The latest High Court business interruption judgment represents another win for claimants. However, policyholders should be aware that the decision is specific to the facts of the case and does not necessarily indicate that all Non-Damage Denial of Access, Prevention of Access or Action of Competent Authorities extensions will respond to losses caused by the COVID-19 pandemic.

On Friday 25th February, the High Court handed down the much-anticipated ruling in the matter of restaurant owners Corbin & King Ltd & Ors v AXA Insurance UK Plc (Rev1) [2022] EWHC 409 (Comm). Pleasingly for policyholders the judgment is supportive of Corbin & King’s arguments, broadly confirming that:

i. COVID-19 is capable of causing a ‘danger or disturbance within 1 mile’ of insured premises. Where such a requirement is within the relevant clause and an occurrence of COVID-19 is evidenced (along with all the other requirements of cover) the insured can claim for losses caused by national COVID-19 restrictions.

ii. Composite policies where all businesses are listed as separate insureds may provide independent limits of cover.

However, there was significant nuance in the decision (not to mention a reasonable likelihood of appeal) which some commentators, particularly national media organisations, appear to have somewhat overlooked.

Here we consider the technical implications of the judgment and how it is likely to affect the operation of Non-Damage Denial of Access (NDDOA), Prevention of Access (POA) and Actions of Competent Authorities (AOCA) clauses with respect to losses sustained as a result of national COVID-19 restrictions imposed by the UK government in 2020.

What was the claim about?

Corbin & King (C&K), began formal legal proceedings against their insurers, AXA in 2021. C&K sought to argue that their AXA Property Damage and Business Interruption (PDBI) NDDOA wording should respond to losses sustained as a result of UK government COVID-19 restrictions imposed in March, September and November 2020. The clause itself read:

‘We will cover you for any loss insured by this section resulting from interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period shown in your schedule arising directly from:

1. the actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises.

2. the unlawful occupation of your premises by third parties…’

In addition to seeking coverage, C&K also sought to argue that the limit of cover under the NDDOA clause, which was expressed as being ‘100% of the sum insured or £250,000 whichever is less’, should respond to each insured location separately, and to each of the March, September and November lockdowns separately.

The litigation was pursued following the ruling of the Supreme Court in the Financial Conduct Authority v Arch Insurance Ltd and others UKSC 2020/0177, better known as the FCA Test Case (the test case). In the test case, the High Court ruled at first instance on a variety of NDDOA, POA and AOCA wordings, which generally cover losses resulting from restrictions imposed by some sort of authority. The ruling was disappointing for policyholders in that it confirmed, with some minor exceptions, that the cover afforded by the clauses was of a localised nature. The High Court ruled that:

‘there could only be cover if the insured could demonstrate that it was the risk of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to in the country as a whole, which led to the action of the government in imposing the Regulations. It is highly unlikely that that could be demonstrated in any particular case.’

Many anticipated that this ruling would form part of the FCA’s subsequent appeal to the Supreme Court. However, when the appeal documents arrived, it was clear that the FCA had chosen to not appeal the High Court’s judgment on this aspect. This left many policyholders who were relying upon a NDDOA, POA or AOCA clause empty handed, looking for further litigation to take up their cause. This was also particularly frustrating for many who felt that the Supreme Court’s subsequent ruling on legal causation (i.e. that each individual with COVID-19 was an equally contributory cause of the national restrictions imposed because of it) flew in the face of the High Court’s views on denial of access type covers.

To further complicate matters, the legal state of play at the end of the test case meant that any policyholder who chose to challenge cover under their own clause could potentially face a significant and costly hurdle: the fact that the High Court had already considered the issue. In effect this meant that those wishing to pursue litigation in relation to their own denial of access claims knew they risked the High Court confirming that they were bound by the precedent set in their test case decision. If this was the case, a policyholder claimant would then have to pursue the matter to the Court of Appeal, a decision which would come with significant costs consequences, particularly if they were to lose.

Why wasn’t the High Court bound by the test case ruling?

Mrs Justice Cockerill, the presiding judge in the C&K claim, discusses this issue at length within the judgment. She was clearly at pains to ensure that she was not restricted by the court’s earlier decision in the test case and was able to hear C&K’s arguments on cover.

Coming to the conclusion that she was not bound by the previous High Court decision, Mrs Justice Cockerill references the fact that the Supreme Court’s views on the subject were now known. The arguments before her were new to the court as they were not presented to Mr Justice Flaux and Mr Justice Butcher in the test case.

