UK decision on COVID-19 business interruption insurance could suggest success for Australian insureds

UK High Court decision / observation (for all wordings except the QBE wording)

"Vicinity" is to be widely construed as encompassing England and Wales, as "in the case of COVID-19, a highly contagious, and often fatal, disease, the relevant area would be the entirety of the UK because one would reasonably expect a national response which might affect the insured's premises wherever they were".

"The insured peril" is the composite peril of interruption or interference with the business following the occurrence of the notifiable disease within the defined radius of the premises. The requirement for proximate causation is between the loss claimed by the insured and the composite insured peril.

These had the effect of narrowing coverage, and in the context of COVID-19, required insureds to prove that the case(s) of COVID-19 within the relevant policy area, as opposed to elsewhere, was the cause of the business interruption.

This limit of the radius to 1 mile in the QBE3 policy supported the Court's view that the intention of the policy was to cover specific and localised events.

Supreme Court decision / observation (for all wordings except the QBE wording)

"Occurrence" is synonymous to "event" and is widely recognised as “something which happens at a particular time, at a particular place, in a particular way". Each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”.

The clause only covers business interruption losses resulting from cases of disease which occur within the radius of the insured premises. As a matter of plain language, cases of COVID-19 occurring outside the specified radius are not part of the peril insured against by the disease clause and should be rejected. Other disease clause wordings should be interpreted in a similar way including the QBE 1, 2 and 3 clauses.

While the wording of QBE 1 is different in that the clause has as its subject a disease, rather than an occurrence of illness sustained by a person resulting from a disease, the Court stated that the same analysis of the clause should be used. That is, the wording makes it sufficiently clear that the insured peril is not any notifiable disease occurring anywhere in the world but only in so far as it is manifested by any person while in the premises or within a 25 mile radius of the premises.

In the case of QBE 2 and QBE 3 disease clauses, it was held that there was no significant difference between the disease clauses in these two wordings and the disease clauses in the other sample disease policy wordings (ie. RSA 3).

The Supreme Court held that the words "event" and "incident" did not have particular significance and that, in line with its conclusions on the other disease wordings, the description of the insured peril as “any occurrence of a notifiable disease within a radius of 25 miles of the premises” made clear that the clause covered losses caused by any cases of illness resulting from COVID-19 that occur within a radius of 25 miles of the business premises.

The Supreme Court agreed with the High Court that no reasonable person would suppose that, if an outbreak of an infectious disease occurred which included cases within the relevant radius in the disease clause and was sufficiently serious to interrupt the policyholder’s business, all the cases of disease would necessarily occur within the radius. Consequently, it is inappropriate to ask whether, but for the cases of disease within the radius, the loss would have been suffered. In particular:

“We agree with the FCA’s central argument in relation to the radius provisions that the parties could not reasonably be supposed to have intended that cases of disease outside the radius could be set up as a countervailing cause which displaces the causal impact of the disease inside the radius.”

On the proper interpretation of the disease clauses, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, the Supreme Court held it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.

UK High Court decision / observation

The word "incident" should be given the same essential meaning as "an event": something which happens at a particular time, at a particular place, in a particular way.

The COVID-19 pandemic cannot constitute "an incident", as the disease is too geographically dispersed, prolonged and non-specific. Although the pandemic is everywhere, it is not necessarily present at a particular insured premises and does not mean that it amounts to a specific incident, even if someone with COVID-19 is present within the radius of the premises;

The further geographical requirement that the incident occur "in the vicinity" or within a particular radius of the premises indicates that the clause is intended to cover local incidents only.

For cover to apply, the action of the relevant authority would have to be in response to the localised occurrence of COVID-19, and not general action taken in response to the pandemic.

An "action" by an authority which "prevents" access requires steps which have the force of law, and must impose mandatory requirements.

The government announcements on 16, 20 and 23 March 2020 were merely advisory, and therefore could not trigger cover.

However, the Regulations issued by the UK Government on 21 and 26 March may trigger cover if they required mandatory closure of an insured's business. The only relevant matters which constituted “restrictions imposed” are those which were promulgated by statutory instrument, eg. the 21 and 26 March Regulations and required mandatory closure of an insured's business. "An outbreak of disease" is the "occurrence" of the disease, and occurs from the point in time at which at least one person who was suffering from COVID-19 was in the relevant area. The case does not have to have been actually verified by diagnoses or be symptomatic at that time, it is just required to be diagnosable.

Prevention of access requires a complete closure of the premises for the purposes of carrying on the business as defined in the policy schedule. Prevention is to be contrasted with and is not synonymous with "hindrance". Hindrance means rendering something more or less difficult, and prevention means rendering something impossible. The prevention does not have to be physical, so that if the policyholder accessed the premises to carry out essential maintenance, that would not preclude there being a prevention of access.

Example:

A pub or restaurant that already had a takeaway service prior to the government regulations which required the restaurant to close so far as consumption of food and drink on the premises is concerned, would not be "prevented access" to the premises as their business was partially, not fully closed.

However, where a restaurant or pub only offered dine-in services prior to the regulations, access to the premises would be "prevented" as there would be a full closure of the premises for the purