The second wave of COVID-19 litigation

This article first appeared in Insurance Day, September 2021.

The FCA test case is widely regarded as having resolved a plethora of issues in COVID-19 business interruption claims. Unsurprisingly, it did not resolve everything and certain issues were not tackled as part of or fully resolved by that case. These issues have started appearing in what might be called the second wave of litigation, and other areas of contention have emerged that are prime for future legal challenges, meaning that insurers are operating in a still uncertain landscape.

Coverage issues

Notwithstanding the clarity brought by the FCA test case, business interruption coverage questions around specified diseases, damage to property, denial of access, cancellation and disease at the premises have been recently brought before the courts.

Specified diseases

In Rockliffe Hall v Travelers, a claim was made for business interruption losses at the claimant’s spa hotel and golf resort resulting from outbreaks of “infectious disease”. “Infectious disease” was defined in the policy as a closed list of 34 diseases, which included ‘plague’, but not COVID-19 (or SARS).

The court rejected the arguments raised by Rockliffe Hall that certain of the listed Infectious diseases (including ‘plague’) should be interpreted as including COVID-19; Rockliffe Hall’s claim was struck out.

Loss of/damage to property

In TKC v Allianz, TKC asserted that the business interruption section of the policy responded to the business interruption losses (deterioration of its stock and the temporary loss of use of its premises) suffered as a result of the closure of its café restaurant in compliance with the 21 March 2020 Health Protection (Coronavirus, Business Closure) (England) Regulations 2020.

The property damage section of the policy responded to “damage to property insured at the premises”, “damage” being defined as “accidental loss or destruction of or damage to property insured”.

The business interruption section of the policy provided cover for “business interruption by any event”, “business interruption” being defined as “loss resulting from interruption of or interference with the business carried on by the insured at the premises in consequence of an event to property used by the insured at the premises for the purpose of the business”.

An “event” was defined as “accidental loss or destruction of or damage to property used by the insured at the premises for the purpose of the business”.

There were no non-damage extensions of cover as were dealt with in the FCA test case.

The court summarily dismissed the action finding:

  • The word ‘loss’ in the property damage section usually (though not invariably) has a physical element.
  • Mere temporary loss of use is not “damage” as that expression is defined in the property damage section of the policy and so is not covered under that section.
  • The enforced closure of TKC’s premises was a business interruption as defined in the policy. The policy, however, only responded to business interruption by any event and the enforced closure could not properly be said to be an event in that it was not an “accidental loss…of…property”.
  • It was wholly unrealistic to suggest that the deterioration in the stock held at the premises during the period of closure caused relevant business interruption. The deterioration in stock was a consequence of, not a cause of, the interruption or interference such that TKC was confusing cause and effect.
  • The natural process of the decay or deterioration of unsold stock is not ‘accidental’ in the sense that the word is used in the definition of “event” in the policy.
  • The natural process of the decay or deterioration of unsold stock was not ‘accidental’, but was for the purpose of exclusions in the policy an ‘inherent vice’, ‘gradual deterioration’ and/or ‘change in temperature, colour, flavour, texture or finish’.

In Concept Group Limited v FM Insurance, business interruption losses (including from customer’s failure to make payments due and a reduction in new business due to the pandemic) were claimed under an “all risks of physical loss or damage” cover where FM Insurance also agreed to cover various types of business interruption loss resulting from insured property damage. A decision has not yet been handed down in this case, but it is unclear how this claim might fare given the findings in TKC v Allianz.

Competent local authority

In the FCA test case, the Divisional Court determined that the phrase ‘competent local authority’ in an infectious disease carve out to a prevention of access provision in a policy issued by Ecclesiastical should be read as embracing the UK Government.

Since then, Lord Mance acting as a sole arbitrator in a non-confidential arbitration between various policyholders and China Taiping Insurance has issued an award finding that the UK Government was not a ‘competent local authority’ for the purposes of a Denial of Access extension of business interruption cover. Lord Mance distinguished the FCA test case on its specific policy wording and context, and determined that effect should be given to the natural and objectively intended meaning of the contractual language.

NDDA/AOCA clauses

Corbin & King v AXA is the first case questioning a potential disparity in outcomes between the High Court and Supreme Court decisions in the FCA test case.

Corbin & King are owners and operators of restaurants, cafes and other establishments including The Wolseley and The Delaunay Restaurants. In April 2021, they commenced an action under Denial of Access (Non Damage) cover (NDDA) that provides business interruption protection where access to premises is restricted or hindered by actions of police or a statutory body in response to a danger or disturbance at or within a radius of the premises.

The High Court in the FCA test case determined that government action in imposing regulations in response to the national pandemic could not be said to be following a danger in the vicinity as the undefined term “vicinity” had a local connotation.

The FCA did not appeal this point and so the matter was not considered further by the Supreme Court. However, the Supreme Court’s determination on causation (i.e. each case of COVID-19 was a separate and equally effective cause of the government restrictions and that interruption was a result of government action taken in response to cases of disease which included at least one case of COVID-19 within the radius covered by the relevant clause) has led to questions as to whether that reasoning also applies to NDDA and AOCA (Action of Competent Authority) clauses.

Corbin & King argue that government action (on three separate occasions in March, September and November 2020) was imposed in response to a “danger” to life and health, which was constituted by every single actual or threatened case of COVID-19 at each of the premises or within the relevant radius as well as elsewhere in the UK, each of which was a separate and equally effective cause of that action.

Given that this action was only recently commenced, it may be some time before a decision is handed down by the court and insurers should watch this space.

