Recent developments in the W&I sector: Q&A with Howden M&A's Head of Claims, Anna Robinson
Hot on the heels of the release by Howden of its annual M&A Insurance Claims Report we caught up with their Head of Claims, Anna Robinson, to find out about trends across the sector in 2020/2021 and her predictions for 2022.
A copy of the full report can be accessed here.
Q: Despite the turmoil of the pandemic, we understand that M&A transactions continue to increase as companies use mergers and acquisitions to grow. Is this increase in deal-making, and increase in the use of M&A insurance, starting to lead to an increase in claims activity?
A: Yes on both counts. Following a significant drop in deal activity at the start of the pandemic, there was a phenomenal and unprecedented increase in deal activity from Q3 2020 onwards and throughout 2021. The same period saw an exponential increase in the use of M&A insurance, and a corresponding increase in the number of notifications. Although the number of notifications in percentage terms has fallen since 2019, the absolute number of notifications has risen, which is a factor both of the increase in use of M&A insurance and the increase in Howden M&A’s market share.
Q: Has Covid had the impact on M&A claim notifications that was envisaged by the insurance industry? Do you expect any COVID-19-related claims trends to emerge in the future?
A: Interestingly the predicted spike in notifications did not materialise. With hindsight, in some ways that is not surprising as the deals done, and associated policies placed, following the emergence of COVID-19 would either have diligenced COVID-19 or excluded claims arising out of it.
Q3: Has there been an impact on when claim notifications are made against the policy i.e. are claims now notified earlier following inception or later?
A: Our research indicates that notifications are being made later. For notifications received from 2015 to 2019, 90% were made within 18 months of the policy’s inception. In 2020/2021 the proportion of later notifications, made after 18 months, rose significantly. There are two potential reasons for this – the first is that longer warranty periods are available, and the other is the increase in tax claims which, of course, have longer notification periods reflecting the time it can take for these to materialise.
Q4. Has there been a change in the claim values being discovered and notified under the policy?
A: It is the larger deals, and in particular the mega-deals (above €1 billion EV) that have a higher notification rate, and which rate increased again in 2021. These large and complex deals are both more difficult to diligence and often conducted at a fast pace meaning issues can be missed.
Q5. What’s the most common cause for claims and are there any emerging trends? Are there any sector trends for claims notifications?
A: The top three most commonly breached warranties that we see are: Material Contract warranties, for example where a known issue with a supply contract wasn’t disclosed; Financial Statement warranties, reflecting errors in the financial statements; and Compliance with Law warranties, where relevant legislation has not been complied with. This latter type of breach is something that arises commonly in relation to real estate deals where planning, environmental and safety laws are not complied with. While Tax warranties have historically been one of the most common breaches, it still takes up a large portion of notifications received at 17.8%. Taken together these four amount to just over three quarters of all notifications.
Q6. Has the percentage of notifications turning into paid claims changed?
A: The data shows that three-quarters of claims were resolved positively, which is a slight reduction from the previous period but is explained, in part, by the increase in precautionary notifications.
Q7. What would be your top tips for policyholders in getting their claims paid?
A: Good question! Notify early and in accordance with the policy provisions; particularise each element of the warranty breach and provide robust supporting evidence; keep the insurer updated and provide them with the documentation they need to investigate the claim, and, perhaps most importantly, make sure you can evidence the impact of the breach on the purchase price. Also, involve your broker as their relationship with the claims handler can be key to ensuring a smooth claims process.
Q8. What role does Howden M&A play in getting claims paid, can you give an example?
A: We provide assistance with the claims process as a W&I claim is often the first time an insured has dealt with an insurer in this context. We also assist clients with policy interpretation and quantum issues – quantum is typically the most complex part of a W&I claim. As brokers, we are able to deal directly with the insurers, and we can negotiate outcomes based on commercial as well as legal imperatives.
Q9. What role do coverage specialists, like Fenchurch Law have to play in the claims process?
A: Where a case turns on a point of law or policy interpretation, and the insurer/insured have reached stalemate and commercial negotiation has not assisted (which is rare!), it is vital for us, and our clients, to be able to have specialist advisers to call in that situation. Knowing that Fenchurch Law offer a free preliminary advice service is very reassuring!
Q10. Finally, what are your predictions for the coming year?
A: We predict a tidal wave of notifications in the coming year, reflecting the phenomenal increase in policies placed in 2020 and 2021. In similar vein, given the increasing number and size of the deals on which we advised in 2021 we anticipate that claim size and complexity will increase. In line with the trend for more policies (title and tax in particular) to include cover for ‘known issues’, we anticipate that notifications and claims arising under these policies will increase. Watch this space!
