The Policy

Clause 8.2.6 of the Policy (headed "Murder, suicide or disease") provided as follows:

“We shall indemnify you in respect of interruption of or interference with the business caused by damage, as defined in clause 8.1, arising from:

a) any human infectious or human contagious disease (excluding [AIDS], an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a [25] mile radius of it;

The insurance by this clause shall only apply for the period beginning with the occurrence of the loss and ending not later than [3] months thereafter during which the results of the business shall be affected in consequence of the damage.”

‘Damage’ was defined elsewhere in the Policy – albeit not at clause 8.1 – as “physical loss, physical damage and physical destruction”. It was common ground that, on the facts of the case, no physical damage had occurred.

The Policy was concluded in October 2019, before knowledge of the COVID-19 disease was widely known. The insurer maintained that the Policy was well known for covering business interruption only when there was physical damage to property. Other coverage for business interruption losses without physical damage was available to the insured, but not taken out.

The Insured’s arguments on construction

The key issue before the court was whether the phrases "caused by damage, as defined in clause 8.1" and "in consequence of the damage" should be taken literally. Bellini’s position was that this wording should be disregarded because it rendered the insurance provided by clause 8.2.6 nonsensical. After all, in what circumstances could physical damage to property possibly arise from the occurrence of a disease within a 25-mile radius?

Bellini contended that, therefore, there was a clear mistake in the language used in clause 8.2.6, so the contractual construction principle of "correction of mistakes by construction" from the case of East v. Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111 applied. Bellini submitted that clause 8.2.6 should be understood as if the words, “caused by damage, as defined in clause 8.1”, were deleted and redefined. Those, and subsequent amendments, were argued as being the only way to “make sense” of the Policy.

The Court of Appeal’s judgment

In dismissing Bellini’s appeal, the Court of Appeal held that the principles established in East v. Pantiles were intended to apply to “obvious clerical blunders” and that redrafting was only permissible if something had gone wrong with the language used. Absent an obvious error, the clause would have to be given its natural meaning, even if the effect was that only limited additional cover was provided.

In reaching its conclusion, the Court of Appeal also considered the Supreme Court’s reasoning in Financial Conduct Authority v. Arch Insurance and others (UK) Ltd [2021] UKSC 1 (the FCA test case on business interruption insurance losses) (see our previous articles on this decision here¹). In the FCA test case it was held that, “The core principle is that an insurance Policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean”.

Insofar as Bellini’s Policy was concerned, and by way of further explanation as to why it would not rewrite a clause even if it was effectively redundant, the Court of Appeal pointed to the fact that insurance policies are often “somewhat repetitive” and are sometimes “clumsily drafted”.

Further, the Court of Appeal considered it relevant that the wider clause 8.2 dealt entirely with interruption caused by physical damage to property. As such, a fair reading of the Policy to a reasonably informed small-business-owning policyholder would lead them to conclude that clause 8.2.6 was confined to physical damage only. The fact that coverage for loss suffered as a result of the COVID-19 pandemic was limited did not make the terms of the Policy itself absurd.

Word of caution for policyholders

The Bellini decision is a reminder to policyholders to carefully review coverage offered, including the operation of extensions and definitions to avoid missing out on coverage they believe they are entitled to.

The Court of Appeal’s observations in this judgment are not the first time that English courts have commented on the quality of the drafting of insurance policies (for instance, see our previous article on the Court of Appeal’s decision in Project Angel Bidco Ltd v. Axis Management Agency Ltd [2024] EWCA (Civ) 446²). While we expect insurers to regularly review and update their policy language to ensure consistency and clarity, policyholders should also ensure that they understand the scope of the cover being purchased, whether for the first time or at renewal.

When it comes to policy interpretation, parties (and the court) must do so from the perspective of the environment in which the parties entered into the agreement. Bellini’s case was from October 2019, in a pre-COVID-19 world. Policy wording cannot be interpreted “through the telescope” of the peril that ultimately occurs (in this case, COVID-19 and the government’s response).

What is next?

There remain a number of COVID-19 business interruption coverage disputes proceeding in the English courts, including:

• London International Exhibition Centre Plc v. Royal & Sun Alliance Insurance Pl. An appeal of preliminary issues was scheduled to be held in summer 2024. The trial of the remaining issues is set for October 2024.
• A potential appeal of three issues (including causation and furlough) in Gatwick Investment Ltd T/A Crowne Plaza London Gatwick Airport and others v. Liberty Mutual Insurance Europe SE (permission to appeal has been granted).
• A hearing on preliminary issues of policy construction in Alison Toulson (T/A Kaleidoscope) and 90 other claimants v. American International Group UK Ltd is set for December 2024.
• Midlands Components Ltd v. QBE UK Ltd, regarding the causation of an occurrence of loss caused by separate and distinguishable manifestations of COVID-19 during a policy period.
• Other cases still continuing include: Wahaca v. QIC Europe Limited; CL-2023-000284 and Flat Iron Steak Limited v. QIC Europe Ltd; CL-2023-000349, as well as Arsenal Football Club and others, which is scheduled for a trial of liability issues in early 2025.

The team at Reed Smith will be monitoring these developments closely in the coming months.

For more insights on business interruption claims, listen to our “Insured Success” podcast from earlier this year which focuses on business interruption claims in 2024.

1.  “FCA v. Arch and others – An analysis of the Supreme Court’s final word on business interruption insurance losses in light of the COVID-19 pandemic” (27 January 2021); “The Policyholder Perspective: FCA v. Arch and others – The UK Supreme Court’s final word on business interruption insurance losses in light of the COVID-19 pandemic” (February 2021).
2. “The Policyholder Perspective: Drafting errors must be clear and obvious – a brief look at the English Court of Appeal’s decision in Project Angel Bidco Ltd (In Administration) v. Axis Managing Agency Ltd [2024] EWCA (Civ) 446” (12 July 2024).

Client Alert 2024-165