In a highly anticipated judgment, the Commercial Court has ruled in favour of four plaintiff publicans (plaintiffs) in litigation initiated against FBD Insurance plc (FBD), heard together last October before Mr Justice McDonald, concerning the interpretation of business interruption insurance clauses. The plaintiffs' claims were selected as test cases with the central issue being whether losses arising from the government enforced closure of pubs due to COVID-19 in 2020 are covered under business interruption clauses under the plaintiffs' public-house insurance policies with FBD (Policy).
McDonald J was due to deliver judgment in mid-January. This was deferred however to early February to facilitate legal submissions on the UK Supreme Court's recent judgment in a similar case, which found in favour of policy holders in a case taken by the UK's financial regulator, the Financial Conduct Authority (FCA).
IS COVER PROVIDED UNDER THE FBD BUSINESS INTERRUPTION CLAUSES?
The relevant clause of the Policy at issue provides:
"The company [FBD] will also indemnify the insured... as a result of the business being affected by... imposed closure of the premises by order of the Local or Government Authority following... outbreaks of contagious or infectious disease on the premises or within 25 miles of same."
It was not disputed that the statement issued from the Department of the Taoiseach on 15 March 2020, that "all pubs asked to close from tonight", satisfied the requirement that the business is affected by an "imposed closure of the premises by order of the Local or Government Authority". It therefore fell for the court to consider whether the closure followed an outbreak of contagious or infectious disease on the premises or within 25 miles of the premises.
The relevant "insured peril"
As observed by McDonald J, an insured will only recover under a policy of insurance to the extent that his or her losses were caused by a "peril" insured under the terms of that policy. FBD argued that the peril was the enforced/imposed closure of the pub, not the infectious or contagious disease. The plaintiffs argued that the peril was a composite one, consisting of
- the imposed closure;
- by order of a local or government authority;
- following an outbreak of infectious disease on the premises or within a 25 mile radius.
McDonald J held that the clause had to be read as a whole, as that is how the clause would be read by a reasonable person standing in the shoes of the parties to the proceedings. McDonald J concluded that the relevant peril was not imposed closure per se, rather it was a composite one i.e. the imposed closure following the outbreaks of disease within 25 miles.
McDonald J then considered whether cover was limited to localised closures only. FBD argued that the government decision to close public houses was prompted, not by a localised outbreak of disease, but by reason of concern at a nationwide level. FBD contrasted the government national closure order on 15 March 2020 (March closure order) with the subsequent government decision of 7 August 2020 where a series of localised restrictions were enacted for counties Kildare, Laois and Offaly. FBD argued that in the latter case, there had been a local lockdown imposed specifically because there had been a surge in cases in those counties linked to outbreaks in various meat plants and that, in such circumstances, one could see that the imposed closure was causatively connected to a specific outbreak at a specific location and counsel submitted that this was "demonstrably missing" from the March closure order. As such, FBD argued that the March closure order could not be causatively linked to an outbreak of Covid-19 within a 25-mile radius of the plaintiffs' premises.
The court did not agree. It held that the fact that the government took the view in March 2020 that it was necessary to close down public houses on a country-wide basis illustrated the widespread nature of the outbreaks. The court held that outbreaks within 25 miles of the premises were, at minimum, a cause of the decision to close each of the public houses. The court found that it was not necessary for the insured to also establish that the outbreak was the proximate cause of the imposed closure so long as the outbreak was a cause. McDonald J's conclusions aligned with the conclusions reached by the UK Supreme Court. On the evidence, it was found that there had been a Covid-19 case within 25 miles of three of the plaintiff pubs. It was further held that the fact that outbreaks outside that 25 mile radius were also proximate causes of the government's decision did not alter that conclusion.
"But for" test
FBD argued that a strict interpretation of the "but for" test should be applied and that the public houses should be indemnified by the insurer in respect of those losses which it can prove would not have arisen "but for" the eventuation of the insured peril. Based on this approach, FBD argued many of the losses claimed by the pubs would have arisen in any event by reason of societal reaction to the Covid-19 pandemic, rather than as a result of the government imposed closure. However, McDonald J found that a fair and reasonable modification of the "but for" test should be applied. In doing so, he held that where loss is sustained as a result of two or more interrelated events which are each capable of causing the loss, such as the government imposed closure and the changes in societal behaviours, but where it is not possible to say that, but for any one of them, the loss would not have been incurred, the insured peril is sufficient to be regarded as a sufficient cause.