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #17 (The Ugly). Diab v. Regent Insurance Company
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.
#17 (The Ugly): Diab v. Regent Insurance Company Ltd [2006] UKPC 29
This Privy Council decision considered whether a policyholder, whose insurer has declined cover, is nevertheless still bound by the claims conditions in the policy.
Background
This case arose from a fire which destroyed a shop owned by the policyholder, Mr Diab, as well as all its contents. Mr Diab made a claim under his material damage policy with Regent Insurance Company Limited (“Regent”).
A meeting (“the Meeting”) took place ten days later at Regent’s offices between Mr Diab and Regent’s Managing Director, Mr Flynn. Mr Flynn made it clear that, if Mr Diab made a claim under the policy, it would be rejected because Regent believed that he had started the fire.
About four weeks after that, Mr Diab’s solicitor sent a letter to Regent persisting with a claim for indemnity and setting out the amount of his loss.
Regent declined the claim. It asserted that:
a) Mr Diab had breached a condition precedent (“the Condition”) requiring that any claim should be notified in writing forthwith and that particulars of the loss be provided in writing within 15 days, and that any oral notice given by Mr Diab at the Meeting was thus insufficient; and
b) and in any event the claim was fraudulent because Mr Diab had started the fire.
Mr Diab duly sued Regent.
At the trial, Regent dropped its allegation of fraud and relied solely on the alleged breach of the Condition.
Regent was successful in that regard, with the trial judge rejecting Mr Diab’s argument that the representations made by Mr Flynn at the Meeting had constituted a waiver by Regent or an estoppel by representation, relieving him of the need to comply with the Condition.
Mr Diab appealed, eventually to the Privy Council, the central issue being the construction and effect of the Condition, namely whether it remained binding even where Regent had told Mr Diab that it would not pay the claim. Mr Diab’s position was that a repudiation of liability by an insurer relieved the policyholder of the need to comply with any outstanding procedural requirements under a policy. In other words, Mr Diab was relieved of the obligation to comply with the Condition given what Mr Flynn had said at the Meeting.
The Decision
The Privy Court dismissed Mr Diab’s appeal. It held that, while Mr Diab had been entitled to take what was said by Mr Flynn to be a repudiation of liability by Regent, Mr Diab had not accepted it or treated it as putting an end to the insurance contract. The obligations owed by each party under the policy therefore continued.
Put another way, a policyholder who is asking an insurer for an indemnity under a policy will ordinarily remain bound by the terms of that policy – unless he can show that the insurer has lost its right to rely on the term in question because it is estopped from doing so; and an estoppel in this situation will usually require both a clear representation by the insurer that it is waiving the condition and the policyholder relying on that representation to his detriment.
Comments
In our view this decision is problematic for policyholders for the reasons set out below.
Policyholders should be aware that, where an insurer has denied a claim, this is not on its own enough to ‘tear up the contract’ and therefore policy conditions must continue to be observed. Although in certain circumstances a policyholder may be able to establish that an estoppel means that the insurer has lost its rights to rely on a condition, that is by no means straightforward.
When faced with a denial of cover by insurers, a policyholder must decide whether to accept that denial as a repudiatory breach of the policy. The practical effect of that would be that both parties are discharged from further performance of the contract. This can be problematic for a policyholder either if the policy is still running or if there are other claims which have been made under the policy. If the repudiatory breach is accepted, a policyholder will be entitled to claim damages for the breach (the purpose of which will be to put the policyholder in the position it would have been in had the breach not occurred).
If the denial of cover is not accepted as a repudiatory breach, the policyholder is obliged (for example) to continue to provide information and co-operation and to observe the other claims conditions in the policy. Failure to do so may result in insurers successfully relying on the technical argument raised in the Diab case. While it may seem unfair that an insurer can hold a policyholder to the conditions in the policy even when cover has been declined, this decision still represents the law on this point and we do not suggest that it was wrongly decided. We therefore categorise it as “Ugly”.
Serena Mills is an Associate at Fenchurch Law.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #16 (The Good). Technology Holdings Ltd v IAG New Zealand Ltd [2008]
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.
#16 (The Good)
The Good
In another useful decision for policyholders under CAR policies (see our earlier article regarding ‘The Orjula’), but also damage policies generally, the High Court of New Zealand found (at para 65 of its judgment) that damage (as distinct from physical damage) can be established by one of more of:
a) a material risk to insured property which did not exist before the relevant event;
b) an event which rendered the insured property not fit for its intended use; and/ or
c) the possibility of malfunction during use as a result of the relevant event, which would require the insured property to be dismantled to determine the risk.
