COVID-19 BI Insurance Claims: Where We Are Now
By Julian Teoh and Carren Thung, DAC Beachcroft LLP Singapore
It would be over-ambitious to try to capture in one post the extent of uncertainty that has roiled businesses around the world since the emergence of the Covid-19 Pandemic. One contributing cause deserves some attention: amidst the on-off nature of restrictions on business and public gatherings, many insured businesses face the added uncertainty of not knowing whether they might be able to recoup some of their business losses through their various insurance policies.
Most attempts arise in the realm of business interruption insurance. The typical business interruption policy requires a policyholder to prove that there has been material damage indemnifiable under Section 1 of the policy in order to admit a business interruption claim under Section 2. Given the insubstantial nature of infectious disease microbes, it is rare for a policyholder to be able to establish that there has been such material damage to his/her business premises. Already, several COVID-19-related claims have been declined for failure to meet this threshold. However, results may differ where policy wordings vary: in October, a North Carolina court held that the insured’s loss of its ability to use its business premises constituted a “direct physical loss” which was sufficient for the purposes of its BI policy which purported to cover “direct loss to property”.[i]
In contrast, in the case of TKC London Limited v Allianz Insurance plc [2020] EWHC 2710 (Comm), the English High Court summarily dismissed a claim brought by a café operator, holding that the temporary loss of use of the property could not constitute “damage” for the purposes of the Property Damage section of the policy. As a result, the losses arising from the temporary closure of the premises were found not to be covered under the Business Interruption Section, which required the business interruption claimed to arise from an Event elsewhere insured in the Policy.[ii]
But that does not put an end to the matter - some may be surprised to find that their BI policies (particularly in the case of bespoke policies or policies specifically negotiated by professional brokers) contain non-damage extension clauses that expressly engage coverage even where there has been no material damage. However, whether these clauses can extend to cover losses arising from COVID-19 related shutdowns is highly dependent on the facts of each claim and the precise wording of the extension clause in question. Even in the instances when coverage is confirmed, insureds/insurers face the thorny issues of how to quantify the loss, how trends clauses (if any) might apply, and so on.
Ongoing Developments
The FCA Test Case, which everyone has heard of by now, considered 17 such non-damage extension clauses.[iii] These were mostly extensions addressing Infectious Disease, Civil Authority Orders and Prevention of Access. The judgment was a mixed bag for insureds and insurers alike, with both sides claiming victories on different issues.
On 16-19 November 2020, the leapfrogged appeal of the FCA Test Case decision from the High Court was heard before the UK Supreme Court.[iv] It is unclear when judgment will be delivered, but it is expected to be within the next couple of months.[v]
A detailed look at the wordings of the disputed clauses, and the reasoning of the High Court[vi] (and the Supreme Court) may be the subject of future posts on this blog. In the meantime, it suffices to state that in very broad summary, the legal issues at stake include:
Causation: Where infectious disease extensions provided cover for business interruption / interference “following” or “arising from” or “as a result of” notifiable/infectious diseases manifesting within a radius / the vicinity of the insured location, the High Court determined that cover was not limited to the effects of local outbreaks that only occurred within the specified radius. The insured peril was a “composite peril” consisting of the interference / interruption arising from or following the outbreak of the disease within the defined radius of the premises – given the widespread nature of the pandemic, a national response to counter the pandemic would satisfy the causation requirement notwithstanding that the response was not directed at cases within the radius of the insured premises defined in the policy.
However, where the policy wording provided that the interruption must occur “in consequence of” specified “events”, [vii] the High Court determined that this narrower wording meant that the Insured had to show that the specific cases of disease that caused the business interruption were present within the specified radius of the insured location.
Prevention of Access: Where policies cover losses arising from the prevention of access to the insured premises, it was held by the High Court that the clause was engaged where the lockdowns resulted in a closure of the premises for the purpose of carrying out the business, notwithstanding that the policyholder might still be able to physically access the premises for limited purposes (for example, to carry out maintenance). Interestingly, it also formed the view that the policyholder could also be said to have been “prevented” from accessing its business for the purposes of its existing business if it had to drastically change the type of service that it could provide from its premises. For example, a restaurant that switched to offering takeaway services during the lockdown could be said to have experienced a “prevention of access” if it did not really provide such services before. However, it if had a takeaway service prior to the pandemic, it would not be entitled to claim a “prevention of access”.
