Property Risks

The Sky is the limit: Developments in relation to damage under CAR policies

On 16 December 2024 the Court of Appeal delivered judgment in the case of (1) Sky UK Ltd and (2) Mace Limited vs Riverstone Managing Agency Ltd and Others, a decision which will provide welcome clarity to the construction community, as well as being of interest to the insurance market more widely in terms of its analysis of the nature of an indemnity policy. The judgment discusses a number of important points, notably the rights of insured parties under a Construction All Risks (“CAR”) policy to recover in respect of “deterioration and development damage” which occurred after the policy period as a result of damage which had occurred during the policy period.

The factual background

The claims were in respect of extensive water damage to the roof of Sky's global headquarters building in West London, which was constructed for Sky in 2014 to 2016 by Mace as main contractor under a JCT 2011 Design and Build Contract dated 17 March 2014. Sky and Mace were named insureds under the Policy.

The roof was comprised of 472 wooden cassettes, into a substantial number of which water had entered before final waterproofing had taken place and had remained for periods of construction, leading to wetting and, so Sky and Mace alleged, irreversible swelling and structural decay by the end of the period of insurance (or “POI”, which ran from commencement of the project to one year after practical completion).

In the period between expiry of the POI and the drying out works (which arrested any further damage) the condition of the timber already damaged had worsened, and moisture had spread to other parts of the roof construction. The Court of Appeal termed these types of damage as “deterioration damage”; i.e. damage, such as further swelling, in parts of the timber already damaged, and “development damage”; i.e. damage to additional, previously undamaged timber by way of spread.

It is important to note, as the Court of Appeal stated, that the vast majority of water ingress had occurred during the POI and there was little, if any, ingress after the POI. Secondly, there was no allegation by the defendant insurers that Sky or Mace had failed to mitigate their loss prior to the hearing, given the complexity of designing, agreeing and implementing a remedial scheme.

The underlying decision

In the underlying decision, HHJ Pelling held that Sky was only entitled to damage which had occurred during the POI, and not development or deterioration damage which occurred thereafter. In reaching this decision, the Judge relied on the House of Lords decision in Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] and statements in that decision that in a policy covering losses occurring during a policy period, the cover does not extend to damage occurring before or after the policy period.

The Judge had found that the entry of moisture into the cassettes during the POI was a tangible physical change to the cassettes as long as the presence of water, if left unremedied, would affect the structural strength, stability or functionality of the cassettes during the POI.

The arguments on appeal

All of the parties were granted permission to appeal on numerous grounds, but in this article we discuss the primary point of contention, which was whether Sky could claim for deterioration and development damage.

On this point, the cover identified in the insuring clause of the policy was in respect of “damage to Property Insured occurring during the Period of Insurance” and insurers argued that damage occurring after the POI was not covered. Insurers relied on the decision in Wasa as authority for the proposition that, under “time policies”, the cover is in respect of damage occurring during the period of cover, and not occurring before or after.

In summary, Sky and Mace’s arguments in reply were that:

1. An insurance claim is a claim for unliquidated damages and, as such, the measure of recovery is for all the loss suffered by reason of the insured peril occurring during the POI, including loss caused after the POI.
2. The Policy contained a Basis of Settlement clause, as below, and the measure of recovery contended for was supported by the underlined words in the clause:

“Basis of Settlement

In settlement of claims under this Section of the Contract of Insurance the Insurers shall, subject to the terms and conditions of the Contract of Insurance, indemnify the Insured on the basis of the full cost of repairing, reinstating or replacing property lost or damaged (including the costs of any additional operational testing, commissioning as a result of the physical loss or damage which is indemnifiable hereunder) even though such costs may vary from the original construction costs …."

The Court of Appeal decision

Development and deterioration damage

Lord Justice Popplewell delivered the leading judgment, which was rooted in the principle, long established in the authorities, that a contract of insurance is a contract of indemnity, often described as a contract to hold someone harmless. Such a contract was not, however, a promise by the insurer to pay money upon the happening of the insured event, but rather a promise to hold harmless, i.e. a promise that the insured will not suffer the damage in the first place. This promise to hold harmless was the insurer’s primary obligation and, when breached, it was under a secondary obligation to pay damages for breach of the primary obligation.

In light of this, damages payable under an insurance policy fell to be assessed on the basis of established common law principles as to foreseeability, remoteness and mitigation that applied to any other contract; namely damages to put the innocent party in the position it would have been but for the breach, subject to express terms in the policy modifying the general position (e.g. limits or deductibles, exclusions such as for consequential loss or if caused by certain perils), but only if such modification was excluded by clear wording.

