On 15 September 2020, the England and Wales High Court handed down its judgment in the highly publicised business interruption test case: The Financial Conduct Authority v Arch and Others  EWHC 2448 (Comm). This judgment is a significant development for property insurers underwriting risks in the United Kingdom, with the Court finding that cover is potentially available under a suite of property insurance policies for business interruption losses sustained on account of the COVID-19 pandemic.
The potential availability of cover arises from the Court's findings that ‘non-damage' extensions of cover relating to notifiable diseases and prevention or restriction of access are potentially triggered by the pandemic, and its finding that the method of determining causation and loss which was applied in Orient Express1 did not apply to the wordings under consideration in this case.
The judgment will be of supreme significance to insurers who have underwritten business interruption risks in the United Kingdom and will therefore most likely be appealed. The decision may also be considered closely by Australian courts considering similar claims in the future, particularly in disputes about the proper application of ‘trends clauses'.
The proceedings were brought by the Financial Conduct Authority (FCA) as a test case. The purpose of the test case was to determine issues of policy coverage and causation under sample insurance wordings issued by the defendant insurers. The FCA represented the interest of policyholders, many of which were small to medium sized enterprises.
Given the importance of the issues the subject of the proceeding and the need for authoritative judicial guidance, the proceedings were heard on an expedited basis under the Financial Market Test Case Scheme. The case was heard by both Lord Justice Flaux and Mr Justice Butcher sitting together.
The case was argued on the basis of agreed facts between the FCA and the defendant insurers relating to the history of COVID-19 in the United Kingdom and the government response to it.
Twenty-one lead policies issued by Arch Insurance (UK) Limited, Argenta Syndicate Management Limited, Ecclesiastical Insurance Office plc, Hiscox Insurance Company Limited, MS Amlin Underwriting Limited, QBE UK Limited (QBE), Royal & Sun Alliance Insurance plc and Zurich Insurance plc were considered in this case. The 3 key coverage issues that arose were:
- Whether certain ‘non-damage' policy extensions that provided cover for business interruption:
- in consequence of or following the occurrence of a notifiable disease within a specific radius of the insured premises (Notifiable Disease Extensions); or
- where there had been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions (Prevention of Access Extensions); or
- on account of restrictions imposed on the premises in relation to a notifiable disease (Hybrid Extension),
were triggered by business interruption losses suffered by policyholders in the context of COVID-19.
- Whether the ‘trends clause' required the business interruption loss to be adjusted on the basis that the broader implications of COVID-19 would have existed even if the insured's business was not affected in a way that triggered the Notifiable Disease Extension, Prevention of Access Extension or Hybrid Extension.
- The types of evidence that may be sufficient for a policyholder to establish that the ‘non-damage' extensions of cover are triggered.
Issue one: extensions triggered
Notifiable Disease Extensions
The Notifiable Disease Extensions broadly provide cover for interruption or interference with the business that was sufficiently connected (i.e. ‘following', ‘arising from' or ‘as a result of) with a notifiable disease within a specified area relating to the insured's premises.
The insurers submitted that the Notifiable Disease Extensions only provided cover for a locally confined occurrence of a notifiable disease. Conversely, FCA submitted that cover is not limited only to local occurrences, but is available if there an occurrence of the disease within the specified area that is indivisible from areas outside of specified area (or alternatively, there are many individual occurrences outside of the specified area).
Aside from two specific QBE wordings, the Court agreed with the FCA's submissions. The key reasons for this were:
- The extensions were satisfied when there was a case of the disease within the relevant area;
- The cover provided under the Notifiable Disease Extensions was not worded so as to be limited ‘only' to outbreaks confined in the local area;
- A ‘notifiable disease' includes diseases that are capable of spreading quickly and widely, and for which action by public authorities may be taken irrespective of the specified area in the extension; and
- If the insurers' position was correct, there would be an anomalous outcome where there would be no effective cover if the local occurrence were part of a wider outbreak.
Prevention of Access Extensions
The Prevention of Access Extensions generally provide cover for prevention or hindrance of access to or use of the insured premises as a consequence of government or local authority action or restriction.
The wording of the extensions under consideration in the case varied greatly from policy to policy. The Court's findings indicate that whether any particular Prevention of Access Extension will be triggered will be fact-dependent for individual cases. Specifically, consideration will need to be given to:
- Whether the extension requires a ‘prevention' of access which is akin to a forced closure, or merely that access be ‘hindered';
- Whether the wording required there to be a specific event at a particular time in the local area (i.e. ‘emergency in the vicinity', ‘injury in the vicinity' or ‘incident within the vicinity');
- The nature of the services provided, or goods sold by the business, and the precise effect of the relevant governmental or local authority action on the business; and
- Whether the action by the government or local authority is properly characterised as ‘advice', ‘action' or ‘orders'.
Accordingly, and subject to the specific facts of the case, the Court's findings have indicated that cover may be available under this extension for COVID-19 related claims.
The ‘Hybrid Extensions' contain elements of both Prevention of Access and Notifiable Disease Extensions to trigger. They are generally extensions that require there to be a restriction on the insured premises in relation to a notifiable disease.
