Products & Environmental Risks

Covid-19 BI claims update: policyholder-friendly judgment in At The Premises litigation

London International Exhibition Centre Plc -v- Royal & Sun Alliance Insurance Plc and others [2023] EWHC 1481 (Comm)

In the latest instalment in the wave of Covid-19 business interruption litigation making its way through the courts since the pandemic, a group of policyholders have been successful in their claim that the Supreme Court’s approach to causation in relation to ‘radius’ wordings should equally apply to the ‘at the premises’ wordings.

This result has a much broader application than simply for the parties to this litigation, and paves the way for large numbers of policyholders on similar wordings to argue that their claims are covered.

The background

While the FCA test case litigation represented a victory for policyholders in many respects, it also left a number of loose ends – one of which this recent ruling ties up in their favour.

With regard to ‘radius’ wordings, that is, business interruption policies that respond to cases of a notifiable disease occurring within a specified radius of the premises, the Supreme Court concluded that that each case of Covid-19 was a concurrent cause of the restrictions.  As such, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of Covid-19, it was sufficient to prove that the interruption was the result of government action taken in response to cases of disease which included at least one case of Covid-19 within the geographical area covered by the clause.

‘At the premises’ wordings, namely clauses providing for cover for losses caused by restrictions resulting from cases of notifiable diseases at the premises themselves – as opposed to within a specified radius of the premises – were not within the ambit of the FCA test case.

As a result, there was uncertainty as to whether the Supreme Court’s causation analysis was equally applicable to such clauses.  This judgment now clarifies that it is.

The policyholders’ position

The claimant policyholders, who included the London International Exhibition Centre the restaurant chain, Pizza Express, as well as a number of smaller businesses including a hairdresser, two gyms, and various hospitality venues, had all suffered significant BI losses as a result of the pandemic, and all had ‘at the premises’ cover as part of their business interruption insurance.  Applying the same approach to proximate causation as adopted by the Supreme Court in the FCA test case, they argued that their policies should respond to cover their losses.

The insurers’ position

The insurers disagreed.  One of the main themes was that ‘at the premises’ clauses and ‘radius’ clauses provided a “fundamentally and qualitatively different” nature of cover: they were “chalk and cheese”. The fact that they are engaged by incidents of disease at a precise location means that a direct causal connection is required, which in turns requires proof of ‘but for’ causation between the occurrence of disease at the premises, the action by the authorities, the consequent business interruption and loss.

The judgment

Mr Justice Jacobs held that the policyholders were correct in their submission that “at the premises” is simply about the geographical or territorial scope of the coverage, and where the parties have chosen to draw the line in that respect - it has no impact on the appropriate approach to causation. In their analysis, the Supreme Court did not draw a distinction between ‘radius’ clauses where the radius was 25 miles, 1 mile, or the vicinity, and there was no reason why the radius could not be further shrunk from the vicinity to the premises itself without making any difference to the causation analysis.  He added that this seemed to him to be an appropriate result, since any other conclusion would give rise to anomalies which it would be difficult rationally to explain to a reasonable SME policyholder who read the policy.

Cover for cases pre-5 March 2020

He did however find for insurers in relation to another issue before the court, namely whether cases of Covid-19 that occurred before it was made a notifiable disease on 5 March 2020 were capable of falling for cover.  On the basis that a disease must be notifiable at the time of the occurrence or outbreak he found that they did not qualify. He stated that an approach that asks whether the disease was notifiable at the time of the relevant occurrence was straightforward to apply and perfectly sensible. That this meant that some occurrences would, depending upon when they occur, fall outside coverage was simply the ordinary consequence of the application of the words of the policy.

What next?

This is not the end of the story for Covid-19 claims – the next instalments will come towards the end of the year when another group of policyholders with claims against insurers for business interruption losses under policies with ‘denial of access’ wordings will have their cases heard - closely followed by the appeals in the Stonegate, Various Eateries and Greggs cases – it is very much a case of watch this space!

Joanna Grant is a partner at Fenchurch Law

by Joanna Grant

Court hands down judgment in much anticipated Covid-19 BI cases: the takeaways for policyholders

Fenchurch Law represents Stonegate Pub Company Limited in its claim for Covid-19 business interruption losses against its three insurers: Ms Amlin; Liberty Mutual; and Zurich.

760 of Stonegate’s premises were insured under a Marsh Resilience wording, which was a wording considered by the Divisional Court and Supreme Court as part of the FCA Test Case. The Test Case confirmed that the policy responded to business interruption losses. However, a number of secondary issues remained in dispute despite the Courts having confirmed coverage.