Whilst this authority isn’t binding on an English court, it would certainly be persuasive and the last category in particular is helpful to policyholders seeking cover for damage, as the mere possibility of malfunction which itself has not occurred would trigger cover under a policy responding to damage based on this authority.
The decision
The claimant supplied credit card terminals to retailers, 2,051 of which were stored in a basement that flooded on 7 February 2005. All of the containers in which the terminals were stored came into contact with flood water (but only around a quarter of the terminals themselves), and all containers were exposed to increased humidity. The claimant claimed under its Business Assets insurance policy (“the Policy”) for loss or damage to all of the terminals, the insuring clause in the Policy stating:
If during the Period of Insurance specified in the Schedule there happens Loss or Damage unintended and unforeseen by the Insured, except as may be excluded, to the PROPERTY AND EXPENSES INSURED, then the Insurers will indemnify the Insured in respect of such Loss or Damage as expressed in the BASIS OF LOSS SETTLEMENT and in addition the Insurers will indemnify the Insured in the manner and to the extent separately stated herein.
Despite being capitalised terms, Loss and Damage were not defined in the Policy. The claimant’s claim was accepted in relation to the terminals which came into direct contact with flood water, but insurers declined cover for the remaining terminals on the basis that they were neither lost nor damaged.
The court was asked to consider whether the insuring clause had been triggered in relation to the other terminals stored in the basement, essentially whether they were damaged because the manufacturer of the terminals had withdrawn its warranty and / or because the operator of the terminals’ intended network had refused to permit those units to be connected because of the risk that they would malfunction.
The claimant relied on expert evidence which included that it was standard industry practice for manufacturers to dismantle terminals returned to it to ensure their continued security and reliability following suspected damage. This, coupled with the low cost of producing terminals compared with the higher cost to dismantle, meant that terminals were often written off/ disposed of rather than being repaired.
The court’s analysis included a discussion concerning the difference between “physical damage” on the one hand and “damage” on the other, and concluded that the parties had intended the Policy to have the wider, unqualified damage cover, as opposed to cover being restricted to physical damage.
There was a detailed discussion of the damage authorities, including Transfield and Quorum AS, but most notably Ranicar v Frigmobile Pty Ltd, which the court regarded as the leading authority on “damage” in an insurance context. That case concerned scallops which could no longer be exported as they were temporarily and accidentally stored above -18 degrees Celsius, with that change in temperature being enough to constitute the physical change required to trigger cover for damage under the relevant insurance policy. The court in Ranicar held that whereas “physical damage” may require a permanent and irreversible change in physical condition, “damage” could occur when an adverse change in physical condition was both transient and reversible.
Deciding the Technology Holdings case, Woodhouse J (quoting a leading insurance text) said that the essence of Ranicar in relation to damage was that “it is normally sufficient if the damage is in the form of diminution in value or functionality”, but that element was not enough by itself – for damage something must happen to the property itself followed by the impairment in value or usefulness.
Applying Ranicar to the terminals which did not directly come into contact with flood water, Woodhouse J said that:
“…there was an occurrence – the flooding – which was unintended and unforeseen by the insured and which happened to the property. Following this event, which may or may not be similar to the temperature rise in Ranicar, the plaintiff found it could not sell the units. For the reasons discussed, I am satisfied that, if the plaintiff cannot prove that the units were “physically damaged”, there nevertheless will have been “damage to the property” for the purposes of the plaintiff’s Business Assets insurance policy if the plaintiff can establish the following: Because the units were stored in premises affected by flooding the units would malfunction during use in the network on a date earlier than the date on which the units would normally be withdrawn from use and in consequence they are not fit for their intended use”.
Comment
In addition to helping to cement Ranicar’s status as a leading authority on damage in the insurance context, it arguably goes one step further by holding that the mere possibility of malfunction was sufficient to constitute damage where that risk impacting on value or usefulness. The logic of the decision is sound, and merely extends existing principles rather than taking an entirely new approach, and the decision is certainly Good for policyholders.
Rob Goodship is a Senior Associate at Fenchurch Law
Even a Solicitors’ PI policy has its limits - Doorway Capital Limited v AIG
In this recent decision, the High Court considered whether a liability incurred by a solicitor under a factoring agreement was covered by its professional indemnity policy.
Background
In 2016, Doorway Capital Limited (“Doorway”) entered into a Receivable Funding Agreement (“the Agreement”) with Seth Lovis & Co Solicitors Ltd (“the Solicitors”). The relevant terms of the agreement were as follows:
- Doorway would provide funding to the Solicitors for use as working capital and to repay certain of their debts.
