Covid-19 BI Update: The Curious Case of the Missing Declarations, and litigation round up.
It is now over five months since the Supreme Court handed down its largely policyholder-friendly judgment in the FCA Test Case, but for a majority of policyholders, the end is not yet in sight.
The FCA’s latest figures, published on 14 June 2021, indicate that, of 46,854 claims reported to have been accepted by insurers, or where a decision on coverage is still pending, only 34% (16,159) have so far been paid in full. Moreover, the data published by the FCA does not include numbers of claims declined by insurers which may be disputed by policyholders, and excludes ‘contracts of large risks’ [i]. Whilst giving an indication of the (some might say slow) progress being made by insurers in settling undisputed SME BI claims, the data does not therefore shed any light on areas of ongoing dispute.
Meanwhile, an examination of cases proceeding in the courts (including the Test Case itself) reveals that the stage is set for a raft of further litigation in relation to issues that were either undetermined in the Test Case, or where a degree of uncertainty persists.
Supreme Court Declarations
Most notably, the Supreme Court Declarations, giving effect to the rulings set out in the Supreme Court’s judgment of 15 January 2021, as applied to the 21 sample policy wordings under direct consideration in the Test Case, are still awaited. It is unfortunate (whilst not intended as criticism levelled in any particular direction) that the outcome of the Test Case has yet to be finalised in this way, following the herculean efforts of the Parties and the Court in bringing the case all the way from inception to the Supreme Court on such an expedited timetable.
The Supreme Court’s conclusions on the legal issues, as set out in its 114-page judgment of 15 January, might be thought to be clear and not susceptible to further dispute between the parties. However, the Draft Declarations, published by the FCA on 15 February 2021, setting out the outstanding areas of disagreement between the parties and the alternative versions of the Declarations sought by each side, shows that not to be the case. In particular, the FCA and Insurers have clearly reached different views on what amounts to ‘restrictions imposed‘ according to the Supreme Court’s judgment, and the final form of Declarations will therefore be welcomed by policyholders and insurers alike in bringing some finality to the issue. The FCA last announced on 30 April 2021 that the Supreme Court Declarations ‘may be available’ in the next week, but has remained silent on the matter since then.
Other litigation – Coverage and Quantum
Whilst impressive in its scope, it was always acknowledged that the Test Case would not be capable of resolving all outstanding issues in relation to Covid-19 BI coverage. For some policyholders, the issue of whether their policy responds at all to losses flowing from the pandemic and the UK government response remains undetermined. For others who have had coverage confirmed, the focus has now turned to the issue of how much insurers are liable to pay. Unsurprisingly, that is frequently contentious, and affected by a number of common issues.
Coverage Issues
Specified Disease
The Disease clauses under consideration in the Test Case generally responded to any disease which is required to be notified to the authorities under the relevant public health legislation. Other, more restrictive Disease clauses only respond to losses caused by an occurrence or outbreak of one of a specified list of diseases, which in all cases did not include Covid-19. In Rockcliffe Hall v Travelers [1], the Court determined by way of summary judgment that such clauses are not capable of responding to Covid-19, rejecting the policyholder’s argument that Covid-19 was a form of ‘plague.’
See our update on the case here.
Damage to /Loss of Property
The Test Case itself considered coverage under ‘non-damage’ clauses i.e. extensions of cover responding to BI losses where no insured property damage has taken place. The issue of whether the presence of Covid-19 or Sars-Cov-2 on the premises could amount to or cause damage to or loss of property, thus triggering the core BI cover under most property insurance policies, fell for consideration in the early case of TKC v Allianz[2]. The Court held emphatically (again by way of summary judgment) that it could not. See our earlier update on the case here.
More recently, a claim filed by Xerox against FM Global[3] seeks to establish coverage for BI losses flowing from ‘physical loss or damage’, although that claim is being pursued as a satellite claim to litigation under a global master policy in the USA. It is not yet clear the basis on which Xerox will invite the Court to depart from the principles set down in TKC v Allianz.
