In this article, we provide an overview of the decision handed down by the London High Court on Tuesday, 15 September 2020 in The Financial Conduct Authority v. Arch and Others  EWHC 2448 (Comm). As set out in our previous alerts on this topic (in May, June and August 2020), this judgment arises from a test case brought by the UK’s Financial Conduct Authority (FCA) against eight insurers.1 The test case was brought by the FCA to resolve uncertainty in the interpretation of business interruption (BI) policies in the context of the Covid-19 pandemic.
Whilst the judgment itself is lengthy and deals with all of the various nuances in relation to the three broad categories of BI policy wordings, namely disease wordings, hybrid wordings and prevention of access/public authority wordings, generally speaking, the Court held that:
(i) Disease wordings: coverage can be available for BI losses sustained in consequence of an occurrence of Covid-19 both inside and outside the specific policy radius of the insured premises.
(ii) Hybrid wordings: coverage can be available for BI losses sustained where mandatory restrictions were imposed on the insured premises in relation to an occurrence of Covid-19.
(iii) Prevention of access/public authority wordings: coverage can be available for BI losses sustained when the insured’s business has been interrupted because access to the insured premises has been prevented or hindered by legally enforceable action(s) due to an occurrence of Covid-19 within the close vicinity of the insured premises.
Read below for more detail on this important judgment.
The Court’s findings
- The judgment has been met largely with approval in the media. As hoped for by the FCA and policyholders alike, the judgment clarified key elements of the BI language used in property policies and confirmed that many of them will provide some cover for policyholders that have been affected by the Covid-19 pandemic.
- The Court was asked to consider three broad categories of BI policy wordings namely (i) disease wordings – which provide cover for BI losses sustained in consequence of, following or arising from the occurrence of a notifiable disease within a specific radius of the insured premises; (ii) hybrid wordings – which provide cover for BI losses sustained where restrictions have been imposed on the insured premises in relation to a notifiable disease; and (iii) prevention of access/public authority wordings – which provide cover for BI losses sustained where access to the insured premises has been prevented or hindered as a consequence of authority action/restrictions owing to an emergency in the vicinity of the insured premises. The Court was not asked to consider any ‘physical damage’ (or equivalent) wordings used in BI policies.
- In its decision, the Court considered 21 different policy wordings from eight insurers, which were considered to be of wide application in relation to BI insurance. However, even though the decision is technically only binding on the insurers subject to the proceedings, and then only in relation to the policies considered, the decision has still provided helpful clarity on how certain clauses and phrases should be interpreted in the context of Covid-19.
- In this alert, we look at what this decision means for policyholders who are seeking an indemnity from their insurers for BI losses sustained due to the Covid-19 pandemic and the impact of the associated UK Government guidance and/or regulations. In particular, we will focus on the prevention of access policy wordings which may, as a result of the decision, present more of a challenge to policyholders when seeking an indemnity under such wordings for Covid-19-associated BI losses.
- We have set out below a series of questions on which it might assist policyholders to focus when evaluating whether or not they benefit from BI coverage.
Question 1: What type of policy wording do you have?
- The first step for a policyholder will be understanding what type of wording it benefits from, and in particular whether it falls within the broad categories outlined above – a disease wording, hybrid wording or prevention of access/public authority wording. We discuss below key findings of the Court in relation to the construction of important terms within each of these three categories. Again, however, owing to the Court’s stricter interpretation of the prevention of access wordings and, therefore, the higher likelihood of potential challenges to coverage from insurers, we have focused more on the Court’s discussion of the key terms in those wordings. This analysis should help policyholders evaluate and consider their claims to help increase their chances of a strong recovery.
Question 2: What category does your business fall into and how did the UK Government’s announcements and regulations impact your business?
- It is important for policyholders to consider the relevant factual time line of the UK Government’s announcements and subsequent legally enforceable regulations, which have determined if and when any type of business needed to close in light of Covid-19. The Court considered the impact of the key UK Government announcements/guidance and regulations and how they affect available coverage under each specific policy. The key dates determined by the Court, along with a summary of the seven categories of business, are found in the annex to this article.
