Property Risks

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

Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim

World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)

The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.

An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.

As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.

The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position.  This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim.  Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.

A full copy of the judgment can be found here.

Background

The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”.  As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.

The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.

Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.

When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for.  It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.

In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).

The claim

The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.

Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs,  Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.

Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.

Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.

It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.

Conclusion

This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.

Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.

From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents.  This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.

Authors:

Joanna Grant, Partner

Rob Goodship, Associate Partner

Anthony McGeough, Senior Associate 

by Fenchurch Law

Not so peachy – a disappointing Covid-19 decision for policyholders

Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)

In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.

On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.

Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.

The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.

Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.

The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.

The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.

Comment

Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.

In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.

It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.

It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.

Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.

Authors:

Anthony McGeough, Senior Associate

Joanna Grant, Partner

by Fenchurch Law

Reinstatement 101 – (rein)stating the obvious?

Reinstatement can be a difficult issue for a policyholder to navigate in the wake of a loss.

The answers to what might seem like obvious questions such as: what is it? who does it? and, do the costs actually have to be incurred? are in actual fact far from straightforward, and have been the subject matter of a number of legal cases in recent years.

This short article summarises some of the key principles that are involved.

What is it?

Reinstatement is the repair or replacement of property so that it is in the same condition or a materially equivalent condition to that which it was in prior to the loss occurring.

Of itself that seems clear enough. However, as ever the devil is in the detail, and the wording of reinstatement clauses varies from policy to policy with very different outcomes for the policyholder.

For example, depending on the precise wording, the policyholder may or may not be entitled to a cash settlement, may or may not be required to rebuild, and may or may not have to rebuild on the same site. Also, many policies give the insurer the option to reinstate.

Who does it?

As might be expected, more often than not the policyholder reinstates. However, many policies give the insurer the option to reinstate at its election. Why might an insurer choose to do so?

There are several reasons why an insurer might elect to reinstate, rather than have the policyholder reinstate or pay them an amount equivalent to the cost of reinstatement. Certainly, one reason identified by the courts is to avoid what other might be “the temptation to an ill-minded owner to set fire to the building in order to pocket the insurance money” (Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440).

If an insurer elects to reinstate, it must give unequivocal notice to the insured, whether expressly or by conduct. Following a valid election to reinstate, the policy is no longer treated as one under which payment is to be made, and instead stands as if it had been a contract to reinstate in the first place. The consequence of this is that if the insurer fails to perform the contract adequately, it will be liable to the policyholder for damages.

Do the works have to take place?

Whether, and if so, when the reinstatement works have to be carried out, or whether the policyholder is entitled to an indemnity for what the works would cost if carried out, is again going to turn on the precise wording of the policy.

The starting position is as set out in the following extract from the judgment in Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd ([2020] EWCA Civ 308):

“How the claimant chooses to spend the damages and whether it actually attempts to put itself in the same position as if the breach had not occurred – for example by reinstating lost, damaged or defective property – or whether the claimant does something else with the money, is – in accordance with the general principle mentioned earlier – irrelevant to the measure of compensation.”

Therefore, subject to any contrary wording in the policy, a policyholder is entitled to recover the cost of repairing their property, regardless of whether they in fact carry out such repairs, but instead decide, for example, to sell their property or to use the money to build elsewhere on site.

Insurers often look to limit that entitlement, and reinstatement clauses often provide that the work must be commenced and carried out “with reasonable despatch”, and that “no payment is to be made until the costs of reinstatement have actually been incurred”. This presents something of a chicken and egg situation for insureds, since an impecunious policyholder will not have the funds available to pay for reinstatement without first receiving the costs of reinstatement from the insurer.

In Manchikalapati & Others v Zurich [2019] EWCA CIV 2163, the insurer contended that where the policy provided an indemnity for “the reasonable cost of rectifying or repairing damage …”, the term “reasonable cost” should be read as meaning “actual” or “incurred” costs. Therefore, because that cost had not yet been incurred, the insurer argued that its liability under the policy had not been triggered. The court rejected that argument, finding that there was nothing about the wording which indicated that the cost must be incurred before the policyholder was entitled to an indemnity.

An insurer can limit its liability to costs actually incurred, provided it uses clear language to that effect. However, absent clear language, or where the clause is neutral as to whether the cost must already be incurred or may be incurred in the future, the courts have made it clear that insurers are no longer able to able to withhold the indemnity pending the works being carried out.

To what extent are intentions relevant?

One thorny issue that has come up time and again in the context of reinstatement is the relevance of a policyholder’s intentions. This first arose in a case where the policyholder intended to sell the property at the time of the fire. In that case, the court found that the indemnity to which the policyholder was entitled was the price at which it was prepared to sell at the time of the fire. This is because a policyholder is entitled to be indemnified for its loss, and in quantifying that loss, an insured’s intentions may impact on an assessment of the value of the property to them.

This issue most recently came before the court in Endurance v Sartex [2020] EWCA Civ 308. The insured, Sartex, claimed an indemnity on the reinstatement basis following a fire at its premises. The insurers asserted that that this was inappropriate because Sartex did not have a genuine intention to reinstate, placing reliance on the fact that Sartex had not carried out reinstatement in the many years after the fire occurred. As such, the insurer said that Sartex was only entitled to the considerably lower sums representing the diminution in market value of the property as a result of the fire. The court found that the question of whether Sartex actually intended to reinstate the buildings was, in most cases, of no relevance to the measure of indemnity.

Standard of repair

Another issue that frequently arises, particularly in the context of older properties, is what happens when the reinstatement results in the property being in a condition better than it was before. This is known as betterment. The principle of betterment requires the policyholder to account to the insurer for the improved or better aspects of the new property.

Sometimes, a policyholder has no practical alternative but to replace the original property with modern, upgraded property. This is known as involuntary betterment, and in those circumstances the policyholder is entitled to the actual replacement cost.

If an insurer does look to apply a discount for betterment, a policyholder would be advised to require the insurer to identify precisely what betterment the policyholder would enjoy and to serve evidence in support, as where an insurer fails to adequality quantify and evidence its case on betterment, no deduction should be applied.

Summary

Reinstatement clauses are intended to place policyholders into a materially equivalent position to that which they would have been in had the loss not occurred. Quite how that works in practice can be a minefield, but recent case law has helpfully cleared up some misconceptions around the policyholder’s intentions and the extent to which the works have to be carried out – both of which will be of assistance to policyholders in getting their claims paid.

Alex Rosenfield is a Senior Associate at Fenchurch Law

by Alex Rosenfield