The keenly awaited Judgment was handed down this week in a test case brought by the Financial Conduct Authority (FCA) which sought to clarify the interpretation of a number of non-damage business interruption (BI) insurance policy wordings.
A full copy of the Judgment can be found here
Following the outbreak of COVID-19 in the UK, and the consequent lockdown measures imposed by the government, many businesses made claims under their BI insurance cover. Cover was arguably triggered either by the outbreak of the disease itself (often within a specified radius of the business), or by the lockdown measures effectively preventing the business from operating. It soon became apparent, however, that the interpretation of the policy wordings and the Notifiable Disease and Denial of Access extensions was far from straightforward, resulting in vast numbers of disputes as to whether BI claims were covered.
The FCA accordingly brought an urgent case (FCA v Arch Insurance (UK) Ltd and others) in which the High Court was asked to review 21 different sample policy wordings issued by 8 different insurers. Notably, in addition to those sample wordings being considered, the FCA has listed (here) numerous other policies with similar wording which may be impacted. As such the ruling could potentially affect up to 370,000 policyholders.
Overview of High Court Ruling
As might be expected in these circumstances, the judgment is long and complex, and will need to be considered in detail by insurers and their advisers over the coming days. In headline terms, the judgment accepts many of the arguments advanced for policyholders on the key issues, an outcome welcomed by the FCA as a ‘significant step in resolving the uncertainty being faced by policyholders ‘. That said, it is important to appreciate that the court did not find that the insurers involved in the case are liable across all of the policy wordings considered; each policy will need to be considered against the judgment to establish what it means for the policyholder in light of its particular circumstance.
We comment only briefly on some of the key takeaways from the judgment but the 167 page ruling is complex and nuanced and we will provide further commentary in due course.
The 21 policy wordings reviewed by the Court fall broadly into three categories: disease clauses; prevention of access or similar clauses and hybrid clauses (see further below). While insurers argued that policy interpretation depended on issues of causation, the Court found that, in each policy wording, the clauses themselves defined the appropriate causation test. A lower test than the “but for” test was appropriate, requiring just one element of a causal link to be present and linked to an insured peril.
Linked to the issue of causation and as part and parcel of policyholders proving their claims is that of prevalence of Covid-19. Many policyholders will be required to prove an ‘occurrence’ or ‘manifestation’ of Covid 19 within a specified geographical area which includes insured premises as part of satisfying policy wording and that a loss has arisen and triggered cover. Whether a policyholder is able to discharge its burden will need to be determined on a case by case basis but the parties agreed that the Court should consider: (i) what type(s) of proof could be sufficient to discharge the burden of proof upon policyholders; and (ii) on the assumption that the matters pleaded by the FCA represent the best evidence available, whether it was sufficient as a matter of principle to discharge the burden of proof.
While being careful to note that there was no expert evidence heard on the question of prevalence the Court provided the following guidance:
- Specific evidence - There may be fact-based evidence that there had been a Covid-19 outbreak at a particular location. Nursing homes was one of the examples advanced by the FCA.
- NHS deaths data - This might be used in order to establish, because of the cause of death, that there were therefore Covid-19 cases prevalent in a policy area and might show evidence of previously tested Covid-19 tested cases within the policy area and at a specific time.
- ONS deaths data - Data produced by the Office of National Statistics as to deaths which occurred each week in England and Wales. Again, it is suggested, and there is no dispute, that this data indicates deaths where the cause of death involved Covid-19. The Insurers, however, did not accept that this data on its own could show the presence of Covid-19 within the relevant policy area on any particular day of any week.
- Reported cases - There is a huge amount of publicly available data in terms of lab confirmed positive tests for Covid-19 across the UK and daily cumulative totals of reported cases from the UK government and local authorities.
The court acknowledged that “in some cases, the Insured may not be able to prove the required occurrence of deaths or cases in the relevant policy area based on the types of evidence identified above”. Other methodologies such as averaging out cases across local authorities might be of assistance as well as factoring in what the Court called “undercounting” - in other words a general acceptance that Covid-19 cases in the UK in March 2020 were much higher than the various sources of reporting suggested. What the Court was not able to decide, because of a lack of expert or other evidence, was the reliability of particular methodologies introduced by the FCA in its case. Accordingly, while there is some useful guidance as to the framing of evidence for policyholders, this is by no means a settled question.
