The interpretation of BI coverage in a COVID-19 context – turning the corner
Following a number of recent Spanish court decisions impacting business interruption (BI) caused by the COVID-19 lockdown, the treatment of BI has significantly evolved. In this article, we take a look at this recent development and its impact on insurers of property policies and their insureds in Spain.
Before we do so, it is worth pointing out that property policies work in a slightly different way in Spain. Of course, typical for every property insurance, there has to be a material loss/damage in the first place, and the consequent BI that would be covered. Spanish Courts have established over the years quite a narrow definition of material 'loss/damage', namely that it has to be tangible, physical damage. Over the past year however, case law has recognised a distinction between 'delimitative clauses' and 'limitative clauses'. The former being clauses that 'delimit' (fixing the limits) or define the scope of coverage and the latter being clauses that, once the scope is defined, limit the rights of the insured (typically by way of exclusions).
Article 3 of the Spanish Insurance Contract Act (ICA) sets a compulsory requirement to highlight limitative clauses (for example, in bold letters) and (more problematically) to have them accepted (i.e. signed) by the insured, except where the risk is a 'large risk' (depending on the size/turnover of the insured company).
Hence, the general acceptance has been that BI due to COVID-19 is not covered, because there is no 'loss or damage' as traditionally understood by the Courts. However, in the last year or so, there have been two main approaches outlined in two Courts of Appeal judgements - one provides a decision based on mere 'formalistic' grounds, the other providing a 'consistent approach' as described below.
Formalistic approach - judgment of the Court of Appeal of Gerona of 3 February 2021
This judgment focused on the formal legal requirements that differentiates 'delimitative clauses' from 'limitative clauses' in policy wordings. The Court held coverage for business interruption claims without material or physical damage to the insured premises should be considered covered.
In this particular case, the insured was a pizza restaurant claiming €6,000 for BI during lockdown. So not a large risk. The policy established coverage for “business interruption as a consequence of a loss covered by this policy as established in Chapter III of the General Conditions 'Property Coverage'" and had also an exclusion in the general conditions for damage or losses caused by a public authority decision. As the general conditions were not signed by the insured, the Court ruled the exclusion was not applicable. On top of that, the Court held that the insured could have reasonably expected to have BI cover because the particular conditions mentioned BI coverage within the corresponding premium.
Interestingly, the Court did not address the question about whether the parties were dealing with a material damage/loss as this had not been raised by the insured’s lawyers.
The Court assumed here an extreme formalistic (and quite creative) approach to the policy wording for justifying coverage for business interruption claims not caused by physical or material damage. This approach has since been followed by approximately 12 other judgments at first instance and in the Court of Appeal.
Consistent approach - judgment of the Court of Appeal of Murcia of 28 February 2022
The other approach, being the 'consistent approach', has recently been confirmed by the Court of Appeal of Murcia. Approximately thirty other decisions have followed this consistent approach.
This Court decision analyses the definition of BI coverage under Section 63 of the Spanish ICA. Under these provisions, BI coverage can be provided as complementary coverage for property damage insurance, or as autonomous coverage.
The Court found that a material physical damage preventing access to the insured premises and causing the interruption period is required for triggering BI coverage. Consequently, there is no coverage for all business interruption events, but only for those arising from a covered loss. Further, there is no specific provision for interpreting that COVID-19 should be considered as a covered loss, or for granting coverage on consequences of public measures as such.
The Court also found that the definition of 'risk' requires a physical damage as a cause of a covered loss.
The Court went on to say that interpretation of the validity of 'limitative clauses' or exclusions comes after analysing whether the loss falls under the scope of the policy. In other words, firstly, it has to be decided whether this is property damage, covered under the property insurance policy, with the subsequent BI coverage being a complementary coverage under property damages insurance (Section 63 ICA).
Even assuming that there are specific provisions providing coverage for circumstances preventing access to the premises for reasons beyond the insured’s control, these are to be interpreted in the general context of the wording, namely to be caused by 'physical loss/damage'. Otherwise, the wording would provide coverage for all business interruption events, which does not follow the contract or the legal provisions (articles 1,285 and 1,286 of the Civil Code).
Since this ruling, other Courts of Appeal have followed this consistent approach, such as the Court of Appeal of Asturias (decisions of 5 April 2022 and 6 April 2022) and Court of Appeal of Gerona (decision of 25 May 2022). Accordingly, the general tendency follows the consistent approach which rejects coverage for BI claims due to COVID-19, but it should nevertheless be noted that:
- None of the decisions constitute a binding precedent (only two Supreme Court decisions confirming the same position are considered binding precedents) and much depends on the specific circumstances of each case (the wording of the policy).
- None of the claims were financially large. The requirement for limitative clauses to be accepted by the insured is not applicable for large claims.
BI litigation due to the COVID-19 lockdown is increasing in Spain, but not as much as initially expected. Two main different approaches have been taken by the courts for resolving coverage disputes, being the 'formalistic' approach that provides grounds for granting coverage but avoids resolution of the key question - whether the COVID-19 situation can be considered a loss or damage for the purpose of property insurance.
The latter approach, a more 'consistent approach' by the Court of Appeal of Murcia, followed by others, denies coverage by ruling that a physical loss or damage is needed to trigger BI coverage under a property insurance.
None of the decisions (using either approach) have been issued by the Supreme Court, and hence, do not constitute a binding precedent. In any case, the outcome of active proceedings will depend on the specific wording provisions and circumstances of each case, and on the approach and interpretation adopted by the Court. We will continue to monitor the situation.