The High Court of England and Wales released its decision in a much-anticipated test case on September 15, 2020. The case was brought by the United Kingdom's Financial Conduct Authority (the "FCA"). The FCA brought the proceeding against a number of defendant insurers to clarify uncertainty regarding business interruption coverage for COVID-19 related losses. The decision interprets a wide cross-section of business interruption policy wordings, and we anticipate the decision will have substantial impact on the interpretation of similar policies in Canada.
The Court analyzed legal issues arising out of three types of business interruption coverage, referred to in the decision as "Disease Clauses," "Restriction of Access Clauses" and "Hybrid Clauses" that combine both.
The FCA did not seek clarity on, and the decision does not address, coverage that requires "damage" to the insured property, as there was presumably more market consistency regarding interpretation of those policies. Recent decisions in the United States support the conclusion that COVID-19 generally does not constitute property damage.
Many of the subject policies contain extensions for notifiable diseases, referred to as "Disease Clauses." An example taken from a Royal & Sun Alliance policy is as follows:
We shall indemnify You in respect of interruption or interference with the Business during the Indemnity Period following:
i. occurrence of a Notifiable Disease (as defined below) at the Premises or attributable to food or drink supplied from the Premises;
iii. occurrence of a Notifiable Disease within a radius of 25 miles of the Premises;
The insurers argued that coverage was limited to the consequences of local occurrences of the disease. Otherwise, the insurers cautioned, the radius requirement would be a mere a "check box" for coverage for a larger occurrence, such as a pandemic. The FCA argued that an occurrence of the disease within the radius was all that was required to trigger cover and that the discrete occurrence was not severable from the pandemic as a whole. Therefore, the FCA contended, the business interruption resulting from the pandemic and related government restrictions was caused by the triggering occurrence.
The Court sided with the FCA, concluding that as soon as the disease was diagnosable (and not necessarily symptomatic or actually diagnosed) the coverage was triggered. The Court reasoned that the proximate cause of the business interruption was the disease outbreak, even if the local outbreak within the policy's geographical area was not serious or did not directly cause the loss. Coverage was not limited to outbreaks within the geographical area as there was lack of such express wording in the policies.
This ruling all but guarantees coverage for policy holders with Disease Clause language who have been subject to COVID-19 business interruption, as they only need to prove that one diagnosable case of COVID-19 occurred within the set radius. If they can do so, they will likely be able to recover business interruption losses caused by the wider pandemic.
Two policies with distinct wordings (that required the loss to be "in consequence of" certain "events") were interpreted more narrowly.
Prevention of Access Clauses
A number of policies granted coverage related to the prevention of access to the insured's premises as a result of an order of a public authority, or words similar to that effect. An example taken from an Arch policy provides as follows:
We will also indemnify You in respect of reduction in Turnover and increase in cost of working as insured under this Section resulting from
(7) Government or Local Authority Action
Prevention of access to The Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property.
The FCA contended that the prevention of access related to access for the insured's intended aim or purpose, and that the restriction might be partial or total. The FCA further argued that the insured's inability to use the premises could be caused by restrictions imposed directly on the insured or its class of business or on customers or other people who would be needed to attend the premises if it was to function for its intended purpose.
The FCA contended that an interruption to the insured's activities did not require a cessation or stop. Instead, there would be an interruption to an insured's activities if there was a material prevention of use of the premises.
The Court was unable to rule with finality on these clauses, holding that a coverage determination is necessarily fact-specific. Various factors had the potential to impact the outcome.
Some policy wordings required an order with the force of law, and, the Court reasoned, government action that was merely advisory and not mandatory would not trigger coverage.
Many policies required that access to premises be restricted as a result of the government order/advice. However, the impact on different businesses could vary. The Court did not rule that the restriction had to pertain specifically to the insured or its class of business, though more general restrictions on the public as whole would require a factual inquiry into the impact on the insured.
