Despite the UK’s 2021 Supreme Court judgement in the FCA’s business interruption test case there remains a plethora of unresolved issues with very significant and high value claims now beginning to make their way to trial.
The Supreme Court judgement
On 15th January 2021 the Supreme Court’s judgment in The Financial Conduct Authority v Arch Insurance (UK) Ltd & others (the FCA test case) was released to the public. The largely pro-insured ruling has reportedly resulted in insurers paying (as of 13th January 2022) £967,987,042 in settlement of 42,842 claims; an average of £22,594 per policyholder.
Many of those who were successful were insured by way of a wide vicinity disease extension, often referring to coverage being afforded for the effects of disease within a 1 mile or 25 mile radius of insured premises, or a ‘hybrid’ extension requiring the presence of COVID-19 and resulting restrictions on their ability to trade.
However, that was far from the whole story. Those who successfully recovered from their insurers following the FCA test case were very much the minority. Many more policyholders, particularly those who had disease extensions that required the presence of COVID-19 ‘at premises’ or who had purchased Non-Damage Denial of Access (NDDOA) cover, were not so fortunate. At the time of writing many large claims for major corporates remain outstanding in the wider market, with insurers arguing over coverage or quantum issues that could cost millions.
Whilst the FCA is to be credited for successfully delivering one of the fastest Supreme Court decisions of all time, that efficiency required a streamlining of the issues under consideration. Accordingly the judgment, whilst bringing welcome and much needed clarity, left a very significant number of unanswered questions across a wide variety of legal issues. It was inevitable that further COVID-19 business interruption disputes would keep the courts busy for years to come.
For those policyholders that have already made the expensive journey to the High Court however, the results have not been particularly positive.
The Claimant’s suggestion that COVID-19 could be covered by a list of diseases within the policy that included ‘Plague’ (but not COVID-19) was summarily dismissed as ‘a clever lawyer's construct and not a credible argument’ in Rockliffe Hall v Travelers.
Also summarily dismissed on the basis that it ‘part[ed] company with reality’ was the claim of TKC London Limited. v. Allianz Insurance plc. in which the deterioration of stock as a result of the closure of the premises was ruled to be an unsuitable trigger for a business interruption claim, the Court blithely pointing out that the closure, not the deterioration, was the cause of the loss.
These decisions must however be seen in context. Both were summary judgments, thrown out because of their low prospects of success. Here we examine some of the unresolved key issues and where the land currently lies:
Non-Damage Denial of Access Cover Re-examined
Extensions that afforded cover for a denial or prevention of access following a ‘danger or disturbance’, ‘emergency which could endanger life’ or similar, in the vicinity of insured premises, were ruled to provide only localised cover by the High Court in the FCA test case. This meant that such clauses may respond in the unusual circumstances of restrictions being imposed on the policyholder as a direct result of COVID-19 in the vicinity (and not beyond the vicinity) of insured premises. However, the clauses would not respond to losses resulting from restrictions imposed in the face of a national or regional picture of disease.
It is unclear why the FCA did not appeal the High Court’s ruling on NDDOA extensions to the Supreme Court, however what is certain is that this decision left many policyholders with little alternative but to accept, for the time being at least, that their policy would not meet any of their pandemic related business interruption losses.
This argument continues to roll on however, with many considering the High Court’s analysis to be flawed. This view has also apparently been garnering support from very senior judicial sources, notably Lord Mance, the former deputy president of the Supreme Court, in his September 2021 arbitration award in China Taiping v Various Policyholders. Whilst ruling in favour of the insurer in that particular case on the basis that the UK government could not be said to be a ‘competent local authority’, Mance L took the view that the High Court’s ruling that NDDOA clauses only provided localised cover may well have been different had they been aware of the Supreme Court’s views on causation.
