To cover or not to cover?
In our previous alerts, we set out our views on the perceived ‘key battlegrounds’ in the test case. In this article, we revisit the main ‘battlegrounds’ in more detail.
Pandemics not compatible with BI cover
Insurers argued that BI policies were not intended to cover the ramifications of a pandemic. The FCA countered that, as a result of the legacy of pandemics (for example, SARS), the Insurers should have expressly excluded cover for pandemics should they not have wanted to cover them. Insurers submitted that this argument was circular and that it was not necessary to exclude risks that were not covered to begin with.
Interpretation of key terms
The test case focused on the proper interpretation of BI policies, with arguments from the various Insurers as to the interpretation of their policy wordings. The policy wordings differed across Insurers and, therefore, while their arguments overlapped, each Insurer took distinct lines of attack as to the interpretation of key terms and, in particular, set out why they did not classify the COVID-19 pandemic as triggering the non-damage BI policy clauses in issue.
Broadly speaking, the FCA argued for a very wide approach to the interpretation of policy terms, so as to include cover for COVID-19 related losses. Insurers disagreed and sought to confine the interpretation of key clauses as narrowly as possible, in order to prevent the triggering of cover for COVID-19 related losses.
In the section below, we look at some of what we consider to be key terms discussed before the court. The court’s decision as to the interpretation of these key terms is likely to have a wide impact on the insurance market – not just the set of wordings that have been included in the test case. Insurers who were not involved in the case will nonetheless have similar policy wordings and thus be caught by the judgment.
A. ‘Orders’ and ‘Prohibitions’ of public authorities
The FCA reasoned that, if a BI policy required a public authority ‘prohibition’ to trigger cover, such a ‘prohibition’ did not require legal force. The two-metre social distancing rule was never given legal force but a ‘reasonable citizen’ understood the UK government’s guidance to mean that they were prohibited from being within two metres of one another.
Insurers did not agree that government guidance constituted a ‘prohibition’ or ‘order’. In Insurers’ view, the social distancing measures were not mandatory and, thus, did not fall within the scope of a ‘prohibition’ such that cover would be triggered under a BI policy.
B. ‘Prevention’ or ‘hindrance’ of access to or use of premises
The FCA argued for a wider interpretation of the words ‘prevention’, or ‘hindrance’ of access to or use of insured business premises.
Insurers said that many insureds were not required to shut down their businesses and could still operate, either fully or partially, to supply essential goods and services. In the FCA’s view, the word ‘prevention’ did not require total prevention. The FCA contended that even if businesses could stay open, they still experienced a ‘prevention’ of use and access because of the government’s instructions to self-isolate, restrict travel, work from home where possible and socially distance. These measures, on the FCA’s case, resulted in a prevention of people accessing businesses. Lord Justice Flaux commented on this argument to the effect that, if parties had intended a looser concept, then more policy wordings would have used the term ‘hindrance’. Insurers raised different arguments in relation to what amounted to ‘prevention’, such as that a total closure of premises amounts to a prevention, or that a physical obstruction is required, or that prevention meant a legal prohibition. The common theme between them, however, appeared to be that ‘prevention’ related to the insured’s inability to access or use the premises for the purposes of its business, not the ability or otherwise of customers to visit them.
The FCA countered that the UK government’s requirement that people stay at home during lockdown was effectively a ‘hindrance’ as it amounted to something that made access to or use of the premises more difficult. Insurers denied that this was the correct interpretation of the word ‘hindrance’ arguing that it was too broad. Again, Insurers took varying approaches but, in overview, said that a ‘hindrance’ required there to be a physical or legal impossibility or difficulty of the insured reaching or using the premises.
C. In the ‘Vicinity’
In some of the policy wordings being considered in the test case, an occurrence or incidence of COVID-19 was required within a specified radius or vicinity to the insured premises to then trigger certain public authority action, advice or orders that subsequently interrupted or interfered with the insured’s business at its premises.
This raised the question as to whether COVID-19, which is rampant across the UK, both inside and outside of the specified vicinity or radius of the insured’s premises, qualified to trigger coverage under the BI policies in issue.
Insurers argued that cover was limited to purely localised incidents, emergencies or dangers that occurred close to the insured premises. Insurers said that policy wordings were designed to respond to a specific incident, such as a terrorist attack, when an insured premises is either damaged or, if not damaged, not able to operate as a result of the particular incident.
Insurers submitted that the UK government’s actions were in response to the nationwide presence of COVID-19 and not as a result of an incident of the disease in a specific vicinity.
