Business interruption insurance claims: choose your battles carefully
Many lawyers, insurers and policy holders have been following the progress of the Financial Conduct Authority’s test case on business interruption (“BI”) claims which will now go to the UK Supreme Court on appeal on 16 November 2020.
As readers of previous posts will be aware, the FCA was selective in the policy wordings it chose to put before the Commercial Court at first instance. The policy wordings were all from larger insurers. None of them was a classic property damage only wording where the insured peril concerns losses arising from direct damage to property, machinery and/or stock in trade. The fact that no classic property damage only BI policy wordings were put before the Commercial Court by the FCA was no accident, as the recent case of TKC London Limited t\a “The Kensington Creperie” v Allianz Insurance plc evidences.
TKC, a café/restaurant business in South Kensington, issued its claim for damages against Allianz in the Commercial Court on 14 April 2020. This was five months before the Commercial Court handed down its first instance judgment in the FCA’s BI claims test case. The policy relied upon by TKC did not contain any disease related and/or prevention of access coverage. It was limited to damage to property cover only. Two main lines of argument were advanced by TKC.
First, that the closure of TKC’s business as a consequence of COVID-19 was “damage to property” as TKC was unable to use its property for the duration of the closure and had thereby suffered “property damage” arising from its inability to use its property. It was argued that because the policy was described as an “all risks” policy, its terms should be construed accordingly. This was dismissed quickly on the basis that there had been no physical damage to TKC’s premises in a literal sense in accordance with Allianz’s policy wording. There was also no alternative cover which could be triggered by a COVID-19 outbreak.
TKC’s second line of argument was that the deterioration and damage to its perishable stock directly or indirectly caused the relevant business interruption covered by its Allianz policy. This was also rejected by Deputy Judge Richard Salter QC in a manner which can only be described as crushing:
“I can summarily reject this as wholly unrealistic even at this preliminary stage. The deterioration of TKC’s stock during the period of closure did not cause TKC’s business to be interrupted or interfered with, because (as is common ground) it occurred at a point at which that business was already closed as a result of the Coronavirus Regulations. It was a consequence of the interruption or interference, not its cause.
Mr Marland’s submission that the deterioration in the stock has resulted in an interruption or interference with TKC’s business because of its inability to sell or use the stock when the premises reopened similarly parts company with reality. As Mr Kealey pointed out, if in fact the deterioration of the stock had threatened to interrupt the business, TKC would have bought replacement stock and thereby avoided any loss. That, of course, was the very last thing that TKC would have wanted to do, because its whole problem was that it could not sell its stock (even if it had been in sound condition) because its business was closed by the Coronavirus Regulations.”
TKC’s entire claim was dismissed by the Commercial Court. To rub salt into its wounds, this occurred as a result of a summary judgment application brought by Allianz to strike out TKC’s claim. This was on the basis that its claim had no reasonable prospect of success and should not proceed to trial. TKC would almost certainly have been subject to a significant adverse costs order as a consequence of having its claim struck out on top of its own wasted legal costs.
Notwithstanding this, the judge was not unsympathetic to TKC’s position. He accepted that:
“Some may also argue that the common law should therefore change its approach to such policies, and should adapt its principles of contractual interpretation and implication to the present unprecedented circumstances, so that they assist in transferring the burden of the present emergency to those, such as insurance companies and other major financial institutions, who may perhaps better be able to bear it.”
However, the judge rejected this as a way forward either in this case or generally. He observed that in times of uncertainty, the law must provide a solid, practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery. Contractual rights had to be evaluated by applying settled principles to the contract in question. Legal certainty remains paramount and gives the surest basis for resolution.
Although policy holders should always check their BI policy terms and conditions if they have a potential claim, this judgment provides little hope for those businesses stuck with classic property damage only cover. Those BI policies which are likely to provide some form of cover to policy holders will be those which include some form of applicable disease related and/or prevention of access coverage.