The key issues for consideration were as follows:

1. Trigger;
2. Aggregation;
3. Causation;
4. Additional Increased Costs of Working (“AICW”); and
5. Government Support.

In its judgment, notably, the Court rejected the Insurers’ primary argument that all cases aggregate to the emergence of the virus or pandemic, and agreed with Stonegate’s position that losses are recoverable after the end of the policy period. The Court found in favour of Insurers on other issues, and in particular with regard to furlough.

Below we consider the Court’s judgment in relation to each of the issues, as well as the related judgments in the cases of Greggs v Zurich [2022] EWHC 2545 (Comm) and Various Eateries v Allianz [2022] EWHC 2549 (Comm), and what they mean for policyholders.

Trigger

The Court was asked to consider the trigger (a colloquial shorthand for the matter or matters which gave rise to a right to claim under a policy) under the Disease, Enforced Closure and Prevention of Access perils present in the Marsh Resilience wording. The Court made the following findings:

• The Disease peril is triggered whenever there were cases of Covid-19 which were either discovered at an insured location, or within the relevant vicinity, and each example is separate Covered Event;
• The Enforced Closure peril triggered whenever all or part of an insured location was closed under a relevant compulsion or instruction. The policy is “triggered” in respect of each such closure, and the number of locations closed is the number of triggers. A location opening and then closing again at a different time would be considered a separate trigger;
• The review, reiteration, continuation or renewal of regulations which were materially of the same effect does not constitute a separate closure or separate ‘trigger’;
• The Prevention of Access peril trigger was the number of such actions or advices which prevented or hindered the use of or access to the insured location;
• Steps or advice which merely repeated or renewed an existing prevention or hindrance of access forms part of one set of ‘actions or advice’, and therefore is only one ‘trigger’ or Covered Event;

Policyholders with different aggregation wording, or with no aggregation wording, could find the Court’s analysis on trigger particularly useful.

Aggregation

With regard to aggregation, ever the tricky area for policyholders and insurers alike, the Court considered the extent to which Stonegate’s claimed losses arose from, were attributable to, or were in connection with one more single occurrence for the purposes of aggregation as one or more Single Business Interruption Loss.

In determining the number and nature of occurrences, the Court had regard to ‘the degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible’. The Court also considered the concept of remoteness between the aggregating event and the loss, which acts as a counterbalance to the more aggressive aggregation clauses and issues that arise from causation.

Insurers maintained a number of alternative cases in relation to aggregation in an attempt to limit Stonegate’s losses to a single sub limit of liability to which all losses could be aggregated.

The Judge disagreed with a number of the Insurers’ proposed occurrences for the purposes of the aggregating wording, including tracing Covid-19 back to its evolutionary roots, the original zoonotic transmission of Covid-19 in Wuhan, and the virus’ entry into the UK. The Court rejected these arguments on the basis that these proposals were either geographically, temporally or causally too remote (or a combination of).

Instead, the Court held that there had been at least two occurrences that satisfied the relevant aggregating test and fell within Stonegate’s policy period (which ended on 30 April 2020), and acknowledged a possible third occurrence, being:

i) The decision taken at the COBR 16 March meeting to advise people to stop non-essential contact with other and to not visit crowed areas such as pubs, restaurant and clubs (a finding that went against the previously established precedent that a decision did not constitute an occurrence);

ii) The instruction given on 20 March that all pubs, bars and restaurants were to close; and

iii) The announcement of the national lockdown on 23 March 2020.

The Court considered that at this point in time the decisions taken by the devolved administrations were taken jointly, and therefore there was only one occurrence across the UK. However, the Court accepted that if it was wrong on this point, there would be an occurrence in the form of the decisions of each home nation.

It is notable, however, that there was no finding in relation to losses in the pre-aggregated period (16 March 2020), therefore, the occurrences thereafter did not aggregate any of the losses incurred before the COBR meeting on 16 March 2020.

The judgment does not consider other occurrences from 30 April 2020, as this is the date on which Stonegate’s policy expired. However, in Greggs v Zurich, the Court provided some further clarity for policyholders, and held that there was a separate occurrence for each announcement or measure relevant to Greggs’ business, with the exception of those that simply continued, made trivial changes to, or reduced existing restrictions.

In Greggs, the Court considered decisions taken from May 2020 by the home nations as being separate and therefore not single occurrences in the meaning the policy wording. The result is that business with locations in each administration will benefit from cover for a separate occurrence (and therefore a separate sub limit if applicable).