Furthermore, upon analysis of the wordings considered by the High Court in the test case it was concluded that the construction of the AXA NDDOA clause was sufficiently dissimilar to those reviewed in the test case, Mrs Justice Cockerill noting that:

‘I would if necessary conclude that there are sufficient differences either in overall content or terminology or both between those clauses and the Axa clause to permit of my approaching this clause from first principles.’

Therefore, whilst the High Court again heard arguments on a NDDOA clause, the judgment itself only serves to clarify the implications of the language used in C&K’s particular policy wording. It is not a reconsideration of those NDDOA, POA and AOCA clauses already reviewed by the same court in the test case. Different policy wordings (including those originally considered by the High Court in the test case) may be affected by the ruling, however this will require a thorough consideration of the construction of the clause and the cover it affords.

Disease and Danger

One of the major outcomes from the C&K ruling was the court’s decision as to whether COVID-19 within the vicinity of insured premises could constitute a ‘danger or disturbance’, so as to allow claims for losses caused by national COVID-19 restrictions.

Considering this question, and following the decision of the Supreme Court in the test case, Mrs. Justice Cockerill took the view that ‘the logic of the judgment, particularly in its treatment of the hybrid and Arch prevention of access clauses, effectively undercuts the [High Court’s previous] approach [to NDDOA, POA and AOCA clauses] and erodes a principled distinction to vanishing point.

Therefore, and in doing so generating an opposing outcome from the first High Court hearing, the judgment confirmed that ‘COVID-19 is capable of being a danger within one mile of the insured premises, which, coupled with other uninsured but not excluded dangers outside, led to the regulations which caused the closure of the businesses and caused the business interruption loss.

This will be very pleasing to policyholders who were insured by a clause that expressly references a ‘danger or disturbance within 1 mile’ and who are able to meet the other conditions of cover. However, NDDOA, POA and AOCA clauses come in a wide variety of forms. In this regard the judgment is less helpful in that it refers to the fact that ‘the difference between vicinity and a one mile radius wording might not be enough to draw a distinction between two otherwise identical wordings [, however] "Emergency likely to endanger life in the vicinity" may mean something different to a "danger within a mile". The word “Incident” also is capable of lending a very distinct colour to a wording - as the telling argument recorded at [398] of the Divisional Court's judgment makes clear. Its significance is underpinned by the Divisional Court's conclusion at [404] that “In our judgment, the FCA’s entire case on the NDDA founders on the requirement for “an incident”.”’

This serves to reinforce the requirement that each individual policy must be considered on its own merits. Whilst it may be that those that have cover for ‘an emergency likely to endanger life in the vicinity’ will see clear parallels with a ‘danger or disturbance within 1 mile’ (and insurers may agree), those with policy wordings that reference an ‘incident’ or ‘event’, generally construed legally as something ‘which happens at a particular time, at a particular place, in a particular way’ may face more rigorous coverage challenges. As Mrs Justice Cockerill notes:

‘I would also tend to the view that the precise wording of the authority or the length of the franchise period might well have an impact [as to whether the clause provides cover for national restrictions]. For example "incident" teamed with an authority wording led off by "local authority, police, emergency services …" [as opposed to something which connotes government] and a short franchise period would certainly have a real sense of pointing to the paradigm situation’.

That paradigm situation, as she explains is ‘set out in the Divisional Court's judgment which concluded in relation to the Hiscox NDDA clause that “this clause is intended to cover local incidents, of which the paradigm examples are a bomb scare or a gas leak or a traffic accident”’.

Authority

Worthy of note is that the C&K AXA policy wording reviewed in this case provided cover for the ‘actions taken by the police or any other statutory body’. AXA sensibly did not dispute that the UK government was a ‘statutory body’.

However, NDDOA, POA and AOCA clauses contain a myriad of alternative requirements including, amongst numerous others, restrictions imposed by ‘a competent local authority’, ‘police or emergency services’, ‘the police’, ‘governmental authority’, ‘military authority’, ‘Civil authority’ etc.

Whether the UK government restrictions of 2020 meet these particular requirements in individual claims is up for debate. Some clearly speak more to an intention to cover government restrictions than others.

Examination on this point is crucial and can be fatal. Lord Mance (the former Deputy President of the Supreme Court) for example ruled in his arbitration award in Certain Policyholders -v- China Taiping Insurance Co. Ltd (10th September 2021) that the restrictions imposed by the UK government could not be said to have been issued by a ‘competent local authority’, Mrs. Justice Cockerill noting in the immediate case that the Claimant in Certain Policyholders had ‘failed at the last hurdle’. In view of the seniority of the judge (albeit in an Arbitration) this decision is likely to be persuasive to a UK court.

Further litigation on these different policy constructions is likely. However, where the wording is less clear and doesn’t obviously cover restrictions imposed by the UK government then policyholders may face significant challenge in successfully achieving coverage.

