Covid-19 BI Update: Supreme Court to hear FCA Test Case appeal on 16-19 November 2020
Further to the ‘leapfrog’ applications for appeal filed by the FCA and 6 insurers in October, the Supreme Court has now granted the applications, and listed the matter to be heard from 16-19 November 2020.
Whilst RSA has notably abandoned its appeal in relation to the RSA4 (Resilience) wording, it appears that the remaining insurers have maintained their appeals in full as set out in the original requests for leapfrog certificates. As a result, the majority of the other 21 wordings considered in the Test Case remain subject to appeal by insurers and/or the FCA to a greater or lesser degree.
The Supreme Court has summarised the scope of the appeal as follows:
1. certain matters of construction relating to:
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- "Disease Clauses" (i.e. those which can be triggered by the occurrence of severe acute respiratory syndrome coronavirus 2 ("COVID-19"), typically within a specified distance of the insured’s premises);
- "Prevention of Access Clauses" (i.e. those triggered by public authority intervention preventing access to, or use of, premises as a result of COVID-19); and
- "Hybrid Clauses" (i.e. those clauses which contain wording from both Disease and Prevention of Access Clauses), and
2. whether the Divisional Court was correct:
-
- to apply certain counterfactual scenarios in relation to the operation of the clauses in relevant policies which provided for loss adjustments (the "Trends Clauses"); and
- in its analysis of Orient-Express Hotels Ltd v Assicurazioni Generali S.p.A.
The last point is perhaps the most contentious and far-reaching, since in the Test Case judgment Flaux LJ and Butcher J found that they were able to distinguish the facts and circumstances of the Test Case from the findings in Orient Express, and did not therefore need to apply it, but that if it had come to it they would have found that it was wrongly decided. Since the Supreme Court panel includes both Lord Hamblen (who as Hamblen J issued the original judgment in Orient Express), and Lord Leggatt (who sat on the tribunal which issued the arbitral award from which the Orient Express case was appealed), the hearings will make for interesting viewing.
Most importantly, whichever way the decision goes, the Supreme Court’s ‘final word’ on the issue of wide area damage, trends clauses and the decision in Orient Express will bring some welcome clarity and finality to the issue which can only benefit policyholders and insurers alike.
Covid-19 BI Update: TKC London Ltd v Allianz – Covid-19 closure not “accidental loss” of property
Hot on the heels of the FCA Test Case judgment, on 15 October 2020 the Commercial Court granted summary judgment in favour of Allianz Insurance Plc, in a case brought by The Kensington Creperie (‘TKC’) seeking coverage of its BI losses arising from enforced closure in the wake of the Covid-19 pandemic[1].
In contrast to the FCA Test Case which examined coverage under ‘non-damage’ business interruption extensions, but echoing many of the cases currently being pursued in various US jurisdictions, TKC sought to establish coverage on the basis that it had suffered an “accidental loss of property”.
TKC’s Arguments
The Policy provided cover for loss resulting from business interruption “in consequence of an event to property”, “Event” being defined as “Accidental loss or destruction of or damage to property used by the Insured at the Premises for the purpose of the Business.”
Seeking to establish that the mandatory closure of its business from 21 March to 4 July 2020 could amount to an Event within the meaning of the Policy, TKC argued that “accidental” meant nothing more than “unlooked for or unintended”, and that “loss of property” included temporary loss of use. TKC pointed to the use of the words ‘All Risks’ in the titles of the relevant insuring clauses, and various judicial authorities supporting an interpretation of ‘loss’ going beyond pure physical damage.
Additionally and alternatively, TKC argued first that the business interruption cover was triggered by loss of or damage to stock, and secondly that the right to carry on business from the premises could itself amount to intangible property which, by virtue of the Regulations, was lost or damaged.
Allianz’s Position
Allianz, represented by Gavin Kealey QC, submitted that the temporary closure of the premises did not amount to “accidental loss of property”, both because accidental loss referred only to physical loss and because something more than merely transient deprivation was required. The temporary closure of the premises failed on both counts.
Relying on an extensive line of case law considering the meaning of the word “loss” (including, probably uniquely, two different cases concerning lost pearl necklaces), Mr Kealey reminded the Court of Sir Martin Nourse’s memorable comment in Tektrol Ltd v International Ins Co of Hanvover Ltd:
““Loss” is a word whose meaning varies widely with the context in which it is used. If a man said to you: “I have lost my wife”, you would understand him to mean one thing outside the maze at Hampton Court and another outside an undertakers in the high street.”