The Court recognized that a full cessation of business was not required, but that mere hindrance or disruption of use would likely not trigger coverage in most cases. Again, the specific impact on the business would need to be assessed in each case.
A common example, and one cited in the decision, is "prevention of access" clauses for restaurants. COVID-19 prevention regulations closed dine-in service in restaurants but permitted them to continue providing takeaway services.
A restaurant that had never provided meaningful takeaway might be said to meet the standard for having access to their premises restricted and consequential business interruption coverage would be owed. Whereas a restaurant with substantial takeaway business prior to the pandemic, despite relying heavily on dine-in service as well, might not be able to demonstrate the requisite restriction on access.
The analysis of each case will depend on the particular facts and their application to the subject policy wordings. It is possible that two similar businesses with the same policy could have very different coverage positions if one business was able to materially maintain its business activities despite the restrictions.
Underwriters with these policy wordings must assess the following as part of fact-driven inquiry into coverage:
- whether the restrictions were imposed by a public authority or some other non-public entity;
- whether the restrictions were advisory or mandatory;
- whether the restrictions applied directly to the insured or its class of business or only to the insured's clientele;
- how the insured used its premises to perform its business activities before the restrictions were imposed; and
- the specific impact on the insured's business activities after the imposition of the restrictions.
The final type of clause analyzed by the Court combined both Disease Clauses and Restriction of Access Clauses. Generally these wordings provided coverage in the event there was an interruption to the business as a result of a restriction of access order by a public authority following the occurrence of a disease. An example of a policy from Hiscox is as follows:
We will insure you for your financial losses and other items specified in the schedule, resulting solely and directly from an interruption to your activities caused by:
Public authority 13. your inability to use the insured premises due to restrictions imposed by a public authority during the period of insurance following:
b. an occurrence of any human infectious or human contagious disease, an outbreak of which must be notified to the local authority;
The Court combined its two approaches for these clauses, taking a broad view of when a disease occurred and causation, but noting that terms like "inability to use" were to be construed narrowly and would be highly dependent on the facts.
Other Causation Issues – Trends Clauses
In addition to questions of coverage, one of the major issues in contention was the calculation of the loss. The ruling commented on a number of "Trends Clauses." An example from RSA is as follows:
"Under Rate of Gross Profit, Annual Turnover, Standard Turnover, Annual Rent receivable, Standard Rent, Receivable Annual Gross Revenue and Standard Gross Revenue adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Incident or which would have affected the Business had the Incident not occurred so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Incident would have been obtained during the relative period after the Incident." (Emphasis ours)
The Trends Clause is designed to take into account outside factors in order to accurately calculate the business interruption of an insured if the loss had not happened. For example, a business that had just started may be reasonably expected to have a trend of growth but for an insured loss. Conversely, a business that burned down immediately prior to the financial crisis should not be evaluated as though their profits would have stayed as high as they once were. These clauses are also routinely invoked to allow for consideration of market forces such as recession or enhanced industry regulation.
Relying on these clauses, and other constructions of causation, insurers argued that businesses were covered for the losses arising from the discrete insured events alone, not for the widespread economic downturn that arose from COVID-19. The practical implication would be substantially lower business interruption valuations.
The Court rejected this line of argumentation, reasoning that the insured peril, business interruption caused by COVID-19, cannot be the very trend used to downwardly adjust coverage.
Implications of Judgment in Canada
We anticipate that the decision will be appealed, and the FCA has indicated they will seek expedited process.
Subject to appeal, we anticipate that this decision will have major implications in Canada. The issues addressed in the FCA test case are presently being tested in numerous pending class actions throughout Canada. While this decision will not be binding, Canadian courts ordinarily follow decisions from UK courts interpreting similar wordings.
Underwriters must consider this decision and how it will influence their exposure in Canada. Practically, a number of the insurers who were parties to the test case also participate in the Canadian market and will not want to advance inconsistent interpretations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.