Business interruption – Covid 19 test case – Commercial Court Financial List – occurrence within a radius of 25 miles – “manifested” – trends clause – Supreme Court appeal
On 15 September 2020 guidance was given on the interpretation of these claims in the light of Covid-19 by the High Court when giving judgment in a test case sponsored by the FCA.
The FCA announced that the judgment would benefit about 370,000 policyholders claiming on some 600 differently-worded policies.
“A big win for insureds and the financial services regulator” was FT Adviser’s pronouncement, but some caution is needed. In all of these cases, the devil is in the detail.
The Court decided that for many policy wordings, local outbreaks should be considered part of a national pattern to which the authorities responded by way of a nationwide response. That means that a policy holder does not have to show some immediate or direct connection between a local occurrence of Covid-19 and the interruption to his or her business.
That overall approach is generous in most cases. But there are more restrictive elements in these policies, the outcome of which will depend on localised facts.
This short commentary looks at some headlines from the judgment by reference to summary policy terms as considered in the judgment. This comes with a strong health warning that the treatment of any policy term always depends on its context.
If you a person or company with a claim which has been denied to you by reference to these summaries, then you may be able to take an informed view about whether that denial deserves a re-think.
It is important to emphasise that these are only summaries. In their own right, a commentary cannot confirm or guarantee a particular outcome. They should be a good start in giving guidance which allows you to understand any response you have already received. They should also help you in considering how to present a claim.
The commentary provided below contains discussions on matters of general principle, so that you will find it helpful to read through them all.
On these pages you will find:
- key dates (which are referred to in the judgment)
- summary policy wordings as to:
Outbreak and place
- the type of outbreaks which may be covered and whether the terms of any claim are limited by spatial distance (e.g. “within 25 miles” or “within the vicinity”)
Cause and effect
- do you have to show a specific connection between the consequences for your business and a particular localised outbreak?
Degree of closure and lack of access
will you have to show that your business has had to close completely, or only partially?
- an issue as to whether or not an insurer can reduce the amount of a payout because of the inevitable effect of Covid-19 (‘Trends and Payments’)
- The Supreme Court appeal
- Useful Links
Some key dates are relevant to the ruling of the Court judgment. This is because they mark the earliest possible times at which an insured can say that the effect of Government measures brought about an interruption to its business activities.
On 5 March 2020 there was a SAGE meeting when it was decided that COVID-19 should be a notifiable disease (this also being the date on which the first death was reported).
This means that on 6 March 2020 COVID-19 was treated as “notifiable disease” across the UK.
On 16 March 2020 the Prime Minister made a statement asking people to stay at home if they had certain symptoms, to shield, to stop non-essential contact and travel, to work from home and to social distance.
On 20 March 2020 the Prime Minster gave further guidance “telling cafes, pubs, bars, restaurant to close tonight as soon as they can. … To be clear, they can continue to provide takeout services. We’re also telling nightclubs, theatres, cinemas, gyms and leisure centres to close on the same timescale.”
On 21 March 2020 the first legally-enforceable regulations were made in England and in Wales (Business Closure Regulations). Regulation 2 required specified businesses to close.
On 23 March 2020 the Prime Minister made an announcement: “from this evening I must give the British people a very simple instruction – you must stay at home. Because the critical thing we must do is stop the disease spreading between households. That is why people will only be allowed to leave their home for … very limited purposes. … We will immediately close all shops selling non-essential items … and we’ll stop all social events, including weddings, baptisms and other ceremonies”.
On 26 March 2020 two further regulations were made in England and in Wales, with a more expanded regime of business closures (Coronavirus Restrictions regulations). Regulation 6 contained a provision requiring people not to leave their homes without reasonable excuse.
Outbreak and place
“First Occurrence of a notifiable disease within a radius of 25 miles”
For the purpose of all the policy wordings considered by the High Court in its judgment, COVID-19 was undoubtedly a “notifiable disease”. There can be no dispute about this starting-point for a claim, and there should be no dispute about this once a claim is presented.