Prevention of Access
The High Court’s findings in the Test Case in relation to Prevention of Access wordings were, by and large, negative, and many policyholders were disappointed by the FCA’s decision not to appeal the negative rulings. Following the outcome of the largely-successful appeal to the Supreme Court on other issues, the coverage position in relation to many Prevention of Access wordings now stands in stark relief to the position under the Disease wordings, and the findings of the High Court on which most insurers have now relied to decline coverage under Prevention of Access clauses are difficult to reconcile with the Supreme Court’s analysis of the covered peril and causation issues.
Unsurprisingly, many policyholders with Prevention of Access wordings are not content to abandon their claims, and a number of disputes are now moving forward to test the point further. The first of these to be litigated is Corbin & King v Axa[4], in which the Policyholder seeks to establish that the Covid-19 pandemic amounted to a ‘danger or disturbance’ within 1 mile of the insured premises, resulting in closure on the advice of a public authority, and triggering coverage for BI losses under a Denial of Access (non damage) clause.
The outcome of that case – and any others that may be joined to or managed with it – is likely to be highly influential on the coverage available under other typical Prevention of Access wordings in the market, and will therefore be closely watched by parties on both sides of the fence.
Disease ‘at the Premises’
The dispute as to whether Disease clauses requiring an occurrence of disease at the insured premises are capable of responding to Covid-19 BI losses in the same way as ‘radius’ clauses rumbles on. Following the conclusions of the Supreme Court on insured peril and causation, many Policyholders have argued that an occurrence of Covid-19 at their insured premises ought to be viewed as a proximate cause of loss in the same way as occurrences of Covid-19 within a specified radius of the premises (indeed some might say that an occurrence at the premises should be viewed as more proximate than occurrences away from the premises), and some insurers appear to have accepted coverage on this basis. A majority have not, however, and it remains to be seen how the point will be resolved.
For its part, the FCA has clearly indicated that it considers the ‘at the premises’ wordings to be capable of responding in the same way as the ‘radius’ clauses, and has instructed insurers to include such wordings in their most recent submissions confirming those policy wordings that are now capable of providing cover for Covid-19 BI losses. Whether insurers will go one step further in confirming indemnity under such policies without further litigation remains to be seen.
Quantum Issues
Aggregation
Non-damage BI extensions are typically sub-limited to 10% or less of the main BI sum insured, and in light of the scale of the losses suffered by many policyholders, the issue of how the sub-limits are available to meet the covered losses is therefore key. If Insurers’ liability is limited to a single sub-limit of liability, the policyholder is unlikely to make a material recovery in relation to the majority of its losses. If, on the other hand, the Policyholder can establish that it is entitled to recover multiple sub-limits of liability under the relevant non-damage BI extension(s), there may be better prospects of recovering all (or the majority) of its losses. How the covered losses are ‘aggregated’ for the purpose of the application of sub-limits is highly dependant on the individual policy wording, but typically depends on whether the sub-limit is expressed as applying ‘per loss’, ‘per claim’, ‘per occurrence’, per ‘event’, or ‘per originating cause’. There are many other variations and permutations of these words, and a long line of complex (and often contradictory) case law considering the meaning of these aggregating terms, typically in the context of war/terrorism, natural catastrophes, and professional risks. Of disease perils, there has been very little judicial consideration in the English courts, either in terms of aggregation or more generally, and unsurprisingly aggregation of Covid-19 losses is therefore set to be a key focus of the next wave of Covid-19 BI litigation.
Because of the peculiarities of specific policy wordings and the manner in which individual Policyholders have suffered loss, the issue of aggregation is less suitable for determination as a general market test case in the same way that the FCA sought to determine the coverage trigger issue. Nonetheless, there will be various points of principle that, once determined, will be influential in the determining the outcome under a variety of different wordings (including reinsurance contracts.) Various cases are now proceeding in the Commercial Court, in particular focusing on the issue of aggregation under the Marsh Resilience policy wording, one of the clear winners in the Test Case (where it was referred to as ‘RSA4’), and which contains occurrence-based aggregating wording.
