August 21, 2020 by Greg Meckbach
Whether business interruption coverage for a notifiable human infectious or contagious disease within a certain distance from the client’s premises actually insures closure due to COVID-19 was a hotly contested issue in a British trial that recently wrapped up.
The recent test case before the High Court of England and Wales involves 17 business interruption policy wordings from various insurers providing commercial coverage in Britain.
Essentially the British Financial Conduct Authority is arguing those wordings do in fact provide cover while insurers want to deny coverage.
A verdict is expected next month and is only binding in Britain, but Canadian courts often use, as precedents, court decisions from Common Law countries (including Britain and the United States). Several insurers in Canada are facing breach-of-contract lawsuits because they denied business interruption claims from Canadian clients arising from COVID. Those allegations have not been proven in court.
In the British test case, one of the 17 wordings at issue covers “any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS-related condition) an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty-five (25) mile radius of it.” Another wording at issue is similar but the radius is one mile instead of 25.
An insurer in the test case argues the key question is this: If it was not for the manifestation of COVID-19 within the radius in the policy, would the insured still have suffered business interruption? If the answer is “yes” then there is no coverage, is how the insurer’s argument goes.
During the trial, the judges in the case asked FCA lawyer Colin Edelman what the purpose of the one-mile or 25-mile requirement is, if FCA is arguing this gives coverage for the circumstances of a global pandemic such as COVID that resulted in lockdowns over all of Britain.
“All they are doing is saying the disease must impact in your area for you to be covered,” said Edelman. “So if something happens in London and because politics are said to be London-centric, they shut down the country when there is no incidence of the disease in Manchester, you have no cover. But if, as in this case, the disease is everywhere, it just so happens because of the severity of the epidemic that the period, that the distance requirement does not have the effect of protecting insurers.”
In arguing this clause does not give pandemic coverage, an insurer gives a hypothetical example of two businesses, with this wording, who had to close because of a government emergency order arising from COVID. One is within a mile of a hospital with a COVID patient while another is more than a mile from the same hospital. It is not the intent of the policy wording to cover the business within a mile and not to cover the other business which is more than a mile away when it’s really the pandemic measures that caused both businesses to close, the insurer suggests.
“The critical question is: When you are applying these policies, do you go around the country and for every relevant policy area you take out that jigsaw piece and say, ‘I can just about still see the picture without that jigsaw piece, so you lose?’ So nobody wins, nobody gets paid out for the worst example of a notifiable disease,” Edelman argued for the FCA during the trial.
“So in other words, what these policies are insuring, according to the insurers, is a notifiable disease as long as it’s not too bad a notifiable disease. If it is a really bad notifiable disease, which really impacts on your business, then we won’t insure you. Because if it is a really, really bad disease, we have always got the “but for ” causation test to fall back on.”
With its test case, the FCA is seeking clarity on whether the disputed wordings provide coverage for BI-related to government orders or advice to shut down a workplace. The outcome will be legally binding, in Britain, on the insurers that are parties to the test case — but only in respect of the policy wordings considered by the court. The case is not intended to encompass all possible disputes, nor is it intended to figure out how much is actually payable on those policies.
Some of the insurers in the test case appear to have accepted some BI claims in Britain. But under the wordings at issue in the test case, many claims have been rejected outright, the FCA said in an argument filed this past July.