Cancellation

In World Challenge v Zurich, World Challenge (who provide adventurous expeditions for school students) has claimed an indemnity for deposits or advance payments that it says it was obliged to refund for expeditions due to depart between 1 March 2020 and 31 August 2020, which were cancelled as a result of COVID-19 and/or government travel advice and restrictions.

It further claims damages for late payment under Section 13A of the Insurance Act 2015, which may make this case one of the first to claim such damages.

Zurich’s reported position is that the indemnity is limited to covering deposits World Challenge makes to third parties (not challengers), and that World Challenge is not entitled to any indemnity that would have the practical effect of providing business interruption cover.

Again, this action was only recently commenced so it may be some time before a decision is handed down by the court and insurers should watch this space.

Disease ‘at the premises’

The FCA test case resolved questions concerning whether there was an occurrence of disease within a radius or vicinity of insured premises. It did not deal with clauses requiring an occurrence of disease at the insured premises.

The FCA recently asked insurers to update their list of policies affected by the FCA test case to include ‘disease at the premises’ wordings, which suggests that such wordings should be similarly capable of responding. A number of insurers, however, have not accepted cover and it is anticipated that the ‘at the premises’ cover is prime for future litigation. In respect of such cover, the FCA has noted that a policyholder will need to prove that COVID-19 occurred at the premises at the relevant point in time in order to support a valid claim, which may be difficult.

Quantum issues

As well as coverage, issues around quantum have recently been presented to the courts.

Aggregation

In Stonegate v MS Amlin & Ors, Stonegate (who own and operate 760 UK hospitality businesses) claimed £845 million of business interruption losses relating to COVID-19 under a Marsh Resilience wording. Insurers agreed to provide an indemnity limited to £17.5 million (£14.5 million of which has already been paid).

The issues primarily concern whether there are multiple triggers and multiple limits/sub-limits applying in the policy. Stonegate claims an indemnity under the policy in respect of three separate perils:

  1. A notifiable disease at or within the vicinity of an insured location
  2. Enforced closure of an insured location
  3. Prevention of access – non-damage.

It considers that each of its 760 premises is a separate insured location, which has suffered business interruption as a result of three separate perils covered by the policy (although not uniformly as to amount, time period or trigger), and that cover under each peril is triggered on multiple occasions (i.e. on a per occurrence per premises basis (notifiable disease), per closure per premises basis (enforced closure) and per advice per premises (prevention of access)), leading to multiple applicable limits. AICW, claims preparation costs and public relations crisis management costs are indemnifiable in addition with multiple sub-limits applicable in the same manner and a maximum indemnity period of 36 months is said to apply.

A similar claim is advanced in Various Eateries v Alliance. Various Eateries claimed £16 million of business interruption losses (plus AICW and claims preparation costs) relating to COVID-19 under the Mash Resilience wording and Allianz agreed to provide an indemnity limited to £2.5 million (which it has already paid) on the basis that COVID-19 and its effects are aggregated as a single business interruption loss under the policy.

Both actions have only recently been commenced and so it may be some time before decisions are handed down by the courts.

Direct losses

In Everatt v Aviva, Everatt (a firm of solicitors) took out solicitor’s office insurance cover that indemnified against loss resulting from business interruption. Following the lockdown on 23 March 2020, Everatt claims to have been unable to work from the premises or to otherwise work efficiently. Aviva confirmed that the claim was covered under a prevention of access extension to the policy and a disagreement arose regarding quantum. Aviva is reportedly arguing that it is only liable for lost income as a direct result of Everatt not being able to conduct business from its premises during lockdown, with such losses being capped at £50,000. Losses attributable to the wider effects of COVID-19 are not considered covered. A decision by the court is awaited.

Government support

There have been various forms of (widely adopted) government support available to policyholders throughout the pandemic. Following complaints about insurers factoring in this support when making business interruption claim payments, the FCA issued guidance on whether it is appropriate to make such deductions. It recommended a case by case assessment, taking into account factors such as the exact type and nature of the support, how it was used and the precise terms of the policy.

The FCA subsequently clarified that certain government grants could not be treated as turnover or as savings for the purpose of deduction.

The position is not accepted by all insurers and the FCA has warned that it may intervene where insurers are not meeting its expectations. This is an area where many anticipate future litigation. In Stonegate (discussed above), the claim does not deduct amounts received by Stonegate through furlough or other government support and this may become an issue for determination in this case.

Comment

The FCA test case was never expected to resolve all of the issues arising out of COVID-19 business interruption insurance claims. These further cases will hopefully provide some of the clarity required to finally resolve the ongoing claims.

At this stage, it is clear that if COVID-19 does not fall within a closed list of specified diseases there will be no cover for losses arising from it and that loss/damage (depending upon how it is defined in any particular policy) may require physical damage. Less clear is whether a ‘competent local authority’ encompasses the UK Government, which will depend upon the context and particular wording of a policy. In this regard, insurers must be careful in seeking to extrapolate the determinations in the FCA test case across to other policy wordings and contexts. Coverage under each policy must be determined on its own merits.

The courts are presently tasked with determining whether there may be cover under NDDA/AOCA clauses and whether multiple triggers and limits/sub-limits apply. They are likely in due course also to be tasked with determining the responsiveness of ‘at the premises’ cover and what appropriate deductions in relation to government support can be taken from insurance pay-outs, meaning that insurers will have to keep fully advised of the developing landscape – while not falling foul of any late payment claims.

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