meaning of the clause, meaning that there could be no coverage under limbs (b) or (c) of the Denial of Access extension for losses caused by closures and other restrictions imposed by the UK Government in response to the Covid-19 pandemic. This issue was ultimately therefore fatal to the policyholders’ claim, which failed at the last hurdle.

Issue 2 – Emergency threatening life or property in the vicinity of the premises

On Issue 2, however, Lord Mance agreed with the policyholders, and despite the fact that it did not alter the outcome in this particular case, his discussion and conclusions on the issue are of potentially much broader significance and merit close examination.

Lord Mance noted that Clause 1(c) was drafted in materially identical terms to two of the representative sample of policy wordings considered in the test case, namely RSA 2.1 and 2.2. The RSA clauses required “an emergency likely to endanger life or property in the vicinity of the Premises”.

In the test case, the Divisional Court concluded in relation to RSA 2.1 and 2.2, that

“There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government. […] it is highly unlikely that that could be demonstrated in any particular case[3].”

Similar conclusions were reached in relation to the other denial of access wordings under consideration, and the findings were not appealed to the Supreme Court.  In the arbitration, insurers unsurprisingly therefore relied on the Divisional Court’s judgment to resist coverage under limb 1 (c) of the China Taiping clause.

Lord Mance began his analysis of the issue by noting that, as an arbitrator, he must regard the Divisional Court’s approach to the NDDA clauses as being, at the very least, highly persuasive, and that it may even, on the face of it, bind him.  However, that was subject to, first, the relevant point having been squarely argued and decided in the Divisional Court, and second the Supreme Court’s judgment.

As to the first point, Lord Mance noted that the Divisional Court appeared to have reached its conclusions on the basis that RSA 2.1 and 2.2 were analogous with MSA 1.  However, in Lord Mance’s view, the China Taiping and RSA wordings were clearly distinguishable from the MSA 1 wording, in leaving open for consideration whether cover extends to an emergency outside the vicinity threatening life or property within the vicinity, in contrast with the MSA 1 wording that required that the emergency be within the vicinity of the premises.  It was unclear how far RSA had argued the point, but a requirement that the emergency be in the vicinity of the premises was central to the Divisional Court’s reasoning in relation to RSA 2.1 and 2.2.

In relation to the Supreme Court judgment, Lord Mance’s words speak for themselves:

“…although there was no appeal in respect of RSA2.1 and 2.2, I find the Supreme Court’s analysis of the operation of other wordings, and particularly its analysis of the correct approach to causation, hard to reconcile with the analysis of RSA 2.1 and 2.2 adopted by the Divisional Court in paragraphs 466 and 467.[…] Paragraphs 466 and 467 of the Divisional Court’s judgment indicate that it was the Court’s view of the causation required that ultimately dictated the likelihood of recovery under the relevant wordings.  The Supreme Court held that the Divisional Court had erred in significant respects in its understanding of the operation of causation under other policy wordings before it.  As I read its judgment, the Supreme Court also thought that its understanding would, at least prima facie, carry through generally into other wordings.”

“… the Supreme Court was, contrary to the Insurer’s submission, prepared to state quite generally that its general approach to causation was applicable across the whole range of wordings”

“That is particularly so, if the emergency may be outside the vicinity, so long as it threatens life or property within the vicinity.  But it is also so if both the emergency and the threat must be in the vicinity.  Once it is accepted that the emergency may at the same time be elsewhere and threaten life or property elsewhere, the Supreme Court’s analysis of the relevant elements of cover and its conclusion that a “but for” test of causation was inappropriate would seem readily transposable to a NDDA clause like Extension 1(c)”

“I therefore doubt whether the Divisional Court could or would have approached the matter as it did in paragraphs 466 and 467 had it had the benefit of the Supreme Court’s analysis.”

“The absence in the Arch wording of the words “in the vicinity” in relation to the emergency appears an inadequate basis on which to distinguish the Supreme Court’s approach in relation to that Arch wording from the present.”

Lord Mance apparently therefore concluded that he was not bound by the Divisional Court’s findings as far as relevant to Issue 2, and despite the negative outcome in the present case, set out a powerful and clear basis on which a case for coverage under the RSA 2.1 and 2.2 wordings (and others on similar terms, including the other denial of access wordings considered in the test case) might be made in reliance on the Supreme Court judgment.

Comment

Lord Mance’s comments in the China Taiping Award are far from the end of the story.  The Award is not binding on any third party, and despite his detailed and helpful analysis, Lord Mance found it unnecessary to issue any final ruling or declaration on the issue, due to his conclusions on the meaning of ‘competent local authority’ which were conclusive to the outcome of the proceedings.  Noting that the issue was complex, and because the Award was to be published and the issue may arise in other contexts, Lord Mance concluded that he should say “nothing more definite” about it.

But as an ex-Deputy President of the Supreme Court and the author of many seminal decisions on English insurance law, his clearly-expressed views on the matter will doubtless be influential in future judicial consideration of the issue, and will need to be studied closely by insurers and policyholders alike in considering the position under Denial of Access and other clauses where coverage is still in dispute.

A copy of the award can be accessed here.

[1] The arbitration proceedings were brought with the agreement of the insurer, who agreed to cover the costs of the proceedings, and not to seek its own costs from the policyholders regardless of the outcome.  Confidentiality in the arbitral award was also waived, meaning that it can be made public.

[3] Divisional Court para.467