Covid-19 BI Update: Access Granted to Corbin & King and Deduction of Furlough from Claims

“… the decision of the Supreme Court has moved the goalposts and the argument which has emerged is materially different.”

Mrs Justice Cockerill, Corbin & King v Axa [2022] EWHC 409 (Comm)

Two further policyholder-friendly judgments last week continued the trend of extending the scope of coverage available for Covid-19 BI losses under non-damage extensions. This time the focus falls on (i) prevention of access wordings; (ii) aggregation of losses at multiple premises; and (iii) deduction of furlough and other government support payments.

1. Prevention of Access – Access Granted!

In our September 2021 Update ‘‘Denial of Access – Access Granted“, we set out Lord Mance’s reasoning in the China Taiping Arbitration, noting that it set out a clear pathway to coverage for policyholders with Prevention of Access and similar wordings, whose claims had been declined following the Divisional Court judgment in the FCA test case.

In a judgment handed down on Friday in Corbin & King v Axa, Mrs Justice Cockerill endorsed that approach and signalled a wholesale reversal of the coverage position under such wordings.

Recap

The FCA test case examined coverage under a number of non-damage Prevention of Access or Denial of Access clauses. At first instance, the Divisional Court found that the majority of such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. The basis for this conclusion was encapsulated at paragraph 467 of the Divisional Court judgment (repeated in similar terms elsewhere in relation to different wordings):

“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].”

Many policyholders were disappointed at the FCA’s decision not to appeal that aspect of the Divisional Court judgment, 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.

The China Taiping Arbitration

The point was subsequently argued on behalf of policyholders in the China Taiping Arbitration, decided by Lord Mance in a published award. Although the China Taiping policyholders’ claim ultimately fell down on the issue of whether the UK government was a ‘competent local authority’ within the meaning of the clause, on the key issue of whether the Covid-19 pandemic was capable of triggering coverage under a clause requiring, “an emergency likely to endanger life or property in the vicinity of the Premises” Lord Mance agreed with the policyholders that the position was indeed altered by the Supreme Court judgment in the test case.

In Lord Mance’s words:

“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 door was therefore left wide open for the point to be fully argued before the Courts, which it duly was by Corbin & King in their case against Axa.

Corbin & King v Axa

In Corbin & King, the policyholders sought coverage for their BI losses flowing from closure and other restrictions places on eight insured restaurants, under a Non-Damage Denial of Access (NDDOA) clause, which responded to:

“the actions taken by police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises.”

Insurers denied coverage in reliance on the Divisional Court, in much the same terms as China Taiping.

Coverage

On behalf of Corbin & King  Jeffrery Gruder QC argued, relying on Lord Mance’s reasoning in China Taiping,  that government action to close down the insured restaurants had been taken in response to the nationwide pandemic, that included cases of Covid-19 within a 1 mile radius of the insured premises, which amounted to a danger. On the Supreme Court’s concurrent causation analysis, the action had been taken in response to a danger or disturbance within 1 mile of the premises, which therefore was a proximate cause of loss, triggering coverage under the NDDA clause.

Axa for its part contended that the Supreme Court’s findings on causation could not be transposed from disease clauses to prevention of access clauses, which were qualitatively different, but that in any case in the present case the insured peril had simply not been triggered. There had been no “danger or disturbance at the insured premises or within a 1-mile radius of the insured premises”, and the question of causation did not therefore arise.

Mrs Justice Cockerill first concluded that she was not bound by the ruling of the Divisional Court, not only because the Axa clause was sufficiently different from the clauses considered in the test case, but also because the Supreme Court decision in the test case had “moved the goalposts”, and that consequently the legal argument had “developed somewhat … in the way that legal argument inevitably develops, like water, to find its way round an obstacle.”

Approaching the matter from first principles, but drawing heavily on the Supreme Court’s ruling on concurrent causation, and Lord Mance’s persuasive discussion of the issue, Cockerill J therefore found that:

• Covid-19 was capable of being a danger within one mile of the insured premises;
• which, coupled with other uninsured but not excluded dangers outside;
• led to the regulations which caused the closure of the businesses and caused the business interruption loss.

There was therefore cover for Corbin & King’s losses under the Axa NDDOA clause.