In the context of the Policy, Allianz submitted that a number of further authorities supported an interpretation of loss limited to physical damage, as well as to circumstances where recovery was at least uncertain (and not therefore temporary). This, Allianz argued, was also the only interpretation of the Policy that made commercial sense of the Policy as a whole, since any other construction would render the proviso and Denial of Access provisions in the policy redundant.
The Judgment
The Court gave TKC’s arguments short shrift. As to what was meant by the word “loss”, the Court found that:
“the immediate context of the word “loss” within the definition of “Event” is that it is followed by the words “or destruction of or damage to”. I again accept Mr Kealey’s submission that those words strongly suggest that “loss” here is similarly intended to have a physical aspect. … Taking these contextual matters into account as a whole, it therefore seems to me that the expression “loss … of … property” in the definition of “Event” cannot sensibly be interpreted as including mere temporary loss of use of property.”
As to TKC’s alternative submission that the Policy was triggered by damage to TKC’s stock, the Court found that:
“the factual assertion that the deterioration in TKC’s stock caused (proximately or otherwise) any relevant interruption or interference with TKC’s business is one which … I can summarily reject as wholly unrealistic even at this preliminary stage.”
As a result the Court found that TKC’s action was bound to fail and granted summary judgment in favour of Allianz.
Comment
The case is of general importance to policyholders seeking recovery of their BI losses flowing from Covid-19 related closures. Whilst the FCA Test Case has established (subject to appeal) that certain ‘non-damage’ business interruption extensions will respond to losses caused by the consequences of the Covid-19 pandemic, a majority of policyholders will not have had the benefit of policies containing such extensions, and those that do are in most cases subject to sublimits of liability that fall far below the main policy limits. A favourable finding in relation to the meaning of “accidental loss of property” could potentially have opened the floodgates to many thousands of additional claims and dramatically increased insurers’ exposure.
The relevance of the present case was recognised by the Court in the Introduction to its judgment:
“The decision in the present case may therefore be of consequence for other potential claimants. To that limited extent, this judgment is therefore something of a footnote to the comprehensive and (subject to any appeal) authoritative statement of the law and exegesis of the various policy provisions in the judgment of Flaux LJ and Butcher J in the FCA test case.”
The Court’s findings are therefore unsurprising, particularly in light of the detailed conclusions reached by the Court in the FCA Test Case. If the Court had found in favour of TKC in this case, the issues determined in the Test Case would largely have become irrelevant, since a majority of policyholders would be covered under the main property damage sections of their policies, and would have no need to turn to the ‘non-damage’ extensions for cover.
Although not on the face of it a positive outcome for policyholders, the Court’s decision is therefore useful in further clarifying the legal position in relation to the cover available to businesses for their Covid-19 business interruption losses.
[1] TKC London Ltd v Allianz Insurance Plc [2020] EWHC 2710 (Comm)
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #10 (The Bad). Orient-Express Hotels v Generali
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#6 (The Bad)
Orient-Express Hotels v Generali – an update
This note is an update to that which we provided on Orient Express on 1 July 2019. The Commercial Court considered Orient Express during the FCA Test Case in July 2020. The Test Case concerned the business interruption losses that arose following the outbreak of Covid-19 in the UK. Orient Express was a hotly contested issue, and we look here at how the Test Case may affect its application.
In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk [2010] EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises – a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.
Orient Express Hotels Ltd (OEH) was owner of the Windsor Court Hotel (the Hotel), which suffered significant hurricane damage in August and September 2005 leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks following the declaration of a state of emergency, and the imposition of a curfew and mandatory evacuation order.
The arbitral Tribunal held that OEH could only recover in respect of loss which would not have arisen had the damage to the Hotel not occurred, and this meant that OEH was to be put in the position of an owner of an undamaged hotel in an otherwise damaged city. Since New Orleans itself was effectively closed for several weeks due to widespread flooding, with no-one able to visit the area or stay at the Hotel even if it had (theoretically) been undamaged, OEH could not recover under the primary insuring provisions for BI loss suffered during this period. A limited award of damages was made under separate Loss of Attraction and Prevention of Access extensions to the policy.