Lord Justice Popplewell found that the temporal limit in the insuring clause was insufficiently clear to modify the ordinary rule that insurers were liable to pay the reasonably foreseeable costs of remedying development and deterioration damage.

This conclusion was supported by the wording of the Basis of Settlement clause.

Further, Lord Justice Popplewell found that the authorities, including the House of Lords’ decision in Wasa was distinguishable on the facts, predominantly because it did not relate to development or deterioration damage of the type suffered in this case.

Investigation Costs

Mace also claimed the costs of “lifting the lid”, namely the upper surface of the cassettes in the roof upslope above the gutters, as reasonable investigation costs. The trial Judge, at first instance, denied these costs as being recoverable under the Policy and characterised them as “speculative opening up works”. Additionally, the Judge found that any investigation costs not revealing physical damage would not be recoverable under the CAR Policy.

Nevertheless, based on the normal common law principles that apply to contractual damages claim, aimed at putting the innocent party back in the position it was before the breach (to hold harmless), the Court of Appeal found that reasonable costs of investigation were recoverable if they were reasonably incurred in determining how to remediate the insured damage which has occurred. This was the case, even if the result of the investigation may be to identify the absence of damage in certain areas.

Meaning of physical damage

On a separate point, the Court of Appeal also rejected insurers’ appeal in relation to the meaning of “damage”, and upheld the trial Judge’s findings that damage meant any change to the physical nature of tangible property which impaired its value or usefulness to its owner or operator. There was no need for the physical change to compromise the performance of an individual cassette, as insurers argued.

Retained Liability

The Policy contained a deductible (or “Retained Liability”) of £150,000 “any one event but this will only apply to those claims which are recoverable under DE5…”. It was common ground that the claim was recoverable under DE5 by reason of defective design being a proximate cause, and the trial Judge had found therefore that a single deductible of £150,000 applied to the whole of the claim, as opposed to applying separately in respect of damage to each cassette.

The Court of Appeal also upheld the trial Judge’s findings on this point that, based on the long established authorities, an event refers to the cause of the damage, and not the damage itself, supported by the fact that the deductible was specifically linked to the cause of the loss being defective design.

Comment

As the Court of Appeal stated, on the principal point of contention, the fact that development and deterioration damage was recoverable, would accord with business common sense. In the context of a major construction claim, an insured party would reasonably expect to be compensated for the consequences of insured damage which occurred during the policy period, to a part of the works already damaged (deterioration) or to some other part of the building not yet damaged (development), after this period had expired, in the absence of any policy terms limiting recovery. This is especially so in relation to complex claims where a remediation scheme may not be finalised until sometime after expiry of the policy period, and where the state of the building may deteriorate in the meantime.

Of course, development or deterioration damage would be unlikely to be covered under a buildings policy, since this would exclude damage which first occurred prior to the building policy period, meaning the Court of Appeal judgment is crucial in helping insureds to transfer this risk to the insurance market.

The outcome is consistent with the approach taken in recent cases on non-damage business interruption claims, that provided the policy “trigger” occurs within the indemnity period, the totality of  loss is covered including that which continued to be suffered after the policy period  (UnipolSai Assicurazioni SPA v Covea Insurance plc [2024]).

The Court of Appeal decision will therefore be welcomed by employers and contractors alike. It remains to be seen whether permission to appeal to the Supreme Court is granted.

Author:

Chris Ives, Partner

by Christopher Ives

Camden Contribution Curtailed: TPRA 2010 Developments

Recent cases highlight potential difficulties for insurers in handling claims under the Third Parties (Rights against Insurers) Act 2010 (“the TPRA”).

By way of reminder, the TPRA allows a third party claimant to pursue a recovery directly against an insolvent insured’s liability insurer, both to establish the insured’s liability to the claimant, and coverage under the policy, in the same action, without the need to join the insured to the proceedings. In relation to the underlying liability claim, the insurer is permitted to rely, as against the third party, on any defences that would have been available to the insolvent insured.

In Riedwig v HCC International Insurance plc & another [2024], the High Court (Master Brightwell) dismissed a liability insurer’s application to bring a Part 20 claim against the claimant’s professional advisors, seeking a contribution in respect of the insurer’s potential liability to the claimant under the TPRA.

The claim arose from alleged negligence by Goldplaza Berkeley Square Ltd (“Goldplaza”) in producing a valuation of property on Camden High Street. The claimant sought to recover her consequent losses from Goldplaza, and subsequently its professional indemnity insurers, HCC, following Goldplaza’s insolvency in 2021.

