Further analysis: Judgment handed down in FCA’s business interruption test case
The Commercial Court (the “Court”) handed down judgment in the COVID-19 business interruption (“BI”) insurance test case involving eight of the UK’s largest insurers on 15 September 2020.
The remit of the proceedings was set out at paragraph 1:
“This case has been brought by the Financial Conduct Authority (“the FCA”), the regulator of the defendant insurers, as a test case to determine issues of principle in relation to policy coverage under various specimen wordings underwritten by the defendants in respect of claims by policyholders to be indemnified for business interruption losses arising in the context of the COVID-19 pandemic and the advice of and restrictions imposed by the UK Government in consequence. We have been asked to determine those issues as to the correct construction of the policy terms and as to whether cover is available in principle by reference to a set of agreed facts (which we summarise in the next section of the judgment) and assumed facts (which were essentially illustrative factual scenarios as to how certain businesses have been affected). Since, in their oral submissions, the parties did not rely upon the assumed facts, we have not felt it necessary to set them out in this judgment, although we have taken them into consideration in reaching our conclusions.”
The defendant insurers were the following companies:
- Argenta Syndicate Management Limited
- Ecclesiastical Insurance Office Plc
- Hiscox Insurance Company Limited
- MS Amlin Underwriting Limited
- Arch Insurance (UK) Limited
- QBE UK Limited
- Royal & Sun Alliance Insurance Plc
- Zurich Insurance Plc
Disease related policy wordings
The Court found in favour of the FCA on the majority of the key issues, in particular in respect of coverage triggers under most notifiable disease and mixed clauses, to a lesser extent certain of the denial of access/public authority policy wordings, as well as causation and so-called trends clauses. The judgment will be welcome news for a significant number of the thousands of policyholders impacted by business interruption losses as a result of COVID-19 who have been denied cover.
The judgment states that most, but not all, of the notifiable disease related clauses in the twenty-one policy wordings were capable of providing cover to their policyholders.
Those that did not provide cover included policies which individually listed the occurrence of specific “Notifiable Diseases”, but which did not specifically mention either SARS or COVID-19. Where the trigger was simply referred to as the existence of a “Notifiable Disease” then the definition to be adopted was the current list of notifiable diseases which in England would be those set out in the Health Protection (Notification) Regulations 2010 (as amended). By 6 March 2020, COVID-19 was a notifiable disease across the whole of the UK. The fact that this was not the case when the policy was entered into was irrelevant unless matters were expressly fixed in time.
Many of these applicable clauses required COVID-19 to have existed within a certain distance from the insured’s business, often within a 25-mile radius. This was accepted as being subject to proof typically of the existence of “manifestation” of COVID-19 within the relevant area.
Denial of access policy wordings
The judgment also states that certain denial of access clauses in the sample will also provide cover. However, coverage depended on a detailed analysis of the wording of the individual clauses against the background facts and how the business was affected by the Government response to the pandemic. This included, for example, whether the business type in question was subject to a mandatory closure order or not and whether the business was ordered to close completely or continued to trade either partially or online. However, the FCA had notably less success before the Court on denial of access policy wordings.
Some of the decisions concerning denial of access cover are entirely logical but they may also seem to policyholders and the wider public to be quite unfair. For example, under the Arch Insurance (UK)’s Government or Local Authority Action Extension, the complete closure of a business is required for denial of access cover to apply. The example of a pub or restaurant with a pre-COVID-19 takeaway service cover by its Arch policy and a pub or restaurant which sets up a new and uncovered takeaway service after having its in-house food offering closed is illustrative of this. The Court had the following to say about both these situations:
“[Arch’s] concessions in relation to the pub or restaurant which started a takeaway service in lockdown or the theatre which started remote performances on the internet are well made since that entails a fundamental change from the business as described in the policy schedule and it is access to the premises for the purposes of carrying on the business described in the policy schedule which must be prevented.