OEH appealed to the Commercial Court, arguing that the Tribunal’s approach was inappropriate given the wide area damage to the Hotel and the vicinity caused by the same hurricanes. OEH sought to rely upon principles established in: Miss Jay Jay [1987] and IF P&C Insurance v Silversea Cruises [2004], that, where there are two proximate causes of a loss, the insured can recover if one of the causes is insured, provided the other cause is not excluded; and Kuwait Airways Corpn. v Iraqi Airways Co. [2002], that, where a loss has been caused by two or more tortfeasors and the claimant is unable to prove which caused the loss, the Courts will occasionally relax the ‘but for’ test and conclude that both tortfeasors caused the damage, to avoid an over-exclusionary approach.
Mr Justice Hamblen dismissed the appeal, concluding that no error of law had been established in relation to the Tribunal’s application of a ‘but for’ causation test under the policy on the facts as found at the arbitration hearing, whilst recognising “as a matter of principle there is considerable force in much of OEH’s argument”. The insurance authorities mentioned above were distinguished as involving interdependent concurrent causes, in which case the ‘but for’ test would be satisfied. The Court did appear to accept that there may be insurance cases where principles of fairness and reasonableness meant that the ‘but for’ causation test is not applicable, but OEH was unable to establish an error of law by the Tribunal where this argument had not been raised at the arbitration hearing. Given these evidential constraints on an appeal limited to questions of law, OEH was unsuccessful in the Commercial Court.
Permission to appeal was granted, indicating that the Court considered OEH’s grounds for further challenge had a real prospect of success. Settlement on commercial terms was agreed between the parties prior to the Court of Appeal hearing, however.
The decision in this case has been criticised by commentators as unfair, giving rise to the surprising result that the more widespread the impact of a natural peril, the less cover afforded by the policy. The High Court appears to have agreed in the Test Case that concluded in July 2020.
In a judgment handed down on 15 September 2020, Flaux LJ and Butcher J said at paragraph 523:
“We consider that there are several problems with the reasoning in Orient Express. First and foremost, as we see it, there was a misidentification of the insured peril… It seems to us that the error in the reasoning may have come about because the judge focused only on the “but for” causation issue and, to our minds surprisingly, did not pose the question of what was the proximate cause of the loss claimed…”
The judgment continues at paragraph 529:
“It follows that, if we had thought that the decision in Orient Express somehow dictated the consequences in terms of cover and the counterfactual analysis for which the insurers contend in the present case, we would have reached the conclusion that it was wrongly decided and declined to follow it…”
This is welcome news for policyholders. It is clear that Flaux LJ and Butcher J disagreed with the principles that underpinned the decision in Orient Express, and this can only be positive for the adjustment of insurance claims moving forward. However, importantly, the Court’s comments regarding the correctness of the decision in Orient Express are strictly obiter, since the case was distinguished from the fact under consideration in the Test Case. On that basis the ‘wide area damage’ principle set down in Orient Express, at least as applied to property-linked BI claims, remains good law and it is likely that Insurers will continue to rely on it unless and until the decision is overturned by a superior Court.
That said, readers will likely be aware that there is a chance that the insurers that participated in the FCA Test Case will appeal. We anticipate that we will learn of any such appeal on 2 October 2020, with the leapfrog appeal to the Supreme Court being heard in December 2020 / January 2021. While it may be frustrating for policyholders that there remains a risk that Orient Express could have some application moving forward, the possibility of the Supreme Court deciding the outcome one way or another must be welcomed. The law as it stands as now unsettled and ultimate clarification from the Supreme Court will provide the finality required by all stakeholders.
FCA Test Case Update – Judgment
Today’s judgment in the FCA’s Test Case on Covid-19 Business Interruption coverage has provided some welcome good news for many policyholders – as well as disappointing findings for others. The court’s findings were very clearly divided between the policyholders seeking coverage under Disease clauses, and those claiming under Prevention of Access or similar extensions.
Disease
With the exception of two of the QBE wordings under consideration, it is unquestionable that the judgment is favourable for those policyholders that have one of the Disease Wordings that has been assessed as part of the FCA Test Case. Critically, the court found that the occurrence of the disease did not need to occur only within the radius contemplated in the policy. Provided that the occurrence of the disease extended into the specified radius, the coverage would be triggered. This has been one of the first coverage issues that policyholders have had to overcome, and which insurers have strongly resisted.
Furthermore, for those policyholders that do not have the benefit of the specific Disease Wordings looked at the FCA Test Case, but instead some other Disease wording, the consistency of the findings is likely to provide persuasive authority to support the ongoing claims under those other wordings.