2. Prevention of Access – Aggregation

A secondary issue was whether the limit of £250,000 available under the NDDOA clause applied as an aggregate limit to Corbin & King’s losses, or to each of the eight insured premises. Axa accepted that a fresh limit applied for each new set of government restrictions, but maintained that in each case the limit applied to Corbin & King’s business as a whole, and not to each restaurant individually.

On that issue the Court also found in the Claimants’ favour, for two reasons.

First, as Corbin & King pointed out, their policy was a composite one under which the insurer had agreed to indemnify a number of different insured entities, each holding one or more insured premises. The Court found that the insureds’ interest was not joint, and that each had their own claim under the policy.

Moving on to construction, Cockerill J noted that the policy referred to cover in respect of interruption and interference with the business where access to the Premises was restricted, and that each of the Premises was in a different location. The closure of two restaurants “must be seen on any analysis as two separate incidents”, and that was said to be regardless of whether there was one common danger causing the closure, or two separate dangers. The word “premises” pointed to each restaurant/café, and that pointed to separate limits.  Cockerill J found that these were powerful points that unequivocally supported the Claimant’s position, and therefore had no difficulty concluding, apparently regardless of the ‘composite policy’ issue, that the Policy provided a separate limit of £250,000 for each insured restaurant.

The ruling marks the first aggregation decision in the Covid-19 BI context, and may serve to dramatically increase insurers’ liability in cases where policyholders have insured multiple locations under a single policy.

3. Furlough and Government Support

A near-universal point of contention in the adjustment of Covid-19 BI claims (where coverage is established), has been the treatment of certain types of government financial support received by policyholders. While insurers have by and large agreed that government grants are to be ignored for the purposes of a BI indemnity, they have generally maintained that any support received in the form of Coronavirus Job Retention Scheme payments (“Furlough”), and Business Rates Relief, should be either be accounted for as turnover or as a saving, thus reducing the value of the covered claim under the Policy.

For their part, many policyholders have maintained that (i) the terms of the policies do not generally support such an approach; (ii) as a matter of common law, such payments do not go to reduce the policyholders’ covered loss, and (iii) as a matter of public policy, government financial support provided to the hospitality industry and other hard-hit sectors was not intended to inure to the benefit of insurers.

Insurers’ approach has had the effect of drastically reducing, or in some cases effectively wiping out, the amount paid by the insurer to policyholders for their claims. The underlying question therefore remains: who should stand first in line to benefit from the government’s financial support measures – the hospitality industry which is still struggling to recover 2 years later, or insurers, who were largely cushioned from the effects of the pandemic, and who have in many cases reported record profits in 2021?

The issue remains untested in the English courts, although a distinguished panel led by Lord Mance in the Hiscox Action Group Arbitration was reported in July 2021 to have found in favour of the policyholders on the issue.

More recently, in the second Australian test case[1], the Federal Court of Australia found at first instance that JobKeeper payments (the Australian equivalent of furlough) were properly deductible from Covid-19 BI claim calculations as a saving. That decision was appealed to the Full Court of the Federal Court of Australia, which last week overturned the ruling and found that JobKeepers payments, and certain other forms of government support, were not to be treated as a saving because they were not made and received “in consequence of” the interruption or interference resulting from the insured peril, i.e. the policyholder would have received the payments regardless of whether there had been an outbreak of disease within the specified radius of the premises.[2]

Whilst the decision of the Australian Full Court is not binding on UK insurers, it provides further support for policyholders’ position in the UK, and will no doubt come under close scrutiny by the Commercial Court, when the issue falls for determination for the first time in the English courts in the forthcoming trial of Stonegate v MS Amlin in June 2022[3].

4. Comment

This week’s developments will come as welcome news to a great many policyholders who have either had their Covid-19 BI claims declined under Prevention/Denial of Access wordings, or who have had the value of their claims reduced for government support received. The Corbin & King decision will also serve as an important authority for those policyholders who are seeking full indemnity for losses suffered at multiple premises. Policyholders in any of these groups should now therefore review their position with their advisors, to consider whether any further action is now required.

Aaron Le Marquer is a Partner at Fenchurch Law

 

[1] Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID‑19 insurance test cases) [2021] FCA 1206

[2] LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC

[3] https://www.judiciary.uk/you-and-the-judiciary/going-to-court/high-court/queens-bench-division/courts-of-the-queens-bench-division/commercial-court/test-and-grouped-cases-including-covid-19-bii-cases/