What does it mean, if, in order to make a claim for business interruption, there has to be an occurrence of the virus within a specific distance of the premises insured?
The court decided that an “occurrence” takes place when an infected person is present within the specified distance (for instance within a radius of 25 miles).
It is not necessary that that person must have had a diagnosis when he or she was within the stated distance (for instance, a 25-mile radius). That person could even have been asymptomatic.
For the purpose of a claim on the basis that there was an “occurrence” of a disease, it must be possible to prove that there was an infected person – any infected person – within the stated distance.
In the wording cited above, a claim would run from the first occurrence of the disease in the stated area.
It should be remembered that a 25-mile radius of premises covers 2,000 square miles (more than Oxfordshire, Berkshire and Buckinghamshire put together).
“Any human contagious disease manifested by any person whilst in the premises or within a 25 mile radius”
Where COVID-19 must have been “manifested”, then this does not just require proof of the mere occurrence of the disease within the area. It requires there to have been a diagnosis of Coronavirus at the time of the interruption for which the claim is to be made.
Whilst the person infected may be asymptomatic, but there must have been a diagnosis.
“A notifiable disease occurring within the vicinity of an insured location”
The Court decided that since all occurrences of the virus can reasonably be expected to have had an impact on the insured and the insured’s business, then vicinity should have a nationwide meaning.
In the context of Covid-19, vicinity is not restricted to any immediate local area, but has this much wider sense.
This is a very important conclusion, the Court adopting the general approach in its judgment, that up to 26 March, the constituent parts of England and of Wales acted as one in response to a national emergency. It did matter at all that there were different outbreaks here and there. They should not be treated as scattered and sporadic. There was one response to what was clearly a set of national events.
Cause and effect
“We shall indemnify in respect of interruption following any occurrence of a notifiable disease”
A key part of the judgment concerned the question of what might be cause and effect (or “causation”). Does a claimant have to show that a particular occurrence of manifestation of the disease brought about the interruption which is the subject of the claim?
Another way of putting this is to ask whether, if an insured is able to show that there was an occurrence of Coronavirus within the specified area, the insured has to go on to show that there was some close connection between the effect on a business (such as its closure) and a particular identifiable occurrence locally of the disease?
The answer to that is “no”, so long as the interruption was brought about by reason of “the actions, measures and advice of the government, and the reaction of the public in response to the disease, from the date when the disease occurred within the relevant area” (for instance within a stipulated 25-mile radius).
This means that since, on 16 March 2020, the Prime Minister made a statement asking people to stay at home if they had certain symptoms, to shield, to stop non-essential contact and travel, to work from home and socially to distance, then 16 March would be the earliest date from which a claim might be made on this basis. A claimant can say that from 16 March 2020, the business interruption in question was the result of the reaction of the public in response to the disease.
The court’s decision on causation is important. The court said that “each case has to be considered as part of the wider picture which dictated the response of the authorities and the public which itself led to the business interruption or interference”.
The Court quoted Mat Hancock, who had said that “we are really in this together” and “the shape of the curve … has been very similar across the whole country”. All occurrences were equal causes of the imposition of national measures.
“Loss resulting from interruption of or interference with the business in consequence of … any occurrence of a notifiable disease within a radius of 25 miles of the premises”
When it comes to cause and effect, the courts are not so generous with a clause which makes it necessary to prove that an interruption was the “consequence” of a particular occurrence of the disease.
This is because such a policy tends to list various other (alternative) triggers which can result in a payment-out only when a business interruption is “in consequence” of the specific matter (such as the occurrence of the disease).
In other words, the specimen clause, when taken as a whole, is likely to be concerned with specific events, limited in time and place (and not with Covid-19 as a nationwide event).
It may therefore be difficult to succeed in a claim where this type of clause. However, this will depend on the detailed wording, so that caution is needed.
Degree of closure and lack of access
“We will insure you for your losses resulting from an interruption to your activities caused by your inability to use the insured premises due to restrictions imposed by a public authority … following an occurrence of a human contagious disease, an outbreak of which must be notified to the local authority”
“Interruption” here includes disruption or interference. It does not apply only where there is a complete cessation or stop to the activities at the premises.
