Property Insurance Update – UK High Court judgment on COVID-19 business interruption cover
The United Kingdom’s High Court has delivered its judgment in the test case regarding business interruption cover for COVID-19 claims. The Court found in favour of policyholders in the majority of issues. The case addresses disease and prevention of access extensions, as well as trends clauses and causation issues.
High Court Test Case
On 15 September 2020, the United Kingdom’s High Court handed down judgment in the test case of the Financial Conduct Authority v Arch and Others. The proceedings were commenced on 9 June 2020 by the Financial Conduct Authority (FCA) as a test case to determine issues of principle on policy coverage and causation under representative business interruption insurance wordings.
The FCA represented the interests of the policyholders, who were small to medium sized enterprises. There were eight insurer defendants. The Court considered 21 policy wordings and the case was decided on the basis of certain agreed facts. The wordings selected were considered representative of the policy coverage issues arising out of the pandemic and the decision is expected to have significant implications as a result.
Business interruption insurance covers loss of profits and additional expenses which an insured suffers as a result of insured damage to physical property. However, business interruption cover also contains specific extensions of cover where there has not been any physical damage to the insured’s property. The application of these extensions to the COVID-19 pandemic were considered by the Court in this test case.
Additionally, business interruption clauses will include how the insured’s losses should be quantified such as through ‘trends’ provisions. These provisions allow for business trends which would have impacted the business had the event causing loss not occurred. They seek to put the insured in the position they would have been had the event not occurred.
The Court considered whether an insured will be able to claim for business interruption losses caused by the closure of businesses by the government in response to the COVID-19 pandemic.
The Disease wordings extended cover to business interruption loss arising from notifiable disease. Generally, the wordings under consideration required:
- interruption or interference with the business;
- following/arising from/as a result of;
- any notifiable disease/occurrence of a notifiable disease/arising from any human infectious or human contagious disease manifested by any person; and
- within 25 miles/1 mile/the ‘vicinity’ of the premises/insured location.
The Court found that the vast majority of notifiable disease clauses provide cover for pandemic loss. One of the key issues was whether the disease needed to be local to the insured location. However, the Court held that the proximate cause of the business interruption is the notifiable disease, of which the individual outbreaks form indivisible parts. Alternatively, each of the individual occurrences was a separate but effective cause of the national actions. This meant that cases within the relevant policy area are not independent of, and a separate cause from, cases outside of the relevant policy area.
However, the Court did note that in the case of two policies, the clause used the wording “in consequence of” together with “events” and this had the effect of limiting cover to matters occurring in a particular place and in a particular way. The Court found that this wording required that the disease within the relevant policy area needed to have caused the business interruption (citing Axa Reinsurance v Field  1 WLR 1026).
Prevention of Access / Public Authority covers
The Prevention of Access and Public Authority clauses extend cover where there has been a prevention or hindrance of access to or use of a premises resulting from an action/restriction by a government or local authority. Generally, the wordings under consideration required:
- prevention/denial/hindrance of access to the Premises;
- due to actions/advice/restrictions of/imposed by order of;
- a government/local authority/police/other body; and
- due to an emergency likely to endanger life/neighbouring property/incident within a specified area.
In contrast to the Disease wordings, the Court found that the Prevention of Access clauses generally provided narrow localised cover which were not triggered by the pandemic (apart from some specific wordings).
One of the key issues was the reference to ‘in the vicinity’, which the Court considered required something specific happening at a particular time and in the local area. This evidenced an intention to provide narrow localised cover and so action taken in response to a pandemic did not satisfy this local requirement.
The nature of government directions were also considered. The government’s announcements to direct people to stay at home and businesses to close were characterised as advice and were therefore not considered sufficient to constitute an ‘action’ by an authority or restrictions which were ‘imposed by order’. Those terms required that the government restrictions be of a mandatory and legal nature.
The Court also indicated that ‘prevention’ did not require physical inability to access the premises, but a closure of the premises such that the business cannot be conducted. The Court also made findings that ‘interruption’ does not require a complete cessation of the business for cover to be triggered.
Therefore, whether cover is available to an insured under a Prevention of Access clause will turn upon the terms of the policy and the specific application of government advice and regulations to the insured’s business.
The Court also considered policies, which contained a hybrid of the Disease and Prevention of Access clauses. Those clauses generally required:
- an interruption to the business;
- due to an inability to use the premises;
- due to restrictions imposed by a public authority; and
- following an occurrence of disease.
The Court made similar findings in respect of these clauses. However, ‘inability to use the premises’ required that the premises were completely closed, rather than restricted in trading.
Trends and Causation
The basis of settlement under the trends clauses was also a significant issue in the case. The insurers submitted that the loss the insured experienced should be considered in the context of the pandemic and that essentially, even if there had not been any disease or prevention of access within the vicinity of the premises that a similar business interruption would have been suffered. In contrast, the FCA argued that the trends clause is intended to put the insured back in the position it would have been had there not been that insured peril (the Disease or Prevention of Access). The Court found in favour of the FCA, and indicated that what was relevant was what the business would have achieved had the matters in the insurance cover not been operating. In respect of Disease covers, the entirety of the COVID-19 outbreak is removed and in respect of the prevention of access cover, you would consider the position of the insured had there not been a prevention or hindrance of access to the premises, by an action of an authority, due to an ‘emergency/incident which could endanger human life’.
Insurers had also relied on the decision in Orient Express Hotels Ltd v Assicuraziono Generali SpA  EWHC 1186 (Comm). That case involved business interruption losses to a hotel in New Orleans as a result of hurricanes Katrina and Rita, which not only damaged the insured hotel, but the surrounding area. The finding in that case was that even if the hotel had not been damaged, the devastation to the area around the hotel caused by the hurricanes was such that the business interruption losses would have been suffered in any event. However, the Court distinguished the test case on the basis that it included specific perils rather than an all risks policy, and otherwise considered that Orient Express failed to appropriately consider the ‘insured peril’ and proximate cause of the loss claimed (i.e. the business interruption arising specifically from the damage caused by the hurricanes). Further, the Court noted that the reasoning in Orient Express created the ‘absurd’ result that the loss would be covered if the hurricane only impacted the hotel, but not if it impacted the surrounding area.
The test case has confirmed that in the United Kingdom, businesses impacted by the COVID-19 pandemic may have cover under similarly worded Disease covers, and to a lesser extent, Prevention of Access covers. The cover is also likely to extend to the position the businesses would have been in had the pandemic never happened. The FCA has indicated that any appeal should be undertaken swiftly, given the broad implications of this decision for businesses.
The test case is likely to be of wide interest to Australian business interruption insurers, although the common wordings using in Australia differ in several significant respects. The implications for Australian insurers will follow in our next update.
This article was co-authored by Graduate Ashlee Sherman.