Trends / adjustment clause: Insurers argued that the previous case of Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) meant that Insurers were entitled to strip out the effects of the underlying and ongoing pandemic when calculating the quantum of indemnification available to an Insured that succeeded in establishing that an insured peril (the local occurrence of a disease) had occurred. The High Court disagreed and reasoned that the wordings that it was considering referred to “composite perils” – which comprised the prevention of access and/or interruption or interference with the business, and the occurrence of the infectious disease from which these arose. Following this reasoning, Insurers would not be able to separate the effects of the wider, national pandemic from the local outbreaks of disease.
Elsewhere, you may recall that early in the pandemic, we heard of the French case of Maison Rostang v AXA France IARD, where the insurers were ordered to make an interim payment to the policyholder (the operator of two Michelin-starred restaurants) who made a claim under its business interruption policy for indemnification of losses caused by a government-ordered lockdown.
In the course of making this interim order, the French court disagreed with the insurer’s argument that general events such as pandemics cannot be insured. The court also held that the government’s order that restaurants block the public from entering the restaurant ought to be construed as an administrative closure of the restaurant.
As this was an interim proceeding, it was not a conclusive determination of the substantive merits of the case, which was due to be heard later before the Paris Commercial Court. The case is reported to have since been settled privately, with the restaurateur receiving a settlement pay-out.[viii]
Down Under, the Insurance Council of Australia (the representative body for the Australian general insurance industry) also brought a test case before the New South Wales Court of Appeal. However, the issue before that Court was relatively narrow: they sought to have the Court decide if exclusions referring to disease declared under a repealed Quarantine Act 1908 could apply to Covid-19 related claims, when COVID-19 was technically declared under the Biosecurity Act 2015 which replaced the 1908 Act. The Court held that the exclusions could not apply. The ICA has recently decided to appeal. [ix]
In the meantime, the ICA is now calling on the industry to participate in a second, broader test case to consider the other implications of Covid-19 claims on business interruption insurance.[x]
The Way Ahead
The industry should brace for the wave of litigation to continue even after the FCA judgment is released. The judgment will at best shed light only on the interpretation of the 17 specific wordings which were placed before the English courts – anyone, insurer or insured, with a different wording seeking to rely on the Court’s rulings will have to argue by extrapolation at their own risk.
It bears remembering that the ICA may bring a similar test case with its own set of contested issues in Australia. If that happens, the two apex courts may well reach different conclusions. Meanwhile, at least one BI dispute arising from the pandemic has already been filed before the Singapore High Court and will likely be heard in the course of the next year.[xi] All in all, 2021 is shaping up to be another year of tumult, at least in courtrooms around the world.
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About the Writers:
Julian Teoh (ILAS Committee Member 2010-15) and Carren Thung (ILAS Vice President 2019-2020) are insurance lawyers at international law firm DAC Beachcroft LLP (Singapore) specialising in insurance / reinsurance coverage disputes in property, casualty, and financial lines.
Chat with the writers at:
jteoh@dacbeachcroft.com / cthung@dacbeachcroft.com
[i] See North State Deli, LLC, et al. v. The Cincinnati Insurance Co., et al., Case No. 20-CVS-02569 (North State Deli)
[ii] See TKC London Limited v Allianz Insurance Plc [2020] EWHC 2710 (Comm), in particular [119]-[130]
[iii] The Financial Conduct Authority v Arch Insurance and ors [2020] EWHC 2448 (Comm)
[iv] Watch the videos of the hearing here: https://www.supremecourt.uk/cases/uksc-2020-0177.html
[v] The FCA reported that the Supreme Court would not be in a position to hand down judgment before January 2021.
[vi] For the time being, check out DAC Beachcroft’s summary of the High Court judgment at: https://www.dacbeachcroft.com/en/gb/articles/2020/september/judgment-on-fca-business-interruption-litigation/
[vii] Specified “Events” in the policy wording (QBE-2 and QBE-3) included “any discovery of any organism at the premises likely to result in the occurrence of a notifiable disease” and “any occurrence of a notifiable disease within a radius of 25 miles of the premises”
[viii] See https://www.reuters.com/article/us-health-coronavirus-axa-france-idUSKBN23U2IV
[ix] https://www.reinsurancene.ws/the-ica-to-appeal-against-bi-test-case-ruling/
[x] https://www.intelligentinsurer.com/news/australia-s-ica-plans-second-covid-19-business-interruption-test-case-24332
[xi] https://globalarbitrationreview.com/coronavirus/insurer-fails-stay-thai-hotel-owners-pandemic-claim