If a client has business interruption coverage “following” a notifiable disease within a certain distance, while another has coverage for BI “in consequence” of the same disease, one of those clients could be covered for its COVID-19 closure while the other is not, the High Court of England and Wales has found in a much-anticipated decision Tuesday.
In a test case brought by the British regulator, the British court looked at more than 21 business interruption policy wordings that insurers said do not cover the specific circumstances of the business closures in Britain related to COVID-19. The disease was declared a pandemic Mar. 11 by the World Health Organization, resulting in widespread mandatory closures in Britain, Canada and other jurisdictions. Many insurers are being sued after denying BI coverage.
The British court ruling Tuesday followed a trial this past July in a “test case” filed by the U.K. Financial Conduct Authority. While it is only binding in Britain, rulings in Britain’s common law system are frequently cited in Canadian court rulings. That said, the test case did not involve policies requiring property damage for BI coverage to apply. In Canada, the vast majority of BI coverage disputes arising from COVID-19 relate to policy wording that requires physical loss or damage for BI coverage to be triggered, said a Canadian lawyer working for an insurer, speaking on background.
The High Court of England and Wales looked at three broad categories of wordings under consideration, said law firm Herbert Smith Freehills LLP, which represents FCA. One is coverage for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises. Another category of wordings provides cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions. A third was a hybrid.
“The judgment says that most, but not all, of the disease clauses in the sample provide cover,” the Financial Conduct Authority said in a release Tuesday.
Whether the notifiable disease coverage applies to pandemic depends in large part on whether the policy contains “following” or “in consequence of.”
For example, in one case, an insurer provides a BI extension covering “interruption or interference with the business during the indemnity period following” any of seven instances, including “occurrence of a Notifiable Disease within a radius of 25 miles of the Premises.”
Insurers argued that coverage would not apply to the circumstances of COVID-19 in Britain. This is because national restrictions across Britain mean that the client’s business would have been interrupted even if no COVID-19 cases had occurred within 25 miles.
But the court agreed with the FCA on this particular wording. FCA argued that the 25-mile radius provision doesn’t mean coverage cannot apply to diseases with no local appearance. The court agreed with the FCA’s argument that the use of the word “follow” involves a requirement that the notifiable disease within 25 miles “should have a causal connection to the business interruption, but not necessarily one of proximate causation.”
Another policy the court considered covers loss resulting from interruption of or interference with the business “in consequence of” any of the several events, including “any occurrence of a notifiable disease within a radius of 25 miles of the premises.”
In that case, the policy wording draws a distinction between COVID-19 cases occurring within the 25-mile radius and those that do not, the court ruled.
“Insureds would only be able to recover if they could show that the case(s) within the radius, as opposed to any elsewhere, were the cause of the business interruption,” wrote Justices Julian Flaux and Christopher Butcher, who heard the case. “In the context of this clause, it does not appear to us that the causation requirement could be satisfied on the basis that the cases within the area were to be regarded as part of the same cause as that causing the [lockdown] measures elsewhere, or as one of many independent causes each of which was an effective cause, because this clause, in our view, limits cover only to the consequences of specific events.”
The verdict means that some of the clauses covering “denial of access” could provide coverage, but this depends on the detailed wording of those clauses and how those clients were affected by the authorities’ response, the FCA said Tuesday.
The question for the court was whether cover is available “in principle” in the context of the British authorities’ reaction to COVID-19. The test case is not intended to encompass all possible disputes, nor is it intended to figure out how much is actually payable on those policies.
“The judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy,” the FCA said Tuesday.
This is a developing story and Canadian Underwriter will be publishing more reaction from experts.
Industry observers have said whichever side loses will probably appeal.