Why UK insurers say coverage for disease within 25 miles does not apply to COVID business interruption

If a client has business interruption coverage for occurrence of a disease within 25 miles of the property that causes a local government authority to place restrictions on the use of premises, this would not cover widespread lockdowns in case of the COVID-19 pandemic, suggests a UK lawyer representing insurers in a coverage dispute.

“If the government imposes restrictions on all areas, regardless of whether there is at the time any case or any serious number of cases, then if the insured cannot show that the disease within 25 miles [caused the insured a loss]…then the insured doesn’t have the coverage,” said Gavin Kealey, a lawyer for two insurers argued July 23 in an eight-day trial before the High Court of England and Wales.

The trial, which wrapped up last month, is a test case launched by the UK Financial Conduct Authority (FCA).

FCA is arguing that nothing in the policy wordings at issue deny or reduce coverage if the loss was caused by COVID-19 more generally; not just by a case of COVID within a certain distance of the premises.

To that, Kealey replied, stating the insurers’ rebuttal: “If the government only imposes restrictions where there are outbreaks, and one of those areas is covered by the policy, then the insured can readily show not only disease within the requisite area but also causation.”  Kealey’s remarks were contained within a court transcript of the eight-day trial July 23. A decision is anticipated in mid-September.

Related: Why insurance regulator says this ‘notifiable contagious disease’ clause covers BI in pandemic

The UK regulator and insurers are making arguments in a test case that covers more than a dozen policy wordings related to business interruption. It is only binding in Britain.

But the test case will still have an impact in the Canadian market, according to Eric Charleston, a Toronto-based associate with Miller Thomson LLP, in an interview before the trial started. The arguments on both sides in the UK will have an impact on lawyers in BI coverage disputes in Canada arising from COVID, he said.

One of the policy wordings in the test case is business interruption arising from a closure or restriction in the use of premises due to the order or advice of the “competent local authority” in respect of “any occurrence of a specified disease at the premises or within a radius of 25 miles of the premises.” This would not pay out in Britain in the case of COVID, insurers in the UK case argue. This is because the losses were caused by government legislation applicable nationwide, the UK insurers argue, which is a different cause than locally-proven cases of COVID-19 within the 25 mile radius of each location.

During the trial, Kealey explained how a clause covering disease outbreak within 25 miles might apply to a measles outbreak at a school. In this hypothetical example, there is a shop whose clients live within three miles of the premises.

“If that is what you have got, if that is the width of your cover , then the fact that there is measles in the local school, which inhibits parents from coming, and therefore inhibits the parents from going to the local shop, et cetera, then you have got coverage,” said Kealey.

Related: How the UK pandemic business interruption test case could play out

One judge hearing the case, Sir Julian Martin Flaux, asked Kealey how coverage would apply if there was a disease outbreak in the West of England affecting multiple areas.

Kealey confirmed that if there was an outbreak of measles within 25 miles of Dorchester that caused schools to close, insurance would be denied to a client if the outbreak in West England still would have caused the closure affecting that business, even if there was not an outbreak within 25 miles of Dorchester.

During the eight-day trial, Justice Flaux and Sir Christopher Butcher (the other judge hearing the case) asked lawyers several times about the purpose of having a 25-mile radius provision in coverage clauses for closures due to disease.

“As a matter of common sense, if you have got COVID within the 25-mile range, which is a pretty big range, depending on where you are in the country, the chances are you have got it all over the place elsewhere. You say, ‘Well, that is nothing to the point, because that is not what insurers have agreed to cover,’” said Justice Flaux.

“That is exactly right,” replied Kealey, who is representing Ecclesiastical Insurance Office plc and MS Amlin Underwriting Limited (part of MS&AD Insurance Group Holdings, Inc.) in the test case, but was arguing during the fourth day of the trial for all insurers in the case.

Feature image via iStock.com/Davizro