Prevention of Access and Public Authority wordings
The position, however, is surprisingly less favourable for the majority of those policyholders with Prevention of Access and Public Authority Wordings that were considered as part of the FCA Test Case.
The starting point for these particular wordings appears to be that they would only in principle respond to localised occurrences of the disease. Interestingly, the Court reached a very different and narrower conclusion on the meaning of the term ‘vicinity’ in the context of the Prevention of Access wordings, compared to that under the Disease clauses. Each particular wording will have to be closely scrutinised, however, as the judgment affects different wordings in different ways, as may the application of the facts pertaining to individual policyholders.
While it is clear that this aspect of the judgment is unhelpful for affected policyholders, it remains to be seen whether the FCA will appeal any aspect of it, and whether the judgment is as unhelpful for those policyholders that have Prevention of Access/Public Authority wordings other than those specifically looked at as part of the FCA Test Case.
Causation
A striking aspect of the judgment is the way the Court neatly dispatches with the complicated causation arguments raised by insurers, by making it a part of their very clear finding on the construction of the coverage clause. Because, the court says, the insured peril is the composite peril of interruption or interference with the Business caused by the national occurrence of COVID-19, the causation arguments ‘answer themselves’. There is only one cause of loss. For the same reasons, trends clauses are largely irrelevant and the principle in Orient Express has no application.
The court’s finding that Orient Express was wrongly decided and that they would not have followed it even had they not found it to be distinguishable, will certainly raise eyebrows, and will surely lead to an appeal from Insurers on this issue at least. In deciding whether also to appeal on the policy trigger issues, Insurers will have to weigh up the potential further reputational damage they may suffer from being seen to resist the Court’s very clear findings.
Our detailed analysis of the judgment and commentary on next steps will follow.
Covid-19 Business Interruption Update: Is another storm brewing?
With the FCA Test Case concluding last week, and judgment not expected until mid-September at the earliest, this blog looks briefly at what further tumultuous times may lie ahead for policyholders. Specifically, whether policyholders’ business interruption (“BI”) losses following COVID-19 will be aggregated.
Policyholders and their brokers will know that aggregation is not in the scope of issues that has been considered by the court in the FCA Test Case. There will therefore be no fresh judicial assistance available to insureds on this issue.
Given the significance of some policyholders’ losses, we anticipate that this will be a hotly contested battle with insurers that will yet need to be resolved post-FCA Test Case.
Aggregation
In summary, aggregation is a principle under which two or more separate losses are treated as a single loss because of a unifying or connecting factor.
For those policyholders that have multiple premises insured under a single composite policy, additional aggregation arguments may arise (subject to the specific policy wording).
Where the sub-limits relevant to these COVID-19 BI claims are often lower, any aggregation of claims may ultimately be the difference between claims of hundreds of thousands of pounds or multi-millions.
On that basis, it is inevitable that insurers will use any and all arguments available to them to limit the losses recoverable, presuming policyholders succeed at least in part on liability and are able to pursue the quantification of claims.
Key issues
Whilst insurers may well seek to aggregate the losses for those policyholders that have suffered large losses, there must be a proper legal and policy basis for doing so. We are not convinced that, market-wide, there is such a basis.
As a starting point, there are numerous BI policies that do not have any aggregation wording present at all. In those cases, policyholders can take some comfort depending on how the applicable limits and sub-limits are expressed.
There are others that may face arguments from insurers that suggest that throwaway comments such as “any one loss” amount to an intention to aggregate losses, even where the wording does not purport to be an aggregation clause. Such assertions are capable of being firmly rebutted.
Any application?
On one view, it might be that aggregating wording is not triggered in any event. If the wording responds in cases where there has been ‘Damage’ i.e. property damage, one might question the relevance of that wording to the non-damage linked extensions with which COVID-19 BI claims are principally concerned. If the definition of ‘Damage’ is not extended to include non-damage perils, then it may be arguable that any aggregating wording is limited to apply only to those damage-based claims.
Commercial intentions
Even if it is conceded that there is a hypothetical basis for aggregation wording applying to a BI policy, policyholders may wish to look for the commercial realities of the effect of aggregation.
Taking the example of multiple premises being insured under one policy, where the sub-limits of the non-damage BI extensions are often a lot lower than the sum insured, policyholders may reasonably arrive at the conclusion that the aggregation of its losses would result in a commercial absurdity. Policyholders might be left with entirely inadequate cover, which cannot have been what was intended by policyholders or their brokers when obtaining cover.