We turn now to the Court’s consideration of the three categories of wordings and provide a high level summary below but we caution again that a detailed ruling was provided in relation to each of the wordings and the judgment should be examined in detail in order to be clear on the Court’s specific findings.
Disease Clauses (RSA, Argenta, MS Amlin, QBE wordings considered).
The Court considered provisions which provide cover for BI in consequence of or arising from the occurrence of a notifiable disease within a specified radius / in the vicinity of the insured premises.
- The Court took the approach that disease cover is not confined to the effects only of the local occurrence of a notifiable disease. Otherwise there may be “no effective cover if the local occurrence were part of a wider outbreak, and where precisely because of the wider outbreak, it would be difficult or impossible to show that local occurrence(s) made a difference to the response of the authorities and/or public.”
- The Court found that these clauses were triggered from the point of time that there were diagnosable diseases (not requiring formal diagnosis) in the relevant policy area.
- The word “Vicinity” in the RSA 4 Resilience wording was found to have a very broad meaning – effectively anywhere in England and Wales.
- In relation to two of the QBE wordings which required an “event” to trigger cover (the events being “any occurrence of a notifiable disease within a radius of 25 miles/ 1 mile of the premises, the Court found that the clauses provided no cover because occurrences of the disease at different times and in different places would not constitute the same event and the clause limits cover only to the consequences of specific events.
Prevention of Access Type Clauses (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich wordings considered).
These extensions provide cover where there has been a prevention/hindrance or access as a consequence of government (or other authority) action.
- The ruling is more favourable to insurers. These clauses (which were generally construed more narrowly than the disease clauses) were found to relate to specific localised events rather than the UK wide response.
- While the Court found that certain denial of access clauses provide cover, this does depend on the specific wording (e.g., prevention v. hindrance) and exactly how the business was affected by government measures/ mandatory closure orders. Another key starting point in determining policy cover generally and a theme throughout the ruling.
- The Government announcements of 16, 20 and 23 March were found to be “advice” rather than mandatory orders – which has to be considered alongside the exact wording of the applicable clause.
Hybrid Clauses (Hiscox and RSA wordings considered).
These clauses link cover for BI to a combination of disease and denial of access cover, e.g., a clause engaged by restrictions imposed in relation to a notifiable disease.
- The Court did not accept the narrow interpretation put forward by insurers such that any occurrence had to be local and specific to the relevant insured/ premises. As the Court regarded the entire outbreak of COVID-19 in the UK as an occurrence, the Court accepted that any restrictions/ denial of access necessarily followed that broader national outbreak.
- Note however that the Court once again construed narrowly the meanings of the prevention of access wordings such that mandatory orders/ regulations may be required to trigger cover depending on the exact wording of the clause.
Trends Clauses (Business trends)
When it comes to quantification of a claim, trends clauses look to factor in and limit the loss by that which would have been incurred in any event due to the wider situation/ downturn.
- The Court found that trends clauses may be applied to “no damage” extensions.
- But, the Court made it clear that where a policyholder has established a loss caused by an insured peril, that loss should not be limited (unless the wording clearly requires) by including any part of that insured peril in the assessment of what the position would have been had the insured peril not occurred. The Court found that, depending on the wording of the clause, the disease/ prevention of access/ restrictions imposed should be removed from the counterfactual when factoring the broader circumstances into the loss.
- Significantly, the Court also determined that it was not required to follow the Orient Express Hotels decision which involved a hotel that closed for two months in 2005 after being damaged by Hurricane Katrina (Orient Express Hotels Ltd. V Assicurazioni Generali SpA  EWHC 1186 (Comm). The judgment addressed the decision in some detail, and the causation issues presented by it and the effect of the trends clauses, and commented obiter that it was wrongly decided.
While this ruling will be a relief for many, in particular those small to mid-size businesses in the midst of insurance claims and financial uncertainty, they will need to consider the finer detail of the ruling carefully alongside the particular facts and policy wording at play. The ruling certainly does not find insurers liable across the board for business interruption losses in respect of the wordings considered.
In addition, it is important to appreciate that this is not necessarily the final outcome. Many expect that insurers will seek to appeal the judgment and, if so, the parties have agreed that the appeal be heard as quickly as possible and that the appeal will leapfrog the Court of Appeal and go straight to the Supreme Court.
Insurers should provide policyholders potentially affected by the judgment with an update within 7 days from the date of the Judgment.
Our Insurance experts are able to advise on coverage queries arising out of the judgment or more generally.