The FCA rejected the Insurers’ argument that the causative incidence of COVID-19 had to be a localised incident. The FCA said that any requirement for the incident to occur within a specific vicinity or radius did not mean that it was not possible that the presence of COVID-19 within the vicinity of the insured premises might be a part of a greater problem. The FCA said that if, in addition to the disease being present within the vicinity of the insured premises (which is required by the BI policies), the disease can also be found outside of the relevant vicinity, then this should not prevent insureds from being covered.
Prevalence of the disease
An issue that arises for insureds seeking coverage for COVID-19 related losses under a BI policy is what evidence can be relied on to satisfy the policy requirement that, on the balance of probabilities, COVID-19 has occurred within the required vicinity of the insured premises.
The FCA asserted that, to show the prevalence of COVID-19 in the policy area, policyholders should use evidence from a suitably qualified institution; whether this evidence is capable of being relied upon should then be tested in each individual case, but it should be for the Insurer in question to show that such evidence of prevalence was unreliable.
Notably, Mr Justice Butcher commented that “if there is an estimate by a reputable institution and then there is nothing said against that, then one might assume that that was likely to be concluded to be reliable”.
The Insurers argued instead that it must be shown by a policyholder that a local case directly caused the closure of an insured business. The FCA found this position untenable, as prevalence of the disease caused the UK government to implement a nationwide lockdown and this context must be kept in mind when considering policy coverage.
‘But for…’
The FCA's position on causation was that the nationwide presence of COVID-19, and the resulting restrictions on businesses and the population that the disease has caused, constituted a single dominant and proximate cause of the financial losses suffered.
Certain of the Insurers disputed whether, as a matter of law and fact and in the context of the BI policies, the necessary causal link to loss suffered by policyholders could be established. They relied on the fact that English law says that, where loss can be said to have been proximately caused by two or more independent causes, with at least one insured and one not, such that the loss would have happened regardless if one of the causes was not present, the policy will not provide cover because the loss cannot be said to have been caused by the insured risk. In general terms, the Insurers said that policyholders will not be able to show that their particular insured risk (for example, an incidence of COVID-19 within a specified radius of their premises) is the proximate cause of their loss since the loss suffered would have been incurred irrespective of the local incidence of the disease, as a result of the widespread occurrence of COVID-19, and the reaction of the UK government and public to it.
On day two of the trial, the FCA explored the case law that dealt with concurrent causes of loss and the approach that should be taken where there are two or more effective causes (i.e., COVID-19 and government action). The FCA relied on the findings of the court in The Miss Jay Jay ([1985] 1 Lloyd’s Rep 264), which considered a situation where there are two interdependent causes of loss that are both necessary for the damage to have occurred (in that case an unseaworthy boat and adverse weather), but that are causatively insufficient on their own.
The FCA submitted that, where there were independent causes with some commonality between them, consideration needed to be given to what was intended by the policy within a commercial context. If one cause was insured and the other was not insured, cover would apply under the policy, unless the uninsured clause was specifically excluded.
The FCA submitted that the occurrence of COVID-19 in each specific area was an essential part of a single all-encompassing and undividable cause, being the COVID-19 pandemic and all its ramifications. Alternatively, the occurrence of COVID-19 in each specific area made its own concurrent causative contribution to the overall makeup of a pandemic, which in turn drove the UK government response. The FCA said, on either view, the losses sustained were caused by an insured risk.
The Insurers submitted that the court must apply the ‘but for’ test of causation, as it is an integral element of contract law that traditionally and correctly answered the question of whether an insured risk caused loss. The key purpose of insurance is to put the insured in the same position, but not a better position, as if the insured event had not occurred. To provide an indemnity in this scenario would be to place the insured in a better position than it would have been had the insured risk not occurred.
The FCA argued that the ‘but for’ test is not always suitable as there are deficiencies when applied to two equally efficacious causes. Where there are two causes, the ‘but for’ test would need to be adapted to apply to both causes together.
Submissions were made in relation to causation in the context of ‘trends’ clauses, which are found in some of the policies in issue. Trends clauses usually operate to mean that any insured BI loss needs to be adjusted to provide for the circumstances or ‘trends’ of the insured’s business both before and after the loss is sustained. The purpose being that the adjusted figures represent, as nearly as may be reasonably practicable, turnover which, but for the damage, would have been obtained during the relative period after the damage.