The form of restrictions

Whilst it is not possible in the interests of brevity to go into this issue in detail here, also important to the consideration of cover will be the language used in the policy wording with respect to the form and effect of any restrictions imposed by government.

Where the policy wording requires a ‘prevention of access’ or ‘closure’ for example, this will connote a total cessation of operations of the whole business or part of it (e.g. in the C&K case, the clear instruction to the insured restaurants by government that they must close, save for takeaway services, which was followed up by way of legally binding measures in statutory instruments). However, should the policy wording also allow for ‘hindrance’ of access this will generally require a much lower threshold of interference in business operations.

Furthermore, whilst some policies may require ‘restrictions’ to be ‘imposed’, generally requiring legally enforceable restrictions or the impending likelihood of them, other policies may cover the ‘advice’ of government, meaning coverage may be available for losses caused by a much broader scope of government messaging, whether legally enforceable or not.

Again, expert advice should be sought as to coverage on particular clauses.

Multiple limits

The secondary issue before the High Court in the C&K hearing was how the limits within the policy operated.

AXA had already agreed that if C&K were successful in achieving coverage, they would be liable for the £250,000 limit for each of the three sets of lockdown restrictions imposed in March, September and November 2020. Whether other insurers are prepared to take the same approach is yet to be seen.

Following AXA’s concession on the ‘multiple claims for multiple lockdowns’ issue, the question before the court was whether AXA were correct in their view that the limit operated in respect of the whole group of restaurants that were insured by the policy; in other words, there was in total £750,000 of cover available for three separate lockdowns.

C&K disagreed arguing that there was £750,000 for each insured restaurant.

The AXA policy in question was a ‘Commercial Combined’ policy which provided numerous types of cover to the C&K group of restaurants, only one of which was PDBI insurance. Various limited companies set up with respect to each restaurant were noted as being separate and distinct policyholders in the policy document. On this basis it was ruled that this was a ‘composite policy’ Lady Justice Cockerill noting that:

‘The exercise to be performed is to ascertain whether the interest is joint or not. Asking that simple question, the answer is perfectly straightforward: it is not. Each company has a separate interest represented by the restaurant or restaurants/café which it owns [5]. The policy therefore falls to be analysed as a composite policy.’

Each policyholder therefore was able to rely upon the contract of insurance individually, based upon their own interest in their specific restaurant. There was no applicable language within the policy which meant that the claims were aggregated or joined in any way. Therefore, on this basis the natural conclusion of the court was that ‘the correct answer is that this is a composite policy in respect of which each insured is entitled to claim £250,000 in respect of each claim’. On this basis each restaurant was ruled to be able to pursue the £250,000 limit for each lockdown individually, leading to an anticipated claim value of up to £4.4m.

Again, it should be noted that this decision is particular to the facts of the case. Aggregation of COVID-19 business interruption claims is a complex and uncertain area which requires expert analysis. Whilst those with composite policy wordings will no doubt be buoyed by the judgment, care must be taken to review each policy in detail, particularly with respect to any provisions regarding the aggregation of claims under a single limit.

Summary

Whilst many policyholders will be delighted by this first instance decision, the nuances of the ruling must be clearly understood. Mrs. Justice Cockerill felt she was able to hear the claim only by distinguishing the High Court’s previous ruling on those clauses considered in the test case. The decision was entirely based on the C&K policy wording. This means that whilst the judgment may be of use to some policyholders it certainly does not open the door to coverage in all NDDOA, POA and AOCA claims.

Furthermore, although the decision may be helpful with respect to the question of multiple limits for some policyholders, many others will need to await further legal decisions, or make the difficult and potentially costly decision to issue proceedings themselves, to gain clarity on their own particular policy wordings.

In order to determine cover it will be of critical importance to review the policy wording in detail and examine where the construction of the language departs from that seen in the AXA policy wording, and those originally considered in the test case. In some instances, the divergence may be slight and the result positive; in other cases, it may be fatal.

Of course, all policyholders must also be aware of the fact that AXA are yet to disclose if they intend to appeal this judgment, most likely to the Court of Appeal. If they do, which is not unlikely, insurers are expected to be highly reluctant to confirm cover until the matter is legally settled.

Samuel Ellerton , Regional Claims Lead

T +44 (0)121 232 4563

E sam.ellerton@uk.lockton.com

Disclaimer

This document is in no way intended to provide legal advice. The recipient of this note should obtain independent legal advice from a suitable practitioner as required. Lockton Companies LLP does not accept any liability with respect to reliance upon the content or accuracy of this note.