The "appropriate counterfactual"
The court then considered what would have been the counterfactual position of the business of each of the plaintiffs but for the occurrence of the insured peril. This would assist in establishing the base point against which the plaintiffs' losses would be calculated. FBD argued that the counterfactual should be a scenario where there was no imposed closure, but where COVID-19 restrictions were still in place. An application of this position to the plaintiffs' policies would reduce the level of profits they would have made in that counterfactual scenario thereby reducing the losses they could recover under their policies. In contrast, the plaintiffs argued that the relevant scenario should be one which involved no closure and no Covid-19 restrictions, such as the trading position for pubs before the outbreak. In agreeing with that position, McDonald J held that the "... correct counterfactual is a world in which there is no imposed closure and no outbreaks within 25 miles of the plaintiffs' premises" in respect of the plaintiffs other than the Lemon & Duke. The court concluded that the plaintiffs' recovery would not be reduced just because the change in societal behaviour, (whether within or outside the prescribed 25 mile radius) as a result of the pandemic, was also a proximate cause.
A distinction was made involving the claim of the one of the plaintiffs (the Lemon & Duke), as it was based on a policy arising from a specific representation made to it by FBD on 2 March 2020 that cover would be available if the premises were the subject of an imposed closure by reason of coronavirus. That representation made no reference to outbreaks being confined within a radial distance of 25 miles from its premises. In those circumstances, the court held that the correct counterfactual in its case is a world in which there is no imposed closure and no outbreaks of Covid-19.
CALCULATION OF LOSS
Most business interruption policies provide for calculation of loss by adjustment of the results of businesses financial performance in the previous year, usually loss of income or loss of gross profit.
In his judgment, McDonald J stated he will rule on the issue of quantum and calculation of loss following a further hearing where detailed evidence will be provided from each of the plaintiffs as to the individual losses sustained by them. However, the court stated that it is improbable that the closure following the outbreaks in question is not, at least, an effective (i.e. proximate) cause of some of the claimed losses since, to state the obvious, if pubs are closed for business they are unable to trade and make a profit.
Since delivering the judgment, it is reported that the parties may agree the issue of quantum themselves and a further hearing in relation to quantum may not ultimately be required.
McDonald J rejected the plaintiffs' claim that they are entitled to recover for ongoing losses in respect of the continuing effects of the Covid-19 pandemic on their business even after any period of imposed closure comes to an end. McDonald J characterised this as akin to claiming for losses that arise from changes in societal behaviour arising from the continuing presence of Covid-19 in the community. In fact, the court held that the plaintiffs could only recover for loss of gross profit as a result of the imposed closure following the outbreak of disease within the relevant radius that is covered. Both the imposed closure and disease outbreak elements must exist (the composite peril) for the plaintiffs to be covered. In practical terms, this means that if the government lift restrictions allowing public houses to open, even in circumstances where the disease outbreak was still prevalent within 25 miles of the premises, and the public remain reluctant to enter enclosed spaces such as public houses, the plaintiffs could not recover under the Policy.
CONCLUSION AND REACTION
It is understood that the Policy at issue in the test cases has been sold to approximately 1,300 publicans throughout Ireland. It is also reported that FBD has set aside €30 million of provisions to deal with an adverse finding. FBD has confirmed it will not appeal the decision.
There are a number of other extant proceedings against FBD, which are dependent on the outcome of the test cases. Separately, the operator of the Clarence Hotel, a hotel and bar controlled by the Press Up hospitality group, has also issued Commercial Court proceedings against Axa and its broker Arachas Corporate Brokers Ltd in respect of its business interruption insurance cover.
Further, in the wake of this landmark judgment, it has been reported that 12 other insurance companies have been put on notice of High Court actions from some 423 businesses regarding confirmation of indemnity under business interruption insurance clauses.
The Central Bank of Ireland (CBI) has welcomed the judgment in a recent statement here. The CBI has referred to its Covid-19 and Business Interruption Insurance Supervisory Framework (which we previously discussed here), stating that it expects firms to "...adopt a consumer-first approach to the resolution of issues". The CBI also stated that it expects firms to pay the reasonable costs of consumers in the agreed test cases. In his address at the European Financial Forum on 11 February 2021, CBI Governor Gabriel Makhlouf stated that insurers must adopt a "customer-first approach" to the resolution of pandemic related business interruption claims, adding "Let me make it clear to the insurers involved: we've been clear with you on cases where valid cover exists. The UK courts have been clear with you. And now the Irish courts have been clear with you. Any continuing failure to do the right thing by your customers is inexcusable and we won't hesitate to take action accordingly."
The test cases are listed for mention before McDonald J on 26 February 2021. We will continue to keep you apprised of developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.