Background
The Court of Appeal decision in London International Exhibition Centre plc v. Allianz Insurance plc & others considered a series of important preliminary issues in connection with five separate claims by policyholders for business interruption (BI) losses suffered following the pandemic. The initial claims were brought by a variety of businesses, including the owner and operator of the Excel Centre in London and several smaller businesses active throughout the UK, mostly in the hospitality sector.
Each of the claimant parties had similar policy wordings that provide cover for business interruption losses if there is a notifiable disease “at the premises” (ATP). This is the first time that this particular wording has been considered by the English court.
As each claimant policyholder had relatively similar ATP disease wording in their BI insurance policies, the cases were heard together. This approach reflects the English courts’ desire to identify “test cases”, where a single judgment can decide issues affecting a large number of individual policies of a certain type.
In June 2023, the High Court decided in favor of the claimants at first instance. Mr Justice Jacobs held that the causation test applicable to “radius” disease clauses should also be applied to ATP clauses. In reaching this decision, Mr Justice Jacobs applied the reasoning of the UK Supreme Court (UKSC) test case of FCA v. Arch, which we covered in a previous client alert.
ATP language
This case provides the first analysis of wordings containing ATP disease cover, as opposed to radius disease cover. While radius disease clauses provide cover for outbreaks of a “notifiable” disease within a certain vicinity of the business, ATP clauses only provide cover for losses due to outbreaks at the specific premises, making their scope narrower and the evidence required to be shown potentially more challenging. Each of the clauses in the policies being considered by the Court contains language that provides for indemnification if the insured’s business is interfered with or interrupted due to a notifiable disease at the premises. Although the exact wording of each clause differs, it was considered that the clauses’ features justify them being assessed simultaneously.
Issues on appeal
The principal issue in the first instance case and the subject of the appeal was the appropriate test for causation; in particular, whether the relevant case of Covid-19 at the premises was a “proximate” or concurrent effective cause of the subsequent order or advice by the relevant local authority to close the relevant premises.
In FCA v. Arch, in relation to radius disease clauses, the UKSC found favorably for policyholders on causation. Specifically, the UKSC disapplied the blanket application of the “but for” test for causation. Instead, the appropriate test (set out by the UKSC) was held to be one of “proximate” cause: each case of Covid-19 was considered to be a concurrent cause of the restrictions and, therefore, even if there was only one case of Covid-19 in the relevant radius before the restrictions were introduced, a policyholder would be entitled to coverage.
In the Court of Appeal, the insurers argued against extending this same approach to ATP wording, which they presented as materially different from radius clauses. Their main arguments were centered on contractual interpretation: firstly, the insurers submitted that the result of the FCA test case was exceptional and based on the specific wording of the radius clauses. Secondly, the unique context of the Covid-19 pandemic was highlighted: according to the insurers, it could not be argued that the policies in this case were intended to provide cover for the historically unprecedented events that occurred. Following this line of reasoning, cover should only be extended when a case of Covid-19 at the premises was an “effective cause” of the closure, as opposed to the closure being a result of a wider response to the Covid-19 outbreak.
In contrast, the policyholders argued that the UKSC’s reasoning on the issue of causation was, in essence, motivated by the highly contagious nature of Covid-19, which made a response based on the presence of the illness at specific premises impracticable. They emphasized that the restrictions introduced by the UK government were a response to all cases of Covid-19 in the UK, whether known or not, and independent of where they occurred.
Decision on causation
The first instance judge, Mr Justice Jacobs, found that the UKSC’s decision on radius disease concurrent causation (i.e., that the case of Covid-19 was a “proximate cause” of the subsequent closure order) applies to ATP wording. Mr Justice Jacobs held that the existence of a radius did not amount to a fundamental difference that would justify the application of a different test of causation to ATP wording.
In an important victory for policyholders, the Court of Appeal agreed with the lower court on causation. However, while the ultimate conclusion was the same, the Court of Appeal’s approach in reasoning differed from the High Court, as it considered that the material question when deciding causation was not whether radius and ATP clauses differed materially. Rather, it considered that the correct approach is to begin with the interpretation of the policies in issue “having regard to their language and context" and consideration of the "presumed common inventions of the parties" (at [59 and 73]).
In acknowledging that radius and ATP clauses were different, the Court of Appeal held that “those differences do not materially affect the nature of the causal link which must be proved” (at [73]).
While Covid-19 was not a known risk as at the inception of the policies, the diseases identified in the policies were those capable of spreading rapidly and widely, with the potential to cause interruption to businesses over a wide area. It was, therefore, unlikely that the parties would have contemplated that business closures or restrictions would be in response only to the occurrence of the disease at the insured premises.
The Court of Appeal further considered that the causation requirement need not be dependent on the relevant local or governmental authority’s knowledge of the occurrence of a disease at the relevant premises. The Court considered that this approach was clear and simple to apply, in contrast with an interpretation that would require the policyholder to establish precisely what knowledge (or belief) the relevant authority had as to the existence of a disease at any given location. This, it was held, also reflects how the words of the policy would be understood by a reasonable person and, in particular, the ordinary policyholder, when taking out a policy of this kind.
Impact for policyholders
All interested parties need to take time to consider the detail of this important judgment. The original FCA test case finding sent a very clear message in support of the policyholders’ position and in favor of coverage, and insurers should have been reserving appropriately.
We are already aware of express exclusions for Covid-19 and similar pandemic-based diseases in policies, and we expect insurers to continue to review wordings closely. Policyholders and their brokers must be aware of any changes in renewal terms and the introduction of new exclusions not found in expiring policies.
It remains to be seen whether insurers will decide to appeal this further. Perhaps, given that the initial decision on causation in FCA v. Arch was given by the UKSC, it might be that further guidance from the highest court is required, albeit the insurers will need to have a clear basis for seeking to distinguish the prior analysis in Arch if they expect a different outcome for an ATP wording.
There remains the challenge of proving the occurrence of Covid-19 at the premises. Policyholders will need to work closely with brokers and specialists to gather the necessary evidence. Further, while coverage might be confirmed, policyholders should still be sure to fully document all costs, expenses and losses in relation to the impact of Covid-19 on their business. Even though a claim may be covered in principle, we expect insurers to scrutinize quantum closely (not least in light of any “trends” clauses that might apply).
The Court of Appeal’s full judgment is available for review on the British and Irish Legal Information Institute’s website.
Client Alert 2024-196