HCC applied to join the solicitors who had acted for the claimant on the original property transaction to the TPRA proceedings. The parties agreed that Goldplaza and the solicitors were potentially liable for the “same damage”, based on section 1 of the Civil Liability (Contribution) Act 1978 (“the CLCA”), which provides that:

“any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”    

However, the Court held that the insurer and the solicitors were not liable for the same damage. The insurer was potentially liable under the policy, while the solicitors were allegedly liable for financial loss resulting from the property transaction. Following Bovis Construction v Commercial Union [2001], approved by the House of Lords in Royal Brompton Hospital v Hammond [2002], “an insurer does not inflict damage on anyone … the only damage it is capable of inflicting is in refusing to meet its obligations under the policy of insurance”.

The Judge noted that the purpose of the TPRA is to enable a claimant to pursue an insurer directly in respect of the liability of its insured, and for the claimant to stand in the insured’s place for that purpose, not the insurer. The insurer does not become liable for damage caused by its insured, and the fact that the insured might have a contribution claim against third parties does not mean that the insurer also has that right.

Depending on the type and stage of insolvency proceedings, insurers may be able to apportion loss with third parties by a more convoluted route of joining the insolvent insured to TPRA proceedings (as HCC had intimated an intention to do) or else by way of subrogated recovery, after settling a policy claim. Alternatively, an assignment of the insured’s contribution rights could potentially be made to the insurer, through policy wording or subsequent agreement.

Liability insurers are generally required nowadays to take a more proactive approach to defence of litigation against an insolvent insured, since judgment in default may suffice to establish liability under the TPRA, even if it does not follow consideration on the merits of the underlying claim. This was confirmed by the Scottish Inner House, Court of Session, in the recent appeal decision Scotland Gas Networks plc v QBE [2024], upholding the first instance findings considered in our previous article.

While the intention behind the CLCA is to broaden the class of potential contributing parties, where a number of defendants share responsibility for a claimant’s loss, the ability of an insurer to seek contribution from third parties is limited in the context of TPRA claims.

Authors:

Amy Lacey, Partner

by Amy Lacey

Reinsurance Cover for Covid BI Losses Upheld on Appeal

In UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWCA Civ 110, the Court of Appeal has upheld the first instance finding that the reinsured (Covea), having paid out substantial sums in respect of Covid business interruption (BI) losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The decision provides clarification on the operation of aggregation clauses and the proper interpretation of a “catastrophe” in treaty reinsurance arrangements.

Covea provided cover for a large number of children’s nurseries which were forced to close between 20 March 2020 and July 2020, as a result of the pandemic. The factual background and outcome at first instance are explained in detail in our earlier article. The decision was appealed by reinsurers and the following questions arose for re-evaluation:

1. Whether Covid-19 losses arose out of, and were directly occasioned by, a “catastrophe”; and

2. Whether the “Hours Clause” - by which the duration of any “Loss Occurrence” was prescribed depending on the nature of the underlying peril - meant that:

(i) an “individual loss” occurs on the date the covered peril strikes, including where the insured peril is the loss of ability to use premises; and

(ii) where the (re)insured first sustains indemnifiable BI loss within a nominated 168-hour period, subsequent losses after that period fall to be aggregated as part of a single “Loss Occurrence”.

Meaning of Catastrophe

At first instance, Mr Justice Foxton held that Covid-19 did amount to a “catastrophe,” as required under the reinsurance wording. On appeal, the reinsurers argued that a catastrophe must be a sudden or violent event, capable of causing physical damage, whereas the pandemic was an ongoing state of affairs.

The Court of Appeal rejected these submissions, highlighting the absence of any reference to an “event” within the policy wording, and noting that the unities test in Axa v Field [1996] is merely an aid to be used with broad application. Their Lordships also rejected the argument that “suddenness” was a pre-requisite for all catastrophes, and, in any event, the “exponential increase in Covid 19 infections in the UK […] did amount to a disaster of sudden onset.” The attempt by reinsurers to rely on an ejusdem generis argument, in relation to the alleged need for physical damage, was flawed, as the types of catastrophes mentioned in the policy were not intended to be a prescribed class. The expert evidence that BI cover may include cover for non-damage BI was unchallenged.

Operation of the Hours Clause

The central question for consideration under the Hours Clause was when the relevant loss occurred. If it fell outside the period stipulated, then it would not be recoverable. It was also noted that the term “Loss Occurrence” was defined in the policy to mean “individual losses”. Discussing this further, the Court of Appeal emphasised that the term “occur” means when a loss first happens during a period of time. In relation to BI specifically, it was held that when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues - consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences. An apportionment of financial loss would give rise to considerable practical difficulties and was deemed to be incorrect.