Government Support
Many (if not all) policyholders have received some form of government support, in the form of grants, rates relief, and furlough payments over the course of the pandemic, and the issue of whether and how these amounts are to be applied to insurance claim calculations is hotly contested. Insurers for their part insist that any receipt of government support goes to reduce the loss suffered by the policyholder, and therefore the value of any claim under the Policy. Policyholders, in response, point out that government support payment are neither ‘Turnover’ nor a ‘Saving’ within most Policy definitions, and are not therefore to be taken into account within a typical Specification setting out the correct basis for calculating a BI indemnity under most policies. In light of the low sub-limits of liability available under most non-damage BI extensions, the suggestion by some insurers that failing to make deductions for government support results in a ‘windfall’ for policyholders, is viewed by many policyholders as insulting and a further example of insurers’ egregious attempts to limit their own liability.
The FCA has written to insurers expressing concern over the issue on several occasions, and the ABI has confirmed that some of its members have agreed not to deduct government grants from Covid-19 BI claims. However, the position in relation to other types of support, in particular furlough payments, remains highly contentious and unlikely to be resolved without litigation. It is likely that one or more of the existing cases proceeding through the courts will seek to test the issue.
Loss of Rent
While the Test Case considered and determined which events connected with the Covid-19 pandemic were capable of triggering coverage, the case did not consider the matter of what type of loss is covered by the sample clauses. In most cases, policies respond to loss of Gross Profit in one form or another, but in the case of commercial landlords, coverage is often provided for Loss of Rent Receivable. In relation to these policies, insurers have commonly taken the position that the landlord has not suffered a loss of Rent Receivable merely by virtue of the fact that its tenants have been unable to pay rent during periods of closure (due to a total lack of revenue); the landlord must also be able to show that the tenant has been relieved of its obligation to pay rent during the closure period, which in most cases will not be satisfied. Otherwise, the insurers say, the loss should fall on the tenant (who may or may not have BI cover), and not the landlord.
Landlords may reasonably question the commercial utility of such clauses if their response is limited in the way insurers claim, as the coverage provided would in real life be largely illusory. The issue has fallen for consideration, somewhat obliquely, in two recent cases, that were also decided on summary judgment, unfavourably for policyholders. In Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd[5] and Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others[6] it was determined that the government-ordered closure of various retail premises did not activate rent cessor clauses or otherwise relieve the tenants from their obligation to pay rent under the relevant lease. The tenant’s argument that the landlord held insurance for loss of rent was also rejected on the basis that the insurance policies were only designed to respond where the rent cessor clauses were activated, and the existence of the insurance did not therefore affect the obligations as between the tenant and the landlord.
The initial view of the courts therefore appears to be that commercial landlords will in most cases have no valid claim for a loss of Rent Receivable due to Covid-19 closures. However, considering that both cases were decided by a Master on summary judgment, and with the insurance coverage issue being determined very much as a secondary issue (the Master in one case expressing reservations over determining the issue with no insurer as a party to the case), the reasoning in the two judgments might be viewed as far from final, and in view of the importance of the issue to a large number of policyholders, it seems likely that the point will be further tested in the courts in the near future.
The Path Ahead
It is clear that the Covid-19 BI has not only given rise to a host of new coverage issues, but also reignited a number of traditional areas of dispute in the field, each of which is generating further litigation now emerging in the courts. Although it will be regrettable for many policyholders that additional legal hurdles must be overcome before coverage of their claims can be established and or quantified, the further consideration by the courts of these issues in the round will, it must be hoped, lead to further clarification of the law underpinning business interruption insurance, and as such may be a welcome development in the longer term.