- The Solicitors would sell to Doorway its “Receivables” i.e., the Solicitors’ trading debts, together with the right to pursue those debts.
- the Solicitors would be appointed as Doorway’s agents to collect the Receivables.
- On receipt, the Solicitors would hold the Receivables in their client account on trust for Doorway, before paying the sums over to Doorway’s nominated account.
Doorway claimed that the Solicitors collected c. £2m worth of Receivables between 2017 and 2018 but in breach of the Agreement, only paid over a small portion of them. Doorway also asserted that the Solicitors breached fiduciary duties owed to Doorway.
As the Solicitors had entered into administration, Doorway claimed directly against the Solicitors’ professional indemnity insurers, AIG, under the Third Parties (Rights Against Insurers) Act 2010.
The Application
AIG applied for summary judgment, arguing that Doorway’s claim had no prospects of success. For the purposes of the application, AIG did not dispute that the Solicitors had breached the Agreement nor that they had breached fiduciary duties owed to Doorway.
There were two principal issues for the Court to decide:
- Did the liability that the Solicitors incurred to Doorway fall within the insuring clause of the policy (“the Policy”)?
- If so, did the ‘Debts and Trading Liabilities’ exclusion (“the Exclusion”) nevertheless apply?
The insuring clause
The insuring clause indemnified the Solicitors against “… civil liability to the extent that it arises from Private Legal Practice in connection with the Firm’s Practice.”
“Private Legal Practice” was defined as meaning “the provision of services in Private Practice as a solicitor … including, without limitation … (c) any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner, or in any other role in conjunction with a Practice.
Doorway argued that the Solicitors’ services fell within the definition of “Private Legal Practice.” In particular, it said that acting as a trustee, without more, was sufficient. It also argued that (i) the Solicitors exercised “professional judgment in relation to the assessment of obligations which would arise in the course of the solicitor’s practice”, because they were required to determine whether, as a matter of law, a Receivable was payable to Doorway; and (ii) the holding of monies in their client account showed that they were providing a service in private practice.
The Judge, Mr Justice Butcher, paid short shrift to Doorway’s arguments. Any liabilities that the Solicitors owed to Doorway derived from Agreement alone; the fact that the Solicitors were holding monies on trust was merely “a part of the mechanism” of fulfilling their obligations under the Agreement. The Judge came to the same conclusion in respect of the Solicitors’ use of “legal judgment” to recover the Receivables, as well as the use of their client account – neither were for the provision of services in private practice as a solicitor.
In the circumstances, the liabilities incurred by the Solicitors did not arise from Private Legal practice, and were therefore not covered by the insuring clause. Accordingly, AIG’s application for summary judgment succeeded.
The Exclusion
Although it was not necessary for the Judge to decide this given his findings on the insuring clause, the Judge nevertheless also expressed a view on the applicability of the Exclusion.
The Exclusion stated: “The Insurer will have no liability to indemnify an insured in relation to any … legal liability assumed or accepted by an Insured under any contract or agreement for the supply to, or use by, the Insured of goods or services in the course of the Insured Firm’s Practice.”
In considering this issue, the Judge referred to the Supreme Court decision in Impact Funding Solutions Limited v AIG Europe Insurance Ltd [2016] UKSC 57. As with the present case, Impact Funding concerned a commercial agreement between a firm of solicitors and a third-party funder, and required to court to decide whether services conducted in connection with that agreement were covered (or, in the circumstances, excluded) under the solicitor’s PI policy. The policy contained an exclusion for “breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing legal services.” By a majority of 4 to 1, the Supreme Court found that the exclusion applied. Of particular relevance, Lord Toulson said that the commercial agreement “did not resemble a solicitor’s professional undertaking as ordinarily understood, and it falls aptly within the description of a “trading liability” which the minimum terms were not intended to cover.”
Therefore, by analogy with Impact Funding, the liability incurred by the Solicitors to Doorway was not the type of liability which would be covered by a solicitors’ PI policy. Therefore, had he been required to do so, the Judge would have found that the Exclusion applied.
Conclusion
The case is confirmation that not every service provided by a solicitor will be covered by its professional indemnity policy. In any case, one has to look at the substance of the service being provided; merely acting as a trustee or using a client account, for example, will not necessarily be enough.
As to the Exclusion, although the Judge’s comments were obiter, it is difficult to see how the issue could have been decided any other way in light of Impact Funding. As with that case, the meaning and effect of the Exclusion were clear, and the Judge had no doubt that it applied.
Alex Rosenfield is a Senior Associate at Fenchurch Law
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/