Policyholders with longer policy periods should be aware of other examples of an “occurrence” within the meaning of the Marsh Resilience aggregating wording, which may include:

i) In England, the bringing into force of the three-tiered system on 14 October 2020;

ii) The announcement and implementation of the second national lockdown,

iii) The announcement and implementation from 20 December 2020 of the Tier regulations;

iv) Restrictions imposed on limited areas of the country, for example, the local lockdown in Leicester on 04 July 2020.

Causation

Stonegate, as with most hospitality and leisure businesses, continued to feel the effects of Covid-19 long after the expiration of its policy period. The Court found that losses suffered after the expiry of the policy period were attributable to Covered Events, and rejected the Insurers’ argument that any losses suffered after the expiry of the policy period could not have been caused by a Covered Event.

Stonegate’s losses, from 1 May 2020 until 4 July 2020 (in England), 6 July 2020 (in Scotland) and 13 July 2020 (in Wales) were all proximately caused by Covered Events that occurred between 17 February and 30 April 2020.

Losses beyond those dates were considered to be in response to the subsequent developments of Covid-19, and predominantly caused by more recent cases.

The Court did accept that there were several individual categories of causal linkage that could continue after the dates outlined above, such as continued losses caused by deaths or long covid, and loss of momentum in relaunching premises prior to the expiry of the policy period.

Within those categories was the cancellation of events which had been organised to occur after the dates outlined above, by reason of uncertainty as to whether they would be able to go ahead. This category is undoubtably important to the hospitality industry, and the same logic may equally apply across other industries.

The Court gave further consideration to the issues of causation in Various Eateries v Allianz. The Court held that in Various Eateries’ circumstances (where this particular policy expired on 28 September 2020), cases of Covid-19 occurring in the Vicinity during the Period of Insurance were potential proximate causes of government action for a time after 28 September 2020 and in particular, that they were at least equal proximate causes of the tier system announced by the government on 14 October 2020 (but not the movement of some areas within the tier system to tier 2 on 29 October 2020).

The causation findings are very fact sensitive and will be dependent on the length of the policy, the length of the indemnity period and the significance to that policyholder’s business of the different announcements, measures and regulations.

AICW

The Court confirmed that AICW applied per Single Business Interruption Loss (i.e. per occurrence) and in addition to the notifiable disease sub-limit, but it did not apply to economic increased costs of working. The wording of the policy, correctly construed, meant that the AICW limit only applied to additional costs which were uneconomic (i.e. that which exceeds the amount of reduction in turnover avoided) but not to increased cost of working where the limit applicable to the ICW has been exhausted.

Government Support

The Court considered that payments received under the Coronavirus Job Retention Scheme (“CJRS”) should be taken into account for Insurers’ benefit when calculating sums recoverable by policyholders. The significance of this finding is subject to the wording of policy specific savings provisions. However, it is likely to be applicable to most policyholders (not just the Stonegate, Various Eateries and Greggs parties).

Payments made under the Business Rates Relied (“BRR”) would not be accounted for to insurer’s benefit if the business shows that normally business rates would have been paid out of turnover. Unlike the Court’s finding in relation to CJRS, the BRR is fact specific per policyholder.

Where next

A spokesperson for the Stonegate Group said:

“The outcome of this case is far from conclusive. We are pleased that the Judge found in our favour on a number of key issues and note that he sided with our insurers on others. In this sense, the outcome is similar to the judgment of the Divisional Court in the Test Case brought by the FCA last year.

However, we believe that the Court’s interpretation on a number of issues which are generally applicable to policyholders is out of step with the approach taken by the Supreme Court in the Test Case and with the approach of Courts in other jurisdictions (such as on furlough). We intend to appeal those elements of the decision.

Whilst our recovery from the pandemic has been strong, we cannot ignore the significant disruption caused during the last two years and, along with most businesses in the UK, we are now grappling with inflationary challenges and a cost of living crisis for the UK consumer. In the circumstances, we, and other businesses, are entitled to look to our insurers to provide the cover promised under our policy”

Copies of the judgments can be accessed here:

Stonegate - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2548.html

Various Eateries - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2549.html

Greggs - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2545.html

Authors:

Anthony McGeough is an Associate at Fenchurch Law

Joanna Grant is a Partner at Fenchurch Law

by 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/

by Fenchurch Law

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

by Fenchurch Law

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

by Fenchurch Law