Aaron Le Marquer is a Partner at Fenchurch Law
[1] [2021] EWHC 412 (Comm)
[2] [2020] EWHC 2710 (Comm)
[3] Commercial Court Claim No. CL-2021-000138
[4] Commercial Court Claim No. CL-2021-000235
[5] [2021] EWHC 863 (Ch)
[6] [2021] EWHC 1013 (QB)
[i] i.e. where the policyholder exceeds the limits of at least two of the following three criteria: (i) balance sheet total: €6.2 million; (ii) net turnover: €12.8 million; (iii) average number of employees during the financial year: 250
Weathering the Hard Market: is your CAR Policy Watertight?
The increasing prevalence of water damage losses on construction projects, combined with hard market conditions, has led to a rise in disputes over insurance policy response for these types of events. Claims in consequence of cascading water from burst pipes or adverse weather conditions often give rise to disagreements over the occurrence and timing of ‘damage’, in order to trigger coverage under contract works policies, and a number of standard exclusion clauses may impact upon the level of protection.
Insuring Clauses
The legal test for damage requires proof of physical change to insured property, adversely affecting its value or usefulness. Authorities demonstrate a distinction between policies requiring ‘damage’ - which includes transient or reversible changes if time and money has been spent dealing with the problem (Ranicar v Frigmobile; The Orjula) - as opposed to policies with a ‘physical damage’ trigger, which may not respond in the absence of a permanent alteration in condition (Transfield Constructions v GIO).
The need for coverage in respect of temporary changes is particularly important in water damage scenarios, where the insured property could dry out relatively quickly. Insurers might suggest that no lasting damage remains, even if the policyholder has been put to considerable expense and inconvenience through a water ingress event, especially where guarantees relating to electrical elements of contract works may be invalidated.
It is sufficient for physical change to have occurred at a microscopic level, detectable only through careful examination using advanced inspection techniques, such as accumulation of dust on carpets (Hunter v Canary Wharf) or increased brittleness and liability to early degradation of a pastel painting following exposure to high temperatures (Quorum v Schramm). Accumulations of water can result in physical changes to insured property in the form of rot or fungal spores, especially in close proximity to timber elements, although expert assistance may be required to identify the presence of this type of damage.
Exclusions from Cover
Contract works policies typically exclude cover for damage resulting from changes in the water table level, and may refer to fungus or rot alongside other naturally occurring processes as part of a gradual deterioration exclusion.
Another key aspect of the policy wording determining the scope of protection for water damage events are relevant defects exclusion clauses. Contract works insurance usually contains a standard defects exclusion based on the DE or LEG suite of options, offering different levels of coverage for cost of repair associated with defective design, workmanship or materials. Failed connections in water systems may involve a combination of design or workmanship problems, and the proximate cause of loss will often need to be identified to determine policy response.
DE5 or LEG3 usually provide the broadest coverage for losses in consequence of defects, to include costs incurred to gain access to property damaged as a result of defects, and excluding only the cost of improvements. Some policies provide an option as to application of DE5 or DE3 / LEG3 or LEG2, at the policyholder’s option at the claims stage, allowing flexibility to determine which alternative produces the most favourable outcome with knowledge of the particular circumstances arising.
Some standard exclusion clauses (such as DE4) provide cover for damage to ‘other property’ caused by defects, but not the defective ‘part’ itself, which often leads to disputes over divisibility of insured property between defective and non-defective parts. In general terms, the courts will look to the commercial reality of whether a particular aspect of the development would be viewed by contracting parties as a separate package or phase of works (Seele Austria).
The aggregation wording in the policy may also impact upon coverage for complex aspects of contract works, such as structures formed from separate sections or modular elements, with the possibility of insurers arguing that multiple ‘losses’ have occurred for purposes of the limits of indemnity and deductible.
Policy Conditions
Careful consideration should be given to policy conditions requiring particular steps to be taken in relation to risk mitigation and claims handling.