However, where the pub or restaurant already had a takeaway service prior to the government actions or advice, it seems to us that the position is different. The paradigm example is that of the local restaurant which in addition to in-restaurant dining offered a takeaway collection or delivery service which may have formed a substantial part of its business. Whilst the government advice and the Regulations required the restaurant to close so far as consumption of food and drink on the premises is concerned, Regulation 4 of the 26 March Regulations did not require the restaurant to close the premises to the extent that they were used for the purposes of providing a takeaway service. It seems to us that Mr Lockey QC [for Arch] is right that, in such circumstances, there is not a prevention of access, as the restaurant owner policyholder and his employees are not prevented from accessing the premises for the purposes of carrying on that part of the existing Business which involves providing the takeaway service. They may be impeded or hindered in their use of the premises because they cannot operate the restaurant for in-house dining, but the Arch GLAA Extension does not insure against “hindrance” or against prevention or hindrance of “use” of the premises. If it had been objectively intended by the parties to provide cover against hindrance of access as well as prevention of access they could and would have used the words “hinders or prevents access to The Premises” as they did in Clause (1). We agree with Mr Lockey QC that the FCA’s argument that there is prevention of access even if part of the pre-existing business (like a takeaway service or a mail order part of the business) is still permitted to be carried on, conflates “prevention” with “hindrance” when the two are distinct concepts with different meanings, for the reasons we have given.
The same fallacy infects the FCA’s argument that the 16 March advice of the Prime Minister about working from home where possible, social distancing and avoiding going to pubs or clubs prevented access to insured premises. That advice did not in any sense cause a prevention of access to any premises, as can be demonstrated by the example of pubs. As we discussed with Mr Lockey QC in the course of argument, for the rest of the week after 16 March, there seems to have been something of a “booze-fest” with people making the most of going to pubs before the anticipated instruction to close which came with the government advice on 20 March that pubs should close.”
Hiscox’s Non-Damage Denial of Access (“NDDA”) terms were also held by the Court not to provide policyholders with valid cover. They were held to be concerned only with legal denials of access based on purely local incidents and “therefore it follows that there is no cover under the NDDA clause in respect of business interruption losses caused by the restrictions imposed by the government in response to the national pandemic”. This no doubt was not well received by the Hiscox Action Group.
Where cover was likely to be available under denial of access terms and conditions, claims for losses were commonly only valid from the date of the legal closures ordered by the Coronavirus regulations and not following prior informal advice delivered by the UK and devolved governments.
The judgment itself runs to 165 pages.
Although the judgment is very useful for lawyers it is not a user-friendly document for policyholders to work out in quick order whether their policies are likely to provide them with cover or not. This is particularly so if their policies do not fall within the wording of the 21 sample policy wordings.
Will there be an appeal?
The most immediate question is whether the defendant insurers will appeal the judgment of the Court and, if so, in what manner. Comments made by Lord Justice Flaux anticipate at least the possibility of appeals concerning certain areas of the judgment. If an appeal or appeals are made by one or more of the insurers then these may well go straight to the Supreme Court on an expedited basis, leap-frogging the Court of Appeal.
The FCA was selective in the policy wordings that it chose to put before the Court. The policy wordings in question were from larger insurers and none of them was a classic property damage only wording. Several large insurers (such as AXA and Aviva) and a very significant number of smaller insurers were not included in the test case. The FCA has estimated that there are in fact over 700 different types of BI policy in existence in the UK from around 60 different insurers.
Notwithstanding this, the judgment does (subject to any appeals) provide very useful guidance for lawyers and policy holders as to how a court will, or will be likely, to interpret the effect of BI policy terms and conditions examined. In this regard the judgment can only be welcomed. It will also have a much wider impact than just the eight insurers in question. For example, the policy wording examined by the Court for “RSA 4” is very similar to the policy terms issued by Aviva in a large number of its BI policies.
However, the judgment provides little hope for those stuck with classic property damage only cover who are very likely to remain disappointed. The fact that no classic “property damage only” BI policy wordings were put before the Court by the FCA was no accident.