“Inability to use” is a question of fact depending on the circumstances. It does not mean “hindrance or disruption to normal use” and it does not apply when an insured could not use all of the premises in question. At the same time, it does not mean a complete cessation or stop.
Cover could only apply when mandatory restrictions came into force, in other words the 21 March Regulations (in particular reg.2) and the 26 March Regulations (regs.4 and 5). An insured was not covered because of any guidance, for instance by the Prime Minister’s statement on 13 March.
For the purposes of the wording of many of these policies which are concerned with prevention of access to business. “occurrence” will extend to the whole UK outbreak, and is not restricted to particular local outbreaks. Moreover the restriction in question will have “followed” a local occurrence as part of the Government’s response to the whole nationwide outbreak – the local occurrence will be considered part of the whole nationwide outbreak.
“Enforced closure … by any government or local authority”
Where a claim will only be met where there has been an enforced closure, then that requirement can only be met if all or part of the premises in question were closed as a result of the effect of the 21 or 26 March Regulations.
It must be clear that closure was required either by the national Regulations or by some local restriction, failure to comply with which would have been some compulsory order.
“We will indemnify you in respect of prevention of access to your premises”
As to cover in respect of “prevention of access”, this can only apply where premises closed pursuant either to advice from government dated 20 or 23 March, or the 21 or 26 March Regulations.
“Prevention” is to be contrasted to “hindrance”, which means “interposing obstacles which it would be really difficult to overcome.
In more practical terms, this means that in order for there to be a good claim on the policy, what has to result from the government action or advice is closure of the premises for the purposes of carrying on the Business as defined in the policy schedule. There must be a fundamental change from the business as described in the policy schedule.
Caution is needed here, since a restaurant without a takeaway outlet suffered a fundamental change when the government imposed a restriction prohibiting the consumption of food and drink on premises (see reg.6 of the 26 March Regulations). This would be the case even if the restaurant were able to carry on trading by starting up a takeaway outlet.
In the case of a bookshop, for instance, which chose to start taking orders online or by telephone, this new service would not prevent the owner from claiming on a policy.
But in the case of a restaurant which already had a takeaway service, then there is not such a fundamental change. The restaurant suffers a hindrance to its business, but access is not prevented. The premises could still be used for the takeaway outlet. “Anything short of complete closure will not constitute prevention of access.”
As to essential shops such as food retailers, pharmacies, petrol stations (see Part 3 of Schedule 2 to the 26 March Regulations), a policyholder which chose to close down because of reduced footfall would unlikely to be able to make a business interruption on the ground of prevention of access. The premises were permitted to remain open.
“We will indemnify you in respect of an incident within a one mile radius which results in a denial of access or hindrance of access”
A clause phrased in this way, by reference to “an incident”, is intended to cover local incidents, of which obvious examples are a bomb scare or a gas leak or a traffic accident.
TRENDS CLAUSE AND REDUCTIONS TO PAYMENTS
Policyholders should be cautious about insurers who accept a claim but who seek to limit payments on the basis that the general local effect of Covid-19 had the effect of reducing the likely income of the insured.
Here are a couple of examples of the following common policy wordings:
“Adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Incident … had the Incident not occurred”;
“Adjustments have been made to take into account the trend of the Insured’s Business and for variations in or other circumstances affecting the Insured’s Business either before or after the Covered Event”
The Court decided that this would be unfair. Covis-19 had to be left completely out of the picture. In its judgment the court said this:
“Where the policyholder has therefore … established a loss caused by an insured peril, it would seem contrary to principle, unless the policy wording so requires, for that loss to be limited by the inclusion of any part of the insured peril in the assessment of what the position would have been if the insured peril had not occurred.”
This too might be said to be generous to policyholders. It means that insurers cannot reduce payments on the basis that Covid-19 would in any event have reduced an insured’s income.
APPEAL TO THE SUPREME COURT
On 2 November 2020 the Supreme Court granted permission to appeal