Policy construction and factual issues
Notwithstanding the primary arguments above, policyholders can take some comfort that there are likely to be good policy construction arguments available, which may well be supported by a proper application of the facts.
Each policy and claim will of course have to be assessed on its own merits and facts. That notwithstanding, we would encourage insureds and their brokers to very carefully consider: (a) the construction of the wording that the insurer wishes to rely on (where relevant); and (b) how the insured’s losses have actually arisen.
Close attention needs to be paid to the actual aggregating words used: clauses that purport to aggregate losses by ‘originating cause’, ‘event’, ‘occurrence’, or ‘claim’, will have very different effects, and despite a long line of case law considering the meaning and application of these terms to various facts and circumstances, their proper application in any given case remains perennially contentious.
No two losses will have arisen in the same way. Referring again to the example of a limit applying ‘any one loss’ in a policy covering multiple insured premises, it is likely implausible that the same losses will have arisen across multiple premises, at the same time, in the same way, and with the same consequences. Might the better analysis be that multiple losses and therefore claims have in fact arisen, which therefore do not fall to be aggregated?
Further Lockdowns
As we move into the next phase of the pandemic and a new era of local lockdowns and other containment measures, many recently re-opened businesses may find themselves shutting down once more. Do any losses arising as a result give rise to a new claim under the policy, or do they fall to be aggregated with any claim already submitted from the earlier national lockdown?
The answer will lie partly in the outcome of the FCA Test Case, which will give us clearer guidance on exactly how and when the various non-damage BI clauses respond, and partly on an analysis of the relevant aggregating language in the policy. No doubt further disputes will arise over whether local lockdowns and restrictions imposed in relation to localised COVID-19 outbreaks amount to independent ‘causes’, ‘events’, or ‘occurrences’, and again the outcome may make the difference between no cover and full cover for continuing losses suffered by many businesses affected by the progress of the pandemic.
In the meantime, any policyholder that is subject to new restrictions on their business that are likely to result in losses should make a fresh notification under their policy via their broker.
Comment
We remain hopeful that the judgment following the FCA Test Case will decide at least some of the issues in favour of policyholders so that claims in principle may yet fall to be indemnified. If that is right, policyholders will understandably wish to proceed as quickly as possible to the quantification, and recovery, of losses.
In circumstances where that point is nearing, and losses may begin to be crystallising as those shorter indemnity periods end, we would encourage policyholders to seek assistance from their professional advisers in presenting the losses in an accurate and appropriate way. Failure to take care in doing so only risks backfiring at a later stage.
If policyholders or their brokers would like advice on any of the issues discussed in this article, or COVID-19 BI claims generally, please do not hesitate to contact us. In addition to written material, our thoughts on these issues are also disseminated by webinar as part of Fenchurch Law’s The Associate Series.
Covid-19 Business Interruption Update – FCA challenges Orient Express v Generali
The FCA and insurers have now filed their skeleton arguments in the COVID-19 business interruption Test Case, drawing the battle lines and setting out in full the arguments in support of their pleaded cases.
Of particular interest, and with potentially significant wider implications, are the sections on causation, including the application of trends clauses. The general thrust of the FCA’s case on causation is that:
- for disease clauses, the presence of COVID-19 in each locality is an integral part of one single broad and/or indivisible cause, being the COVID-19 pandemic; and
- for public authority/prevention of access clauses, the various ingredients of the clause and the government’s actions in response to the pandemic amount to a single indivisible cause of loss, and the insurers' "salami slicing” of the insuring clause is legally flawed.
Most notably the FCA submits that, not only is Hamblen J’s decision in Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [1] to be distinguished on the facts, but that it was wrongly decided , ‘falls to be revisited’, and is ‘open to correction.’
Recap
Our commentary on the contentious Orient Express case can be found here, but in summary, the case concerned a claim brought by a hotel in New Orleans following Hurricane Katrina, which had damaged the insured property and devastated the city as a whole. The policyholder claimed for its business interruption losses caused by the damage, but the court found that the application of the trends clause prevented recovery of the losses due to the application of the ‘but for’ test of causation. ‘But for’ the damage to the insured property, the policyholder would still have suffered the same losses because of the damage to the wider area, meaning that there would have been no tourists able to stay in the hotel even if it had been undamaged.
