Occurrence of COVID-19

The court has confirmed that COVID-19 is a human infectious or contagious disease, which became notifiable on 5 March 2020 in England and on 6 March 2020 in Wales.

A medical professional, or medical testing, is not necessarily required to verify whether COVID-19 has occurred in the relevant policy area.

The various policy wordings subject to the case had specific triggers for occurrence (for example, “sustained”, “manifested”, “within 25 miles”) but in all cases, COVID-19 was found to have occurred.

Specifically in relation to RSA4 policy wording, COVID-19 was deemed to have been a notifiable disease since 31 December 2019.

Prevalence of COVID-19

At the consequentials hearing, the court heard submissions from parties on the prevalence of COVID-19 and the evidence that a policyholder would need to produce to demonstrate an occurrence.

Firstly, the court has confirmed that the burden of proof lies with policyholders to prove the presence of COVID-19 within the relevant policy area.

Whilst the court has maintained that what evidence may prove actual prevalence of COVID-19 will depend on the particular factual context, the relevant policy area, and the timing and location of any given claim, it has, nonetheless, provided some important and useful clarifications on the types of evidence that could discharge the insured’s evidential burden.

The below are examples that the court declares “could” be used “in principle” to prove the prevalence of COVID-19 in a particular policy area and on a specific date, and therefore potentially discharge that evidential burden:

(a) Specific evidence of a case or cases of COVID-19 in a particular location within the relevant policy area.

(b) Data published by NHS England on a daily basis recording deaths of individuals in hospitals having tested positive for COVID-19, where one or more deaths have been recorded on a particular date. All hospitals in the particular NHS Trust must be within the policy area.

(c) Weekly data published by the Office for National Statistics recording deaths in England and Wales by local authorities or health boards, where the death certificates reference COVID-19. Again the local authority or health board must be entirely within the relevant policy area.

(d) Data published by the UK government recording the number of daily laboratory confirmed positive results of COVID-19 in a particular region.

(e) Geographic distribution analysis of COVID-19 cases.

(f) Undercounting analysis – given that the likely true number of cases of COVID-19 in the UK in March 2020 was much higher than that shown in the reported cases, an undercounting analysis could be a way of demonstrating the likely number of actual cases of COVID-19 in the relevant policy area.

Absolute precision is not required to discharge the burden of proof. The court did, however, confirm that the FCA cannot use the above types of evidence or analytical methods to establish any rebuttable presumption. The court has, therefore, maintained caution in holding back from definitively saying, on a blanket basis, whether a particular type of evidence would discharge the burden of proof in certain circumstances. Establishing a prevalence of COVID-19 in the relevant policy area will remain a fact-intensive exercise, which the courts will consider on a case-by-case basis.

Policyholders might want to rely on multiple sources of information where possible, to ensure that the best available evidence is presented to insurers on notification of a claim.

Public authority action

The court helpfully confirmed that ‘the UK government’ includes the following policy terms:

‘government’, ‘governmental authority or agency’, ‘public authority’, ‘competent public authority’, ‘civil authority’, ‘competent civil authority’, ‘competent local authority’, and/or ‘statutory authority’.

Trends clause

As explained in previous updates, the basic cover provided in BI policies is for loss of gross profit as a consequence of an insured peril in reference to the standard turnover of the business. The trends clause, in principle, acts to adjust this formula to take into account any overarching trends in the business.

In its Judgment, which is reiterated in the declarations, the court held that the starting point in a loss assessment is to put the insured into the position it would have been in had the insured peril not occurred (i.e., all COVID-19 impacts must be disregarded when establishing the insured’s turnover).

Put another way, the correct counterfactual when calculating an indemnity is to assume that once cover under the policy is triggered, none of the elements of the insured peril were present, which for:

(a) disease clauses means after the date on which cover under the policy is triggered there were no COVID-19 cases in the UK, or any public authority or public response thereto (the court has not decided and does not declare whether the correct counterfactual does or does not retain the existence or effect of any public authority or public response to COVID-19 which was instigated prior to the time when cover was triggered under the policy, but which was continued after that time);

(b) prevention of access clauses means (for example) no prevention or hindrance, no government action and no emergency; and

(c) hybrid clauses means (for example) no inability to use the premises, no public authority restrictions and no COVID-19 in the UK.

It was also held that the trends clause should extend to ‘non-damage’ sections of a policy.

In relation to causation, the declarations now provide further clarity, on a sample policy-by-policy basis. The court confirmed that the occurrence of COVID-19 within a relevant policy area is to be treated as a single, indivisible cause (namely, the national COVID-19 outbreak and the governmental and public reaction) of any business interruption. Alternatively, each such occurrence of a case of COVID-19 is to be treated as a separate but effective cause of national action and any consequential business interruption.

The court confirmed that the correct counterfactual when calculating an indemnity is to assume that once cover has been triggered none of the other elements of the insured peril were present. What amounts to a circumstance will be a question of fact and construction of each individual policy.

The FCA has stated that it will now publish a guide to assist policyholders in understanding how the declarations may impact their individual policies.

The Appeal

As anticipated, the FCA, the Hiscox Action Group, and six (of the total eight) insurers have now confirmed their intention to appeal to the UKSC by filing an application setting out their respective grounds of appeal.