Implications for Policyholders

The decision is welcomed by cedants with the benefit of similarly worded reinsurance policies. The implications are far-reaching, with total payouts for Covid BI claims estimated in the region of £2 billion, according to the Association of British Insurers. This policyholder-friendly precedent is particularly helpful, since most reinsurance disputes are resolved in confidential arbitrations.

Authors:

Amy Lacey, Partner

Pawinder Manak, Trainee Solicitor

by Fenchurch Law

Climate Risks Series, Part 2: Flood and Storm Risk - Keeping Policyholders Afloat

Introduction

Extreme rainfall and storms have become increasingly prevalent in the UK. Figures from the Association of British Insurers (“ABI”) show that storms and heavy rain have contributed to driving up property insurance payouts to the highest level in 7 years.

During floods in September 2024, several areas of the UK experienced significant property damage. This included AFC Wimbledon’s grounds, where a sinkhole caused the football pitch to collapse, after a nearby river burst its banks due to the excessive rainfall.

This article will discuss:

1. The coverage issues that policyholders could face in relation to cover for damage caused by flood and storm.
2. How stakeholders can increase resilience to floods and storms.

Coverage Issues

Where policies do not clearly define what constitutes a “flood” or a “storm”

Extreme weather comes in various forms and severities. In the absence of a clear definition of “flood” or “storm”, insurers may seek to rely on metrics such as the Beaufort wind force scale, ABI definition of storm, or previous case law, to support arguments limiting the scope of policy cover depending on the particular facts.

Recent decisions from the US have held that flood exclusions did not apply to: water damage from backed-up drainage following Hurricane Ida (GEMS Partners LLC v AmGUARD Ins Co (2024), in the New Jersey district court); and water accumulating on a parapet roof after a severe storm (Zurich v Medical Properties Trust Inc (2024), in the Massachusetts Supreme Court); based on the meaning of “flood” and “surface waters” in the relevant policy wordings.

In FCA v Arch Insurance Limited [2021] UKSC 1, the UK Supreme Court confirmed that, when looking at the construction of a policy, it is necessary to consider how a reasonable person would understand the meaning of the words used, in light of the commercial context. Therefore, policyholders should ensure, prior to inception, that the policy contains appropriate and clear definitions of “flood” and/or “storm”, to prevent ambiguity in the event of a claim.

Where the weather event is a combination of “flood” and “storm”

Where a weather event may appear to be a combination of both a flood and a storm, identifying the proximate cause of the loss, i.e. the dominant cause, may be difficult without meteorological expert evidence. This can raise two separate issues.

Firstly, policies contain different sub-limits for flood or storm damage. For example, if “flood” has a lower sub-limit compared to “storm” perils, a policyholder would likely seek to argue that storm damage has occurred, to maximise cover under the policy.

Secondly, if a policy excludes either flood or storm damage, the principles derived from Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 and The Miss Jay Jay [1987] 1 Lloyd's Rep 32 may apply. This means that where two concurrent proximate causes operate together to bring about a loss, if one is insured under the policy and one is excluded, the loss will not be covered. If one concurrent proximate cause is an insured peril and the other is not insured, but not excluded, the loss will be covered.

Flood management measures

After the damage to its pitch, AFC Wimbledon was reportedly exploring ways to improve its flood management and infrastructure, to reduce the risk of future floods. It is likely that insurers will seek to introduce more conditions within property insurance policies, requiring certain flood management measures to be in place as a prerequisite to cover.

Flood resistance measures aim to “resist” or reduce the amount of water that enters a property. This can include the installation of flood gates or airbrick covers. Flood resilience measures purely mitigate the level of damage to property. This would include having concrete floor tiles, as opposed to carpets, and placing plug sockets away from entrances close to water.

Some property policies will contain a stillage condition precedent to liability. This will state that a policyholder will not be covered for loss caused by a flood, storm or escape of water, if it does not keep stock or other items a certain distance above floor level.

Furthermore, insurers could potentially restrict cover offered to policyholders whose buildings are situated in areas at a higher risk of flooding, or where businesses do not have mechanisms in place to deal with potential flood damage.

Why is Climate Change causing more Floors and Storms?

It is thought that the increase in the number of extreme weather events is a result of climate change.

Climate change contributes to more floods and storms because the increase in greenhouse gases in the atmosphere has allowed carbon dioxide to trap the sun’s rays. This has resulted in an increase in the planet’s temperature and the level of moisture that is held in the atmosphere. The warmer the atmosphere, the quicker the water can evaporate and fall, resulting in more intense and voluminous rainfall.