Insurers’ reliance on the case
In relation to COVID-19 business interruption claims, insurers have cited the Orient Express case in support of their arguments that, even if coverage is triggered under Infectious Disease, Public Authority or Prevention of Access clauses, the application of trends clauses in the relevant policies means that adjustments must be made for the wider effects of the pandemic and/or other government actions such as social distancing and the general lockdown. The net result, insurers say, is that policyholders would have suffered the same losses regardless of whether the insured peril can be demonstrated to have been triggered.
The FCA’s case
The FCA attacks Orient Express from a number of angles. First, it notes that this was a first instance decision that was itself an appeal from an arbitration award, and as such was limited in scope to considering whether the arbitral tribunal had made an error of law. The court acknowledged that further arguments could have been made as to the disapplication of the ‘but for’ test in the interests of fairness, and indeed such arguments were raised by the policyholder in the case. But as the arguments had not been raised in the underlying arbitral proceedings, the court was unable to consider them. The court in Orient Express also granted permission to appeal, but the appeal was regrettably never heard as the case was settled.
Secondly the FCA points out, as many policyholders have done repeatedly to insurers, that the decision in Orient Express related to a dispute under a damage-linked BI cover, and that insurers had in fact paid out the available sublimits under the Denial of Access and Loss of Attraction covers in that case. The fact that they had was germane to the decision of the court, since the judge remarked:
“if Generali asserts that the loss has not been caused by the Damage to the Hotel because it would in any event have resulted from the damage to the vicinity or its consequences, it has to accept the causal effect of that damage for the POA or LOA, as indeed it has done. It cannot have it both ways. The ‘but for’ test does not therefore have the consequence that there is no cause and no recoverable loss, but rather a different (albeit, on the facts, more limited) recoverable loss.”
In the present case, insurers are indeed seeking to ‘have it both ways’, since they deny that coverage extends either under the main damage-linked insuring clause or the wider area non-damage extensions.
Thirdly, the FCA argues that the court in Orient Express applied the ‘but for’ test in a fundamentally incorrect way by treating the damage to the property and the underlying cause as distinct competing causes even though the property damage could not have occurred without the hurricane.
Finally, the FCA submits that the court failed to properly apply the superior court decision in The Silver Cloud [2], a case considering claims brought in relation to business interruption losses arising from the 9/11 attacks, in which the Court of Appeal found that the two causes of loss (terrorism and government warnings) were inextricably linked and so could be treated as a single cause. The case has obvious relevance to the present circumstances.
What are the possible outcomes?
Broadly speaking there are three different landings the court may reach on this issue (although inevitably the court may find some more nuanced combination or alternative):
- The Court rules in the FCA’s favour – Orient Express was wrongly decided, and the ‘but for’ test should consider a counterfactual in which the broader underlying cause of loss is removed. This outcome is very unlikely at first instance: although not technically bound by the High Court decision in Orient Express, the decision will be viewed as highly persuasive authority, and the court in this case is unlikely to depart from it, since this would result in two conflicting lower court decisions. It is possible however that the court may simply find that it is bound by the Court of Appeal’s decision in The Silver Cloud rather than the lower court decision in Orient Express. Any such decision would almost certainly be appealed by insurers.
- The Court rules in insurers’ favour – the application of Orient Express means no (or limited) recovery even if coverage is triggered. In this case it is quite possible, that the court may in its judgment indicate that whilst it finds itself bound to follow Orient Express, it disagrees with the decision in whole or in part. Either way, by arguing that Orient Express ‘falls to be reconsidered’, the FCA must presumably be contemplating appealing on this issue to seek the overturning of the decision by the higher courts. As the Framework Agreement expressly contemplates a leapfrog appeal, it is therefore possible that this issue could fall for determination by the Supreme Court in the near future.
- Alternatively, the Court may take the somewhat easier path of distinguishing Orient Express on the basis that it only applies to property damage losses, which has also been argued by the FCA. This would leave the legal principle intact, but would narrow the scope of its application so that it does not act to limit claims brought under non-damage BI extensions, which is surely right, since these extensions are themselves effectively intended to respond to ‘wide area’ perils. Such a ruling would still have significant implications for insurers and may well still be appealed.
It is clear that the FCA’s Test Case has far-reaching implications beyond the scope of COVID-19 business interruption coverage for which it has been brought, and whilst these issues will be fiercely contested by insurers, the end result will hopefully be a greater degree of judicial clarity and certainty, which in the long term can only be in the best interests of both policyholders and insurers.