The Court's approach to the Hybrid Extensions was consistent with its findings in relation to the Notifiable Disease and Prevention of Access Extensions. The Court generally rejected the insurers' arguments that the extension was limited to only local outbreaks of a notifiable disease. Its reasoning in respect of the Prevention of Access limbs of the extension support the view that consideration of these extensions will be heavily fact and wording dependent.
Issue two: trends clause
What is a trends clause?
A ‘trends clause' typically requires that, in determining the cover available for business interruption under a policy of property insurance, the loss is to be adjusted for circumstances that would have affected the business had the insured peril not occurred. This generally requires identification of a hypothetical counterfactual scenario that quantifies the results of the business ‘but for' the insured peril.
The trends clause is consistent with the indemnity principle, in that it is intended to put the insured in the same position it would have been had the insured peril not occurred.
The decision in Orient Express and insurers' submissions
A decision that is often cited in support for adjustments made pursuant to a trends clause is the England and Wales High Court decision of Orient Express. In that case, a hotel in New Orleans advanced a claim for business interruption loss arising from storm damage caused by Hurricanes Katrina and Rita to the premises. The Court held that the trends clause permitted an adjustment of the loss on the basis that, even if the storm damage had not occurred to the premises, the business interruption loss would have in any event been suffered on account of the broader impact of the hurricanes to the local area. The result was that no cover was available as the business interruption losses would have been suffered in any event.
The insurers sought to advance a similar argument in this case, being that, even if there was a notifiable disease in the relevant area, or a prevention of access to the premises (or both under a Hybrid Extension), the broader effects of COVID-19 would have resulted in business interruption losses being sustained in any event. It followed that the trends clause would significantly limit the cover available to the insured.
The Court held that the trends clause did not apply in the manner submitted by insurers in this case. Specifically, the Court held that the insured peril that was to be excluded for the purpose of determining the correct hypothetical counterfactual was one in which the broader impacts of the pandemic were also excluded. The correct insured perils which were to be excluded were:
- In relation to the Notifiable Disease Extensions, the whole of the disease both inside and outside the relevant area which had to be stripped out in the hypothetical counterfactual;
- In relation to the Prevention of Access Extensions, the insured peril to be removed for the hypothetical counterfactual was all composite elements of the extension. For example: (i) the prevention or hinderance of access to or use of the premises (ii) by any action of government or local authority (iii) due to an emergency which could endanger human life; and
- In relation to the Hybrid Extensions, the insured peril to be removed for the hypothetical counterfactual was similarly all composite elements of the extension. For example: (i) inability to use the insured premises (ii) due to restrictions imposed by a public authority (iii) following the occurrence of a human infectious or contagious disease.
Importantly, the Court distinguished its decision from Orient Express on the basis of the different wordings that were considered. However, it went on to say that, had Orient Express somehow dictated the consequences in terms of cover in this case, the Court would have reached the conclusion that it was wrongly decided and declined to follow it.
Issue three: form of proof
As to the extensions that require proof of the occurrence or manifestation of COVID-19 within a specified geographic area, insurers accepted that proof could, in principle, be established by:
- Specific evidence of a case or cases in the particular policy area;
- Publicly available data published by the National Health Service England and the Office of National Statistics;
- Reported cases of lab-confirmed positive tests of COVID-19; and
- Distribution based analysis, or an undercounting analysis.
Each case would, however, have to be determined on its own facts and in light of the precise evidence relied upon by the policyholder.
The Court will now hear the parties as to appropriate declarations to be made in light of its findings. The hearing on declarations will likely commence in October 2020.
The expected outcome of that hearing is that insurers will be required to extend cover under a large number of policies, including in instances where they had declined it.
Generally, the insurers did not intend to cover, and consequently did not price into the premium, cover for business interruption loss caused by a pandemic. Given the findings on coverage in this case, which favour policyholders, and their potential implications for insurers across the board, it is likely that insurers will file permission to appeal. If granted, we can foresee that whichever parties are unsuccessful in the Court of Appeal will then seek permission to appeal to the Supreme Court.
Accordingly, it may yet be some time until there is final and non-appealable judicial guidance on the issues that were the subject of the case.
Australian test case
A test case relating to cover for the COVID-19 pandemic under business interruption policies has also been brought in the Supreme Court of New South Wales in Australia. Unlike this case, however, the Australian test case currently concerns whether a form of infectious disease exclusion found in Australian property insurance policies applies in respect of claims for business interruption loss suffered on account of the pandemic. Accordingly, the findings in this case are unlikely to be of significant weight in the Australian test case.
Orient Express in doubt
One implication arising from the judgment that may be more immediately relevant in Australia is the Court's comments that, if required to, it would have found that the decision in Orient Express was wrongly decided. Specifically, that the correct counterfactual in Orient Express for the purpose of determining the cover available would have been one, not only where there was no damage to the hotel, but also one where the cause of that damage (being the hurricanes) also did not exist.
Trends clauses are commonplace in Australian property insurance wordings, including in Mark IV Industrial Special Risks policies. Forensic accountants, loss adjusters and insurers routinely adjust losses for business interruption by applying ‘trends clauses' in property policies.
The doubt expressed by the Court as to the correctness of Orient Express, and the application of the trends clauses considered in this case, may very well give rise to disputes about the proper counterfactual to be used, and what the ‘insured peril' is to be excluded, in making an adjustment to a business interruption loss on account of a trends clause in Australia.
1 Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm).
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