In order to establish breach of a ‘reasonable precautions’ condition, the insurer must prove recklessness i.e. the insured subjectively appreciated the risk but didn’t care or ignored it; mere negligence will not suffice (Sofi v Prudential). This is distinguishable from policy requirements imposing positive continuing obligations on insureds to take specific actions, such as unoccupied buildings conditions. The recklessness threshold will not apply where there is “a highly defined and circumscribed set of particular safeguards which have to be put in place” (Aspen Insurance v Sangster).
Insurers are increasingly focused on water damage risk management procedures as part of the underwriting process, and may include specific provisions in the policy requiring compliance with e.g. CIREG best practice guidelines. The inclusion of ‘conditions precedent’ should be resisted, with use of appropriate ‘best endeavours’ type language especially if works on site involve third party sub-contractors, so that compliance with the condition is not entirely within the policyholder’s control.
Conclusion
Advice should be sought from specialist brokers on potential improvements to the scope of insurance for contract works, with particular reference to the trigger for coverage, exclusion clauses and policy conditions. When a loss does occur it is important to investigate and document the condition of insured property without delay following a water damage incident, with expert input if required, to minimise the prospect of insurance disputes.
Amy Lacey is a Partner at Fenchurch Law
Fenchurch Law joins City law firms in commitment to levelling up on social mobility in the profession
A group of trailblazing City law firms including Fenchurch Law Ltd have published a pioneering action plan to boost social mobility and widen opportunities within the legal sector and launched a Levelling Up Law Coalition to deliver on the recommendations.
Fenchurch Law and fourteen other City of London Law Society (CLLS) member firms have been working with Rt Hon Justine Greening’s Social Mobility Pledge on a strategy to open up the sector to a diverse range of backgrounds.
The firms have collaborated with a number of universities across the regions, including Bradford, Staffordshire, Lincoln, York St John and Liverpool John Moores in a bid to create new and wider pathways from higher education into the legal sector.
The action plan sets out recommendations for leading law firms to work together on solutions that benefit the whole legal profession. Research shows that more diverse companies are now more likely than ever to outperform less diverse peers on profitability* and the plan looks at how the profession can tap into talent from a range of backgrounds.
The project has been led by former Government Minister, Member of Parliament and city Solicitor, Seema Kennedy OBE. Fenchurch Law and the other firms now plan to go further and play a leading role in Britain’s national recovery from coronavirus, opening up greater access to careers in the legal sector.
The publication of the action plan also marks the launch of the group of firms forming a Levelling Up Law Coalition, coming together to take leadership on the levelling up agenda through the lens of the legal sector.
Seema Kennedy said: “The pandemic has caused many young people to lose jobs or have their future opportunities restricted. Meanwhile, there is now a building demand and need for reskilling and career changes.
“What is now abundantly clear is that levelling up needs to go far beyond just government action, we need businesses to play their role if we are to succeed. Through this action plan, CLLS members have shown that they are committed to playing their part in boosting opportunity and social mobility as part of our recovery.”
David Pryce, Managing Partner, Fenchurch Law “Levelling Up Law is the most effective initiative that I’ve come across with regard to promoting social mobility within the legal profession. The project’s goal of creating true equality of opportunity is vitally important not just in terms of basic fairness, but also because law firms have for too long drawn on an artificially limited pool of talent.
“If the UK is to retain its place as a leading global legal market, it is essential we start to recruiting based on potential, and stop favouring people based on their background and upbringing. Like most firms we have further to go on our journey to creating a truly diverse team, but I have no doubt that we will only be able to unlock our full potential once we do”.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #14 (The Good & Ugly). Arch Insurance (UK) Ltd v FCA and others
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#14 (The Good & Ugly)
Arch Insurance (UK) Ltd v FCA and others [2021 UKSC 1]
The Good?