- Particularly in relation to prevention of access wordings, it will be important for a policyholder to determine if and when its category of business was ordered to be closed by the UK Government and how the closure operated (for example, in relation to restaurants, whether the policyholder continued to run a takeaway business while closing the eat-in aspect of the business).
Question 3: What key terms feature in your policy?
Prevention of access/public authority wordings
- These policy wordings2 were construed by the Court more restrictively than the disease wordings, such that cover will only be provided where there was an emergency in the close vicinity to the insured premises, which resulted in mandatory action that prevented the access to the insured premises. The key findings in relation to this type of wording, to which policyholders should pay close attention, are as follows:
- Location of the emergency and the causal relationship with the authority’s action: Under these policy wordings, coverage will be available if, amongst other things, an emergency endangering life occurs in the vicinity of the insured premises. Broadly, in the model wordings discussed in relation to the prevention of access wording, ‘vicinity’ was undefined, leaving the Court to construe its scope. The Court agreed that “the vicinity of premises is an elastic concept, but it does connote neighbourhood”,3 meaning that the relevant emergency needed to occur in the immediate neighbourhood of the insured premises. The Court considered that, unlike the disease wordings, the prevention of access wordings were designed primarily to respond to an ‘event’ or ‘incident’, like a gas explosion or bomb scare, so ‘vicinity’ in this respect was construed narrowly and therefore limited cover to a localised occurrence of a disease, rather than a more widespread outbreak. The relevant authority’s action had to be in response to a local occurrence of Covid-19 and general action taken in response to the pandemic would not be sufficient to trigger coverage. Therefore, should there be a requirement for the triggering emergency to occur in the ‘vicinity’ of the insured premises, we advise that the policyholder obtains as much information as possible demonstrating the prevalence of Covid-19 in the immediate neighbourhood of the insured premises to strengthen the chances of being indemnified for relevant BI losses (see paragraph 27 below for more information on ‘prevalence’).
- The nature of the “actions” of the authority: Policyholders who chose to close their businesses (however understandable the reasons) prior to any legally enforceable order being given by the UK Government may find, depending upon their policy language, that they are not indemnified for BI losses incurred prior to that order. The Court held that any action by an authority which 'prevents' access requires steps that are legally enforceable – as only this will prevent access; and a restriction ‘imposed by an order’ must be a mandatory restriction and not merely advisory. Therefore, the UK Government’s 'announcements' on 16, 20 and 23 March 2020 were insufficient to trigger cover with such wordings, albeit that the regulations issued on 21 and 26 March 2020 may be enough to trigger cover. By contrast, if the policies contained ‘advice’ wording in relation to the authority action, then the 16, 20 and 23 March 2020 announcements may be sufficient to trigger cover. With that in mind, particular attention should be paid to the wording used to describe the nature of the public authority action that is required for coverage to be available for BI losses.
- The required effect of the authority’s action on the access to the insured premises: The Court found that, where policies say that there must be a ‘prevention’ of access due to authority action, this did not need to rise to the level of physical prevention of access, but this required a higher obstruction than ‘hindrance’ of use. Essentially, there had to be a closure of the specific insured premises carrying on the business. If a policyholder can invoke ‘hindrance’ (as opposed to ‘prevention’) language, the coverage available under the policy may be broader. The Court held that “‘Prevention’ is to be contrasted with and is not synonymous with ‘hindrance’. In Tennants (Lancashire) Ltd v. CS Wilson & Co Ltd  AC 495, Lord Atkinson at 518 defined the distinction between prevention and hindrance in these terms: “‘Preventing’ delivery means, in my view, rendering delivery impossible: and “hindering” delivery means something less than this, namely, rendering delivery more or less difficult, but not impossible.’” 4 Policyholders should therefore review the wording closely to identify the extent to which the public authority action has to effect the insured business in order to trigger coverage.