[1] Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [2010] EWHC 1186 (Comm), [2010] Lloyd’s Rep IR 531
[2] IFP&C Insurance Ltd (Publ) v Silversea Cruises Ltd, the Silver Cloud [2004] EWCA Civ 76, [2004] Lloyd’s Rep 696 CA
COVID-19 Business Interruption Update: FCA Test Case First Hearing and Guidance for Insurers
First Hearing – Case Management Conference (CMC)
On 16 June the first hearing (Case Management Conference) of the FCA Test Case took place remotely at the Commercial Court. At the hearing, the court granted an order that the case will be expedited in accordance with the proposed timetable (i.e. with a final hearing from 20 July to 30 July) and that the Financial Markets Test Case Scheme will apply. The court confirmed that the case will be heard by a 2-judge panel consisting of Mr Justice Butcher and Lord Justice Flaux.
There was some early disagreement between the FCA and Insurers as to the scope of the declarations sought from the court by the FCA, in particular whether the court should make any ruling as to the actual prevalence of COVID-19 in the UK during the relevant period, and the extent to which any such finding would depend on fact and/or expert evidence. These matters will be considered further at the second CMC on 26 June.
The insurers’ Defences are due to be filed on 23 June and at that stage we will see the full extent and basis on which the insurers will resist the declarations sought by the FCA.
The second CMC will be live-streamed on 26 June via https://fl-2020-000018.sparq.me.uk/
Guidance to Insurers
The FCA’s guidance for insurers and intermediaries has now been finalised and came into effect on 17 June. It is equally useful for policyholders seeking to understand the process and how their claim may be affected. Important points to note include the following.
Summary of Test Case
In summary, the core questions that the test case seeks to resolve are:
i. issues of coverage in relation to ‘disease’ and ‘denial of access’ clauses (including any relevant exclusions); and
ii. causation (including any relevant ‘trends clause’ or equivalent wording).
The test case is not seeking to resolve, in particular:
- coverage issues relating to clauses that have an exhaustive list of diseases which does not include Covid-19
- coverage issues relating to clauses which require the disease to be present on the insured premises
- issues concerning misselling of policies
- other issues flowing from the determination of the questions in the test case such as aggregation, additional causation issues specific to loss of rent and similar claims under a property owner’s policy, and the specific quantum of any particular claims
Policy Review
Insurers are required to examine each of their relevant policy wordings to determine whether the outcome of claims under the policy will be affected by the resolution of the Test Case.
Insurers are to notify the results of their review to the FCA by 8 July. The FCA then intends to publish a comprehensive list of insurers and policy wordings that will be affected by the outcome of the Test Case.
Claims Review
The guidance also sets out quite detailed requirements for communicating with policyholders during the Test Case.
In particular, by 15 July 2020 insurers should individually notify policyholders whose claims or complaints for business interruption losses related to the coronavirus pandemic under relevant non-damage business interruption policies are outstanding or have already been declined (or had an adjustment or deduction for general causation) of:
- whether their claim or complaint is a potentially affected claim or a potentially affected complaint and the implications of that (including the FCA’s expectations of the insurer in respect of such claims or complaints under this guidance), or
- the reasons why their claim or complaint is not a potentially affected claim or potentially affected complaint, and the implications of that.
Insurers are required to continue to communicate with policyholders as and when any developments occur in the case that may affect the outcome of their claim.
Any policyholder whose claim has been declined or remains outstanding should therefore follow up with their insurer or broker if they have received no communication by 15 July at the latest.
Clock Stopped on Time Limits
Time limits for making claims or taking any other step under policies, or for making complaints to the FOS are suspended from 17 June until final resolution of the Test Case.
Whilst most claims should already have been notified before 17 June, this means that any other time limits expressed in the policy, for example in relation to proving calculations of loss, or taking action against the insurer will not apply while the test case is ongoing. That does not stop policyholders from taking such steps or pursuing their claims.
Settlement
The guidance expressly recognises that claims may be settled between insurers and policyholders while the test case is ongoing. However, when making any offer to settle, insurers should inform the policyholder about the test case and its implications. In particular, they should tell the policyholder whether the final resolution of the test case may affect the insurer’s decision about their claim, and the implications of accepting or rejecting an offer made on a full and final settlement basis.
Reassessment of Claims following Final Resolution
Upon final resolution of the Test Case, insurers should reassess all potentially affected claims, apply the judgment, and promptly inform the policyholder of the outcome of the reassessment.