Improving Industry Resilience to Floor and Storm

The increase in natural disasters such as earthquakes, floods and hurricanes has  led to some insurers pulling out of international catastrophe insurance markets. This is because of the unpredictable nature of these events and the severity of the losses suffered. This has resulted in limited options and more expensive premiums for catastrophe policies available to policyholders.

Similarly, insurers in the UK are becoming more reluctant to provide cover for damage caused by storm and flood, as the number of these types of claims increases, giving rise to the risk of a protection gap for policyholders.

Parametric Insurance

One of the tools available to help mitigate this effect is parametric insurance. This is a type of insurance cover where claims are paid on a predetermined basis. For example, cover for a storm would have parameters such that, if there is damage to property and a certain wind-speed or water depth is reached, then the policy would be triggered.

Traditional insurance policies are based on the actual loss that is sustained by the policyholder, whereas parametric insurance policies are triggered by the occurrence of an event and when certain parameters are reached. One of the main benefits of parametric insurance is the greater certainty of insurers paying out. This is especially important where there is a need for an urgent financial resource, allowing for a quicker payment to be made to policyholders.

Flood/Storm specific reinsurance schemes

For flood damage in the UK, there is a scheme in place for homeowners known as Flood Re. This scheme operates in a way where insurers can pay a premium to reinsurers and they would have access to a “pool” of indemnity when a claim arises. If the pool is exhausted, then the government can step in to pay the remainder of any losses.

The scheme is expected to provide cover until 2039 as Flood Re anticipates there will then be a “free market” for flood risk insurance. However, one can argue that this is unlikely if we see a similar pattern in the increase in extreme weather events and insurance claims over the next decade. Therefore, an alternative scheme may be needed, for businesses as well as homeowners, to ensure all policyholders have a safety net in the event of claims arising out of floods and storms.

Broader Risk Management

Increased industry resilience is likely to come from broader risk management. Currently, the UK does not have a robust plan in place to tackle flood risk. It is the responsibility of organisations such as the Environment Agency, the UK Climate Change Committee and DEFRA to collaborate and mitigate flood risk.

There have been calls for the Government to set specific flood risk targets as a result of climate change and the increase in extreme weather events. This would be an example of an initiative where input from a variety of organisations could help to reduce the risk of property damage and lead to increased resilience.

Conclusion

With the rise in extreme weather events, insurers will look to mitigate exposures and robustly defend claims arising from flood and storm damage, leaving policyholders in a potentially vulnerable position.

A collaborative response is needed to ensure that the insurance industry can adapt to emerging risks and ensure that appropriate cover is available for policyholders, in the event of floods and storms.

Author

Ayo Babatunde, Associate

by Ayo Babatunde

The elephant in the room: and it’s not the Secretary of State

In this, the latest in a series of recent Covid-19 BI appeals, the Court of Appeal has handed down judgment in International Entertainment Holdings Limited & Ors v Allianz Insurance Plc [2024] EWCA Civ 1281. A copy of the judgment can be found here.

The central issue here turned on whether the restrictions brought in by the government, preventing or hindering access to the claimants’ theatres around the country, were those of a “‘policing authority”.

In concluding that they were not, the Court of Appeal held that, “It is sufficient to say that the term does not extend to the Secretary of State. To adapt Lord Justice Scrutton’s famous remark about the elephant (Merchants Marine Insurance Co Ltd v North of England Protection & Indemnity Association (1926) 26 Ll LR 201, 203), the reasonable policyholder might not be able to define a “policing authority”, but he would know that the Secretary of State was not one.”

That finding notwithstanding, the judgment brings some welcome news for the wider policyholder market with the finding that Covid-19 can be an “incident” and that, in the absence of clear wording to the contrary, cover can be available on a “per premises” basis.

The Underlying Proceedings

The issues on appeal in this matter were first heard by Mr Justice Jacobs as part of a group of cases (see Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE [2024] EWHC 124 (Comm)).

The claim concerned the interpretation of a non-damage denial of access (“NDDA”) clause for losses arising out of the closure of venues, following the 21 March Regulations made by the Secretary for Health and Social Care.

The relevant wording read as follows:

“Denial of Access Endanger Life or Property

Any claim resulting from interruption of or interference with the Business as a direct result of an incident likely to endanger human life or property within 1 mile radius of the premises in consequence of which access to or use of the premises is prevented or hindered by any policing authority, but excluding any occurrence where the duration of such prevention or hindrance of us [sic.] is less than 4 hours, shall be understood to be loss resulting from damage to property used by the Insured at the premises provided that

i) The Maximum Indemnity Period is limited to 3 months, and

ii) The liability of the Insurer for any one claim in the aggregate during any one Period of Insurance shall not exceed £500,000”

At first instance, the Judge concluded that the Secretary of State was not a “policing authority”, which was sufficient for the policyholders’ claims to be dismissed.