Others now seek to test the High Court’s original views on NDDOA clauses, most publicly Corbin & King who purchased cover from AXA for ‘the actions taken by police or any other statutory body in response to a danger or disturbance at [insured] premises or within a 1 mile radius of [insured] premises’. Corbin & King’s claim has recently been heard by the High Court (on the very same day the group was placed into administration) where it was argued before Mrs Justice Cockerill that the COVID-19 pandemic clearly represented a danger within 1 mile of insured premises; AXA responding that the cover ‘contemplates an incident specific to the locality of the premises’. The decision is eagerly anticipated and one would expect is highly likely to be appealed regardless of the outcome.
At Premises Disease Cover
Extensions that require COVID-19 to be present at premises have seen a wide variety of insurer responses, with many taking the view that the cover afforded by such clauses is fundamentally different to disease extensions that cover instances of COVID-19 within a 1 mile or 25 mile radius of premises (i.e. those that were found to cover pandemic related losses by the Supreme Court).
Indeed the FCA themselves initially appeared to support arguments that the cover afforded by ‘at premises’ disease extensions was narrower, their test case pleadings arguing that:
‘the nature of the cover provided by these ‘at the premises’ clauses is different [to wide vicinity disease clauses] because the contemplated interruption (and authority action) caused by a disease occurring at the premises will be different to interruption (and authority action) caused by a disease occurring away from the premises. In the former case…the clause envisages measures directed specifically at the premises to stop that repetition or spread; measures that would not be taken on a national or wide area basis. The fortuity is therefore, as a matter of construction, contemplating and limited to the at-the premises aspect of any disease, not a wider outbreak.’
If this is correct it would mean that the claims of those policyholders who purchased ‘at premises’ disease cover may be limited to losses sustained through a short period of closure so that cleaning could take place. However, there would be no cover for losses sustained as a result of national COVID-19 restrictions.
This somewhat flies in the face of the Supreme Court’s ruling on causation, particularly that all of the individual cases of COVID-19 that had occurred by the date of any relevant government measure were an equally effective ‘proximate’ cause of that measure. On this basis there is no reason why an instance of COVID-19 at premises should be treated any differently from an instance of COVID-19 within 1 mile or 25 miles of insured premises.
MS Amlin, in their test case pleadings, appear to have recognised this in arguing that:
‘Indeed, once there was one case of disease (whether at the premises or within the 25 mile radius) there would be no practical difference in the scope of cover between a limb which insures ‘notifiable disease at the premises’ and one which insurers ‘notifiable disease within a radius of twenty five miles of the premises’.
Furthermore, this view has gathered support from the Financial Ombudsman (FOS) who have recently confirmed that:
‘In our view, the causative effect of a case at the premises can be the same as that of a case within a radius of the premises, and therefore the period of cover provided by an ‘at the premises’ policy can also be the duration of the government measures – rather than, for example, a short period for cleaning.’
Of course, every claim will be subject to a requirement for the insured to evidence an occurrence of COVID-19 at premises in early 2020. FOS decisions reported on their website suggest a focus on the provision of contemporaneous proof of disease which, whilst obviously representing the holy grail of evidence, is as equally difficult to find in the 2020 context of a lack of mass testing for COVID-19. Despite FOS and insurer pushbacks, policyholders must of course only evidence their claim on a balance of probabilities basis and it is not unreasonable to assume that with strong witness evidence many will be able to meet that threshold, even without documentary evidence collected closer to the time of the alleged occurrence.
Ultimately however, until there is a suitable reported decision on an ‘at premises’ disease extension, uncertainty as to how the courts are likely to interpret such claims is likely to remain. The FOS’s pro-policyholder position will have an effect on some insurers; whilst a small number of more progressive insurers have already accepted that ‘at premises’ policies can respond to national restrictions (assuming the policyholder can provide the requisite proof), others remain intransigent. Whilst some insurer’s approach appears to be softening (and many will no doubt prefer to settle such issues behind closed doors for fear of setting unhelpful legal precedent) most claims remain in a state of legal limbo.
Whether or not insurers are able to consider payments made to policyholders under the furlough scheme has proven to be one of the most contentious battlegrounds in the area of COVID-19 business interruption claims. Whilst a number of insurers have confirmed that they would not seek to deduct government grants from business interruption claim settlements, no major insurer has yet confirmed they will take the same position regarding furlough. This has had the practical effect in some cases of vastly reducing policyholders’ claims, sometimes to nil.