The circumstances of FCA Test Case are widely known, and the case has been fairly regarded as a resounding (if not absolute) win for policyholders, having established coverage for Covid-19 business interruption losses under a variety of non-damage business interruption extensions.
Aside from the key policy trigger determinations, which are to some extent confined to the specific circumstances of the Covid-19 pandemic given that most insurers have now withdrawn cover of the type under consideration in the Test Case, perhaps the more significant outcome was the Supreme Court’s findings on causation, and the overruling of the notorious Orient Express v Generali case.
Previously highlighted in our series as one of The Bad, Orient Express first codified the ‘wide area damage’ principle under which insurers decline or reduce a policyholder’s business interruption claim in the event of a loss event causing damage to the wider area, rather than to the insured property only. So in the case of Orient Express, the claimant hotel was denied indemnity for losses following Hurricane Katrina in New Orleans, on the basis that the entire city was effectively destroyed, and ‘but for’ the damage to the hotel, it could not have done any business anyway. The egregious effect of the case was that, the more severe the loss event, the less coverage was provided by insurers.
The case finally fell for consideration by the Supreme Court in the FCA Test Case ten years later, and was unanimously overturned (including by the very judge that issued the original Orient Express decision itself). The approach that should have been taken, the Supreme Court said, was to view the damage to the hotel and the damage to the surrounding area as concurrent causes of loss which, following the principle in The Miss Jay Jay, would not preclude coverage where neither cause was expressly excluded under the Policy. The policyholder in Orient Express should therefore have been entitled to recover the full extent of its losses arising from the hurricane, as should policyholders seeking indemnity for their Covid-19 BI losses.
The Ugly?
The Supreme Court’s approach to concurrent proximate causes is not necessarily all good news for policyholders, however.
It is a well-established principle of English law, affirmed by the Supreme Court in its judgment, that, where there are concurrent proximate causes of a loss, if one cause is an insured peril and the other cause(s) is / are uninsured then the policy should respond in full (The Miss Jay Jay), whereas if a cause is excluded then the policy will not respond (Wayne Tank). The potential for the Wayne Tank principle to be a practical problem for policyholders has historically been largely been mitigated by the Courts’ general reluctance to find that there is more than one proximate cause. However, the Supreme Court’s decision in the FCA Test Case suggests that concurrent proximate causes may be much more likely to arise in practice than had previously been appreciated. The Supreme Court noted that both The Miss Jay Jay, and Wayne Tank, concerned interdependent concurrent causes (so that it was the combination of the two which made the loss inevitable) and went on to find that there is “no reason in principle why such an analysis cannot be applied to multiple causes which act in combination to bring about a loss” (our emphasis). This significantly extends the doctrine of concurrent causes, particularly given that the Supreme Court went on to say that, in certain circumstances, the multiple concurrent causes do not have to meet the ‘but for’ test:
“there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause - indeed as a proximate cause -of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself” (our emphasis).
In some situations (the FCA Test case itself included!) this shift could lead to an increase in cover available to the policyholder and, on that basis, is a welcome development.
However, in our view there are also instances where this change would be unwelcome for policyholders in the context of exclusion clauses – for instance Design & Build contractors who almost always have a workmanship exclusion in their construction professional indemnity policies. The effect of the Supreme Court’s approach to the issue of proximate cause in the Test Case could be to encourage insurers to point to modest workmanship issues as being a proximate cause of the loss in an attempt to refuse cover on the basis of the Wayne Tank principle. Whilst that approach would, in our view, be wrong (unless restricted to the narrow type of interdependent concurrent proximate cause of the type considered in Wayne Tank itself), the possibility of insurers seeking to take a Wayne Tank point more often on the basis of the Supreme Court’s approach to proximate cause makes that aspect of the decision “Ugly” for some policyholders, such as Design & Building Contractors with restrictive workmanship exclusions in their professional indemnity policies.
Rob Goodship is a Senior Associate at Fenchurch Law