The Appeal

While accepting that the term “policing authority” was not limited to the police, and that it could encompass restrictions imposed by a similar body performing policing functions in circumstances likely to endanger human life or property, the Court of Appeal felt it unnecessary to decide how widely the clause may extent on the basis that it was sufficient to say it did not include the Secretary for State.

That decision was ultimately determinative of whether or not the policyholders in this case were able to claim for losses arising out of the Covid-19 pandemic, however, there were three further issues on appeal which will be of interest to the wider policyholder market: (i) whether or not Covid-19 was capable of being an incident; (ii) whether the extension applied on a “per premises” basis; and (iii) whether policy wording referring to “any one claim in the aggregate” contained a mistake capable of correction.

Can Covid-19 be an “incident”?

The Court of Appeal was asked to consider whether, in the context of the relevant clause, Covid-19 could be an “incident likely to endanger human life.”

The Court of Appeal accepted that the word “incident” can be used synonymously with “event” or “occurrence” but, in ordinary usage, it would generally connote something more dependent on the context in which the word is used. In the context of this wording, “incident” was qualified by something that “endangers human life or property,” so as to require a response from a “policing authority”

It was common ground that “Covid-19 endangered human life because of the infectious nature of the disease; and taken together with all the other cases of Covid-19 in the country, it called for a response by the Secretary of State”.

Further, in this clause, it was clear that the terms “incident” and “occurrence” were being used interchangeably. Therefore, a case of Covid-19 could properly be regarded as an “incident,” and could amount to an “event” or “occurrence”.

Although this analysis differs from that of the Divisional Court in the FCA Test Case, where it was held (in the context of the Hiscox NDDA clause) that “it is a misnomer to describe the presence of someone in the radius with the disease as “an incident” for the purposes of the clause”, the Court of Appeal did not find that the point was wrongly decided by the Divisional Court.  Rather, its decision was based on the wording of the clause before it.

The finding that Covid-19 can be an “incident,” in certain contexts, is a potentially significant outcome for other policyholders with “incident” wordings. There are likely to be a number of claims out there that have been in cold storage due to an “incident” wording, which should now be revisited given this apparent thawing on the issue.

Per premises

The Court of Appeal agreed with the lower court’s finding that this wording provided cover on a per premises basis.

When considering whether the wording provided for cover on a per premises basis, the Court of Appeal focused on the specific wording of the clause, and in particular the fact that the insured peril was specific to each of the premises insured. A prevention or restriction of access to each premises would, therefore, give rise to a separate claim to which a separate limit would apply. The insurer’s focus on the defined term “Business” (i.e. that it would not “make sense to speak of the business of the premises as distinct from the business of the policyholder”) was found to place more weight on the definition that it would bear.

Further, the Court of Appeal noted that the policy drew no distinction between policyholders in the claimant group who owned or operated only one venue, and those who owned or operated multiple venues.  In those circumstances, interpreting the policy limit as applying separately to each policyholder rather than to each premises would be “somewhat capricious”.

This is an important finding for policyholders with more than one premises in circumstances where insurers are frequently seeking to limit losses to a single limit across multiple premises. Close attention should be paid to the specifics of the wording, as the nuance of the drafted wording and the policy as a whole will dictate whether a per premises argument can be sustained.

Correction

The insurer’s attempt to introduce an aggregate limit were unsuccessful in the absence of a clear mistake (or at least a mistake with a clear answer).

The insurer’s had attempted to rework the wording of the extension referring to “any one claim in the aggregate” to provide an annual aggregate limit by inserting the word “any one claim and in the aggregate”. The Court of Appeal found that while it was reasonably clear that something had gone wrong in the language, it was nonetheless far from obvious what solution the parties had intended. It was as likely that the insurer had intended for the limit to apply in the aggregate as it was that the limit was intended to apply to any one claim. The correction proposed by the insurer would result in the words “any one claim” being deprived of any meaning. Accordingly, the judge was correct to have rejected the insurer’s case of construction by correction at first instance.

This decision again confirms the principles in East v Pantiles (Plant Hire) Ltd and Chartbrook Ltd v Persimmon Homes Ltd, which were considered recently in another appellate Covid-19 decision, Bellini N/E Ltd v Brit UW Ltd. It serves as a stark reminder that the courts will usually be reluctant to correct mistakes, and the circumstances in which they might do so are limited to those where there is an obvious definitive answer.