One of the key cases discussed was Orient-Express Hotels ([2010] EWHC 1186 (Comm)), the background of which related to the recovery of BI losses sustained from the damage to a hotel as a result of Hurricane Katrina in 2005. In that case, the insured, whose hotel was damaged by Hurricane Katrina, could not satisfy the ‘but for’ test of causation as, even if the hotel had not been damaged, it would have suffered the same BI loss because of the devastation to the surrounding area.The FCA asserted that Orient-Express Hotels was not a suitable authority as it dealt with physical property damage and was limited to an appeal under s69 of the Arbitration Act 1996. The FCA went further to say that, in any event, the Orient-Express Hotels case should not be relied on as, in that case, there was too much focus on the damage to the hotel and not the cause of the damage. In the FCA’s view, the insured risk was the hurricane and, when focusing on that, it logically followed that the trends clause should not be applied to exclude the damage caused by the insured risk.
Lord Justice Flaux commented that it would be difficult to determine all causation arguments put before the court in the test case, as causation usually would be an issue to be explored on the given facts of a case.
The interveners
At the second case management conference, held on 26 June 2020, the Hospitality Insurance Group Action (HIGA) and the Hiscox Action Group (HAG) were permitted to intervene in the test case. The court said that it had no doubt that the FCA would advance the majority of the points relevant to these two groups of policyholders, but it accepted it was important to ensure that all relevant arguments were put before the court.
HIGA represents hotels, restaurants, bars, pubs and nightclubs that were forced to close as a result of government advice surrounding the COVID-19 outbreak. HAG represented almost 400 Hiscox policyholders with a variety of businesses including restaurants, retail, estate agents, gyms, recruitment agencies and event companies. HAG is continuing with a separate claim against Hiscox Insurance Company Ltd.
Permission was granted for their intervention on the condition that oral submissions and skeleton arguments submitted by the interveners supplemented the FCA’s submission and avoided duplication; thus, submissions from these entities were brief and designed to enhance the arguments put forward by the FCA.
The issues raised by HIGA and HAG were tailored to specific policyholder issues. The focus of HIGA's case is the vicinity requirement of the Notifiable Disease and Public Authority Extensions in their policies. They argued that the vicinity requirement is satisfied if there is an instance of COVID-19 in the specified area, even if that incident forms part of the wider COVID-19 pandemic that actually prompted government action.
HAG noted that its members have combined losses in the region of £47 million (applying policy limits), but said that actual losses would be much higher. They argued that under the relevant Hiscox Public Authority Extension wording, its members only have to prove that their losses are solely and directly a result of the interruption to their business.
Market chatter
In an Insurance Times article dated 3 August 2020, Hiscox chief executive Bronek Masojada ‘welcomed’ the FCA test case, despite the potential impact on the Insurer should the verdict go against it. On the same day, the Financial Times reported that Hiscox had increased its estimate of the cost of COVID-19 related claims by more than 50 per cent to US$232 million with the potential to double if the test case ruling goes against the company.
Although they are not parties to the proceedings, Allianz and Aviva have both commented on the proceedings in the Insurance Times. Allianz chief executive, Jon Dye, stated that he understood why brokers and customers might argue that the BI cover is there and the test case has been “a difficult time reputationally” for insurers. Aviva’s UK chief executive for general insurance, Colm Holmes, confirmed that, despite the fact “95 per cent of Aviva’s policies do not cover pandemics”, the insurer is still having to pay out for COVID-19 related BI claims that have been insured using wordings written by brokers.
Policyholders and the insurance market alike are keenly awaiting the judgment.
Conclusion
The FCA has always said that its purpose in bringing the test case is to get rid of coverage ‘road blocks’ for insureds that have been put in place by Insurers through their denial under non-damage BI policies. The test case invited the court to determine the effect of certain policy wordings in that context, and it will be interesting to see exactly how the court takes up that invitation.
The judgment is not expected before mid-September 2020. The judgment will be legally binding on the Insurers that are party to the case in respect of interpreting the BI policy wordings considered by the court. It will also provide persuasive guidance for the interpretation of similar BI policy wordings and claims for insurers that were not a party to the proceedings.
It is possible that any decision will be appealed and it has already been agreed that any appeal will be heard on an expedited basis. This could include the possibility of a ‘leapfrog’ straight to the UK Supreme Court to reduce any delay.
We will provide a further update when the judgment is made available.
If you have any queries as to how you may be affected by the outcome of the test case, or if you require, more generally, advice regarding your insurance policies, please contact one of the lawyers in the insurance recovery team at Reed Smith, the details for whom are set out below.
Client Alert 2020-487