On 25th September 2020, the Association of British Insurers (ABI) wrote to John Glen MP, the Economic Secretary to the Treasury, announcing that some insurers had agreed not to deduct Local Authority grants, Small Business grants and Leisure/Retail/Hospitality grants from claim settlements. However, the furlough scheme was notably absent from the ABI’s correspondence.
Replying to the ABI, Mr Glen wrote that ‘deductions are quite clearly not in line with the intention of the support schemes’. However again furlough, as the most significant of the various schemes implemented in the face of the pandemic, was absent from specific reference.
Ultimately government and the FCA appear to have not been willing to force insurers’ hands on the issue, preferring instead to provide general guidance that insurers should consider ‘the exact type and nature of the Government support, how the policyholder used this support and the type of policy and its precise terms’.
Despite the suggestions from government that such deductions were not the ‘intention’ of the legislature, insurers have largely and publicly taken the position that to compensate their customers for wage roll which was ultimately paid by the UK government by way of furlough would in effect lead to a windfall for policyholders. It is on this basis that they have continued to treat furlough payments as savings, reducing insured claims accordingly.
Conversely, policyholders have pointed out that financial support from the government was provided for the express purpose of avoiding mass redundancies and mitigating the economic impact of the pandemic. It was clearly not the intention of the scheme for taxpayer funds to benefit global insurers.
On the basis that both insurers and policyholders are largely entrenched on this issue it is likely to take judicial opinion to break the impasse. This may arrive in 2022 as claims make their way to court, most visibly in the trial of Stonegate Pub Co v MS Amlin & Others which is currently due before the High Court on 13th June 2022.
In reality of course, some policyholders will have a better case than others as to whether the insurer has the right to deduct furlough payments from their claim. How the individual policy deals with the definition of savings and the calculation of loss are likely to be key and some insurers have been prepared to concede the point, albeit generally on the basis that non-disclosure provisions are central to the settlement agreement. However, it is certainly expected that a significant win for policyholders in a UK court may serve to strengthen policyholder resolve when faced with insurer argument that the loss will not be met. Conversely of course, a loss for the Claimant may make it more difficult to persuade some insurers to pragmatically settle claims relating to furlough behind closed doors.
Aggregation issues continue to plague COVID-19 business interruption claims, particularly those of the largest corporate policyholders. Many Disease, Hybrid and NDDOA clauses are restricted to much smaller inner limits of indemnity than the rest of the policy, often with a much shorter indemnity period than that which applies to property damage covers. Therefore, answers to questions of how policy limits apply to organisations with large numbers of individual premises has the potential to have a massive impact on insurers’ potential liability. Take for example the aforementioned Stonegate Pub Co. claim against MS Amlin, Liberty Mutual and Zurich. If Stonegate are correct (that each of their premises is entitled to their own limit) they estimate their claim to be worth £849m. However, if insurers are correct, the claim may be limited to £2.5m.
Furthermore, certain policyholders whose renewals took place in late 2021 or early 2022 would seek to argue that they are able to make numerous separate claims relating to the various lockdowns that took place across the policy period. This would largely accord with the Supreme Court’s ruling that each individual with COVID-19 was a concurrent proximate cause for the national restrictions imposed in response to it. A different set of restrictions because of a different picture of national disease could arguably generate a new claim. Of course it is worth noting at this stage that the FCA test case only considered the restrictions imposed by the UK government in March 2020 and did not touch upon whether claims could also be made for the restrictions that followed.
Unfortunately, to add to the burden, the legal position is undeniably complex, often uncertain and highly policy specific. It is for this reason no doubt that the FCA sensibly avoided addressing the issue in bringing their test case; had they done so we almost certainly would still be awaiting the first instance judgment a year and a half later. For this reason, it is also not possible to properly address this issue at any length here; those with potentially valid claims will certainly require input from specialist independent legal advisors.