Parting Comments

Despite a disappointing result on the meaning of “policing authority”, this decision has produced renewed hope for policyholders with similar issues in dispute, and it is far from the last word on the various NDDA wordings still out there. Further appeals arising from the Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE group of cases are listed for hearing early next year, in addition to other matters proceeding to trial in the commercial court.

Watch this space.

Authors

Joanna Grant, Managing Partner

Anthony McGeough, Senior Associate

by Fenchurch Law

A twist in the tale!: – the Court of Appeal throws up some surprises in the “At the Premises” judgment

The long-awaited judgment in the “At the Premises” (“ATP”) judgment has now been handed down, and the expected policyholder-friendly outcome marks another welcome milestone in the journey towards bringing these cases to a conclusion, even if the route by which the Court of Appeal got there took some less expected twists and turns.

While there were a number of other issues on appeal, this article focuses on causation, which continues to be a key battleground for insurers and their policyholders.

Background

By way of a brief recap, policies with clauses providing cover for cases of Covid-19 “at the premises” were not considered by the Divisional and Supreme Court in the FCA Test Case, which instead considered a range of policies including those which provided cover for a disease occurring within a specified radius of an insured premises.

In the FCA Test Case, the Supreme Court considered causation at some length, finding that “[212]…in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to prove that the interruption was a 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.”

However, insurers resisted the application of that analysis to ATP policy wordings, leading to this litigation considering “the critical question” as to whether the Supreme Court’s reasoning in respect of causation could properly be applied to such wordings. At first instance, the answer was a decisive yes (and some further background can be found in our previous article). Insurers appealed, and this judgment is from that appeal which was heard earlier this year.

Insurers’ Causation Arguments

Despite a number of common causation issues to all of the appeals, the primary case advanced differed between the insurers, as follows:

• ExCeL & Kaizen Insurers – their position was that there would be cover only when an occurrence of disease at the premises was a “distinct effective cause” of the closure of the premises (i.e. it must be a known occurrence of the disease at the premises to which the government or local authority was responding);
• Hairlab & Why Not Insurers – they took the position that only a stricter “but for” test applied (requiring the occurrence of a disease at the premises to be a necessary and sufficient cause of the subsequent restrictions – the court recognised this test would seldom be satisfied); and
• Mayfair Insurers – whose position was that the authority had to know about the suffering of disease at the particular premises and had to take it into account in reaching its decision (although it need only contribute to that decision).

The Court of Appeal’s Decision

In setting out their positions, the insurers argued that the correct approach was to begin with the interpretation of the policies in issue, having regard to their language and context, rather than asking whether those clauses differ materially from the radius clauses considered by the Supreme Court in the FCA Test Case. The Court of Appeal agreed there was some force in that.

However, ultimately that change of approach proved to make very little difference to the outcome, with the Court of Appeal finding that:

• The nature of the insured peril informs the causation test agreed between the parties, which is not derived from other perils mentioned in the insuring clause (such as vermin infestation), but instead focuses on the particular peril in question.
• In that regard, notifiable diseases spread rapidly and widely, with the potential to cause interruption over a wide area. The circumstances that would lead to a closure of an insured premises are unlikely to be in response to an isolated incident: instead, it must have been contemplated that a closure or restrictions imposed by a relevant authority would be in response to an outbreak as a whole over a particular area, whether that be local or national. Furthermore, the worse and more widespread the outbreak of the disease, the more likely it would be that such restrictions would be imposed.
• Accordingly, a “but for” test could not have been the intended approach to causation, as the parties must have intended for the causation requirement to be satisfied if the occurrence at the premises was one of a number of causes of the closure.
• It would be unrealistic to suppose that the authority would apply its mind to identifying a particular case of a disease at a particular premises. In the case of a serious outbreak, a relevant authority would know that there had been a number of occurrences of a disease (perhaps over a certain area, or affecting a particular kind of premises within an area) and it would simply react to those occurrences by imposing restrictions accordingly.
• The finding of fact by both the Divisional and Supreme Court in the FCA Test Case (that “each of the individual cases of illness resulting from Covid-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action”), applies equally to the ATP claims, both in respect of the cases which were known about, and those which were “known unknowns”.

Comment

This appeal judgment is a welcome development for policyholders and confirms that despite the differences between radius and ATP clauses, it may not materially affect the nature of the casual link that must be established, which is a matter of policy interpretation and intention.