- Required effect on the insured’s business: It will also be important for policyholders to consider the level of interruption or interference the public authority action has to have on their business in order to trigger cover. It was held that 'interruption' to the business did not require a complete cessation of business, but that it could encompass disruption and interference. However, careful attention should still be paid to the wording used, as, in one policy,5 it was held that interruption was strictly interpreted as cessation of the business.
- Infectious disease exclusions: The Court held that the infectious disease carve-out in two policies6 applied such that no cover was available for those policyholders for their BI losses caused by an order or advice of a competent local authority, as a result of an infectious disease, that resulted in the closure of, or restriction in, the use of the insured premises. Special attention should therefore be paid to whether the policy contains any infectious disease exclusions that would seek to limit or exclude completely any BI losses incurred as a result of Covid-19.
- The Court largely favoured the submissions by the FCA on the interpretation of these clauses. These policies provided cover for BI losses sustained in consequence of, following or arising from the occurrence of a notifiable disease within a specific radius of the insured premises.
- The Court agreed with the FCA’s case that the proximate cause of the BI losses (i.e., the predominant or nearest cause of the loss) was the occurrence of the notifiable disease and that because of the nature of diseases like SARS (which was expressly featured in some of these policy wordings and akin to Covid-19) it cannot be said that individual outbreaks of these diseases are separate from the greater spread of the disease (i.e., a pandemic). Alternatively, the Court held that each individual occurrence of Covid-19 was a separate but effective cause of UK Government action(s) (albeit the Court noted they were less satisfied with this explanation) – see also paragraphs 21 to 23 below regarding causation.
- Occurrence: The Court held that an insured does not have to prove that there was actual diagnosis of Covid-19 in the relevant area – just that one person infected was in the relevant area. There will be an ‘occurrence’ of Covid-19 from the time where at least one infected, albeit diagnosable (i.e., whether or not actually diagnosed or symptomatic) person was in the relevant area.
- Vicinity: The Court also found that claims made under disease wordings will not be limited by the requirement that there is an occurrence of Covid-19 in the ‘vicinity’, in contrast to the prevention of access wordings. This is because notifiable diseases listed under these policies included diseases that were capable of widespread dissemination, like SARS, and would attract national not just local action – which the parties must have known. This meant that cases of Covid-19 within the specific policy area cannot be found to be independent or separate from cases of Covid-19 from outside the specific radius. Additionally, the Court observed that these policies did not expressly state that the notifiable disease could only occur within the radius (it was whether it came near the insured premises). Therefore, cover would be available for BI losses where an occurrence of Covid-19 occurred both inside and outside the specific policy radius. This should largely be good news for policyholders with disease wording as, owing to the pandemic status of Covid-19, both the occurrence and vicinity requirements should be met.
- The Court found that, in principle, the hybrid wordings7 (being an amalgamation of both the disease wordings and the prevention of access wordings) did provide cover for BI losses arising from restrictions imposed on the insured premises in relation to Covid-19. Nonetheless, attention needs to be paid to the effect of the UK Government restrictions on the particular policyholder’s business to determine whether coverage will be provided.
- Importantly, the Court clarified that where a public authority’s actions, in light of a disease, result in an insured’s ‘inability to use’ the insured premises, this requires more than just an impairment of normal use. Therefore policyholders will need to carefully present how the 21 March 2020 Regulations and/or 26 March 2020 Regulations prevented business operations. We expect to see discussions with insurers about the application of this to specific businesses, for example restaurants adapting to offer takeaways and hotels offering accommodation to key workers. The Court made a distinction in this context between a restaurant that never provided takeaway food and beverages to one which did prior to the occurrence of Covid-19 at a more than de minimis level, the former being more likely to mean that the insured was ‘unable to use’ the insured premises – even though the regulations allowed for takeaway food and beverage services to continue. The specific nature of the policyholder’s business will be very relevant to determining whether or not coverage is provided under the hybrid wordings.