What is reasonably likely however is that policyholders with cover that only allows for the insurer to aggregate claims on the basis that they result from the same ‘Occurrence’ or ‘Event’, often legally construed following the well-known judgement of Lord Mustill in AXA Reinsurance (UK) plc v Field as something that ‘happens at a particular time, at a particular place, in a particular way’ are likely to face fewer challenges than those whose policies allow insurers to combine all claims arising from an ‘Originating Cause’ or ‘Original Source’.
Insurers are likely to face an uphill battle should they seek to argue that that the global pandemic meets Lord Mustill’s definition in view of the nature of the COVID-19 pandemic and its innumerable and largely incalculable effects. However, policies that allow for the aggregation of multiple claims based upon the cause or source of those claims will naturally necessitate a deeper judicial investigation as to what ‘unifying factor’ links the losses, less constrained by a need for the exposures to be bound by geography or location. For example, in the recent decision in Spire Healthcare v Royal & Sun Alliance claims resulting from the misconduct of breast surgeon Ian Paterson at different locations across a 14 year period were aggregated into a single loss (with a single limit) on the basis that the ‘Original Cause’ of the claims was the ‘performing [of] operations on [patients] without their informed consent’.
Of course, whether a UK court is willing to go as far to construe the pathogen that emerged from Wuhan in early 2020 as the Originating Cause or Original Source of the global impact that has followed over the proceeding two years is another matter entirely. What is certain is that if insurers successfully argue the point it will be the broadest aggregation of claims ever allowed by a UK court. We are unlikely to have to wait too long for the first instance decisions to arrive; the issues described here will certainly fall for consideration in the Corbin & King and Stonegate claims with further satellite litigation already underway (including Various Eateries v Alliance) covering a myriad of factual and policy scenarios all requiring legal clarification.
Intrinsically interlaced with the aggregation issues described above is the question of territorial scope. The fact that the FCA test case only related to COVID-19 in the UK in March 2020 and the restrictions that resulted from it, has led to some insurers seeking to argue that losses that stemmed from COVID-19 beyond the UK are not recoverable. This has resulted in policyholders whose business interruption was largely caused by COVID-19 in other territories having their claims declined or significantly reduced in value.
As an example of this issue, if a UK travel agent specialising in holidays to Italy sustained business interruption in March and April 2020 because of disease in the UK at that time and the resulting restrictions imposed by the UK government, then their wide vicinity disease clause would be likely to respond to their claim. However, if upon examination it transpires that they lost most of their turnover not due to the UK restrictions but because of COVID-19 and the resulting restrictions imposed in Italy, then the insurer may seek to argue that they are not covered for those losses.
The type of clause under consideration, the factual circumstances of the loss and the extent to which the UK courts consider COVID-19 to be a global event (as opposed to a series of separate events) will have an impact here. Again, dealing with such issues will necessitate the instruction of specialist independent legal representatives with claims likely to reach the courts (and the national press) in the coming 12 to 24 months.
The landscape of COVID-19 business interruption claims continues to shift with disparate legal opinion slowly giving way to judicial decisions on issues which are likely to have seismic effects on policyholders and insurers. In addition to those outlined above, there are pervasive arguments surrounding other major areas of uncertainty including (but not limited to) whether COVID-19/SARS-CoV-2 can cause property damage and whether property owners policies should respond to rental income losses.
Many insurers, fearful of opening the floodgates, will inevitably rely upon Arbitration clauses within policy wordings to try and keep key decisions private. Others will require the signing of NDAs when concluding commercial settlements to avoid the risk of trial. Whilst this is unfortunately unavoidable, policyholders should be pleased that there are enough litigated claims already coming to the fore in 2022 to have a major impact on significant coverage and quantification issues. Many are likely to get a first hearing this year. Unfortunately however, even with such judicial clarification claims are likely to run on for the foreseeable future to the detriment of all concerned.
For further information, please contact:
Regional Claims Lead (SVP)
T.: +44 (0)121 232 4563
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.