Policyholders with the benefit of ATP cover can now expect a recovery from their insurers, although notably a lack of clarity remains about the evidence required to demonstrate the presence of a case of Covid-19 at the premises, and it is to be hoped that insurers take a pragmatic approach that avoids this issue becoming the next battleground.

Now that the ATP appeal has concluded, and with the tide very much in favour of the policyholders, the Court of Appeal will be considering similar causation arguments along with furlough in the upcoming appeals arising out of the Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE group of cases.

Watch this space.

Anthony McGeough is a Senior Associate at Fenchurch Law

by Anthony McGeough

Terrorism Law Reform: Compliance and Coverage for Property Owners

The Terrorism (Protection of Premises) Bill was confirmed by the King’s Speech on 7 November 2023 for the legislative agenda in the year ahead.  Also known as ‘Martyn’s Law’ in tribute to Martyn Hett, who was tragically killed in the Manchester Arena bombing in 2017, the proposals are aimed at enhancing security and mitigating risks of terrorism in public venues such as music halls, stadiums, theatres, festivals and shopping centres.

Mandatory requirements would be imposed on operators of crowded premises throughout the UK to prepare for and seek to prevent terrorist attacks, overseen by a regulator with powers to issue enforcement notices and impose fines or criminal sanctions.  The new measures focus on risk assessment, planning, mitigation and security protection training, with the level of duty depending on the type of premises:

• Venues with capacity of 100 individuals or less fall outside the scope of the Bill. However, these premises are encouraged to adopt the spirit of the legislation and implement voluntary measures to reduce the risk (which may be relevant in the context of licensing applications).
• Venues with capacity over 100 people are ‘standard tier’ premises, required to undertake basic security measures including staff training, public awareness campaigns and development of a preparedness plan.
• Venues with capacity of 800 or more are ‘advanced tier’ premises subject to additional requirements including: notification to the regulator of the premises or event, and its designated senior individual, where the responsible person is a company; taking all reasonably practicable steps to reduce the risk of terrorist attacks or physical harm occurring, for example, bag searches and metal detectors in appropriate cases; and maintaining a security document evaluating the risk assessment and planned response, for submission to the regulator.
• Venues with capacity over 5,000 or hosting specific types of activities, such as major sporting events or concerts, will be subject to more stringent requirements covering the risk assessment and security planning process.

Government consultation is continuing with industry stakeholders on the scope of duties reasonably deliverable for standard tier locations, to strike a fair balance between public protection and the need to avoid excessive burdens on smaller premises.

The Home Affairs Select Committee raised concerns about proportionality, and the impact on small businesses or voluntary and community-run organisations.  Implementation costs of £2,160 for standard tier premises and around £80,000 for enhanced premises were estimated by the Home Office, over a ten year period, but these figures have been queried amid concern that costs will escalate.  The idea of staged implementation focusing initially on enhanced tier venues has been suggested by some commentators, whilst others believe this would increase the threat to smaller locations and put lives at risk.

Critics argue the draft Bill is not fit for purpose to adequately reduce terrorism risk, which may vary significantly based on the event or persons attending rather than the size of venue, especially since most provisions are directed towards mitigating the consequences of attacks, rather than preventing them from happening.  Jonathan Hall KC, the Independent Reviewer of terrorism legislation, said that most attacks since 2010 would be outside the scope of the Bill; and campaigners argue current exemptions for outdoor Christmas markets and mass sporting events, such as marathons, should be lifted.  Further improvements are recommended in areas including mandatory life-saving training, statutory provision for security to be considered in the design of new public buildings, and improved systems for procurement and training of security staff.

The events (re)insurance market is likely to see increased demand for terrorism-specific policies, or extensions to existing property programmes.  It will be easier in future to identify whether operators of premises affected by terrorist attacks took reasonable steps to minimise risk, and respond appropriately to such events, judged against the new mitigation guidelines.  Insurers will be apprehensive at the prospect of enhanced duties and liabilities, during the initial period whilst changes are introduced and understood, which may lead to increased casualty pricing or restricted terms of coverage.  The scope of management liability insurance should also be considered for businesses operating in this sector, to cover potential mistakes by directors and officers tasked with implementation of additional controls.

There have been 14 terror attacks in the UK since 2017, representing a complex and evolving risk affecting a broad range of locations.  Subject to fine-tuning during the process of detailed scrutiny through both Houses of Parliament, the new legislation is broadly welcomed as raising the bar on public safety, helping leisure, entertainment and retail premises to be better prepared and ready to respond to security threats.

Amy Lacey is a Partner at Fenchurch Law

by Amy Lacey