Meanwhile, Zurich and Ecclesiastical have decided not to pursue an appeal. This is unsurprising following the FCA’s decision not to appeal the court’s finding that Zurich’s and Ecclesiastical’s respective sample policies did not provide cover for BI losses arising as a result of COVID-19.

The FCA has filed four grounds of appeal:

1. Total closure – the FCA says the court was wrong to find and declare that the prevention of access wordings and hybrid wordings are only triggered by complete closure of the business for the purposes of carrying on the business, or almost total inability to use the premises, respectively. This will be welcome news for policyholders who found ways to stay open, but suffered losses nonetheless.
2. Mandatory / force of law – the FCA says that the court was wrong to find and declare that only the imposition of legally binding prohibitions (the 21 March and 26 March Regulations) could satisfy the triggers “restrictions imposed”, a denial or hindrance in access “imposed”, “action”, “closure or restrictions” and “enforced closure”.
3. Incident / Event and nature of disease clause cover – the FCA has cross-appealed the court’s QBE2-3 finding that the disease wordings are uniquely confined to local outbreaks only.
4. Quantum – the FCA has sought clarification on the apparent tension between the court’s suggestion that, in circumstances where COVID-19 has already depressed revenue prior to the triggering of a policy, the insured would not be able to recover losses to the extent that COVID-19 would have depressed revenue anyway. That contention appears to be inconsistent with a number of the court’s other findings, in particular that the intention is to put the insured in the position as it would have been in if the insured peril, including all its elements, had not occurred. This will be important to businesses that closed on their own volition, but feel that the court here is rewarding business owners who ignored the outbreak until they were ordered to close.

The Hiscox Action Group has appealed on similar grounds.

1. They say that the court had misconstrued the meaning of “restrictions imposed” and had given the words an unrealistic and uncommercial meaning in deciding that it could only include something mandatory that has the force of law.
2. They also contend that the court should have held that, if there was a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered, then it is not appropriate for the counterfactual to take into account the continuation of a measurable downturn and/or increase in expenses in calculating the indemnity payable.
3. Specifically in relation to the Hiscox 1-4 wordings, the Hiscox Action Group state that the court erred in finding that “inability to use” means something significantly different from ‘being hindered in using’ or similar. The correct construction is that “inability to use” refers to the inability to utilise or employ the premises for its intended aim or purpose.

Six insurers have also made applications for permission to appeal. Each of their appeals focuses on specific points of law arising out of their individual policy wordings. Key themes include:

1. The insurers contest the court’s finding that COVID-19 is a single, indivisible cause. The insurers have argued that there is no concept in English law of a “part of an indivisible cause”, and that the test of causation is not satisfied by characterising the relevant event (“the occurrence of the disease within the area”) as being “part of” a wider event or concept (i.e., the COVID-19 pandemic). Instead, the insurers argue, the court should have applied the ‘but for’ test and should have asked whether, but for the relevant insured peril, the policyholder would have suffered the same loss, in any event.
2. Certain insurers challenge the court’s interpretation of composite peril wording, and in particular, whether certain extension clauses establish a composite peril. The insurers have argued that the court wrongly construed the insured peril as a composite peril of interruption or interference with the business during the indemnity period following a disease event, as opposed to the disease event. Having done so, the court wrongly dispensed with the requirement that the peril (i.e., the disease event) must be the (or a) proximate/effective cause of the loss.
3. The insurers disagreed with the court’s approach to the Orient-Express case,^[1] and its consequent application to the trends clause. In the Orient-Express case, damage to a New Orleans hotel following Hurricane Katrina was found not to have caused loss when the damage to the surrounding area would have resulted in the same loss in any case. In that case the insured peril was construed narrowly to mean just damage to the hotel itself, so in the counterfactual, the only fact that was stripped out was the damage to the hotel itself, meaning the wider damage to the area and subsequent evacuation of the area would still have happened and thus the insured would still have suffered the same loss. The court found that Orient-Express should not be followed as it was distinguishable from the present case but stated that, in any event, it was also the court’s view that it was wrongly decided as the effect of that construction of a trends clause renders the cover illusory. However, the insurers argued that there was no basis for distinguishing the analysis of the tribunal and the court in Orient-Express, and that the analysis was correct and reflects orthodox principles of causation.

Several of the insurers appealed on a number of other grounds. For example, RSA, in relation to its sample hybrid wordings, appealed on grounds in addition to those mentioned above, including that the court wrongly concluded that any proximity requirement in the disease/hybrid clauses was no more than an adjectival qualification with the consequence that, provided there was at least one case of the disease in the relevant geographical area, the policies would respond to the national pandemic. We refer you to the specific grounds of appeal of each insurer (available on the FCA website) for further information.

Next steps

It is understood that the UKSC will hear the appeal before the end of the year, although it is unclear when a judgment would then be expected. However, given the expedited basis on which the test case has progressed to date, we expect that it will continue to follow that same trajectory.

The end may, at last, be in sight for policyholders desperately wanting the certainty that it was hoped the test case would afford them. We will continue to follow this case closely.

If you need any assistance with your BI policy, or would like to understand more about this important test case, please contact one of the lawyers below.

1. Orient Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk) [2010] EWHC 1186 (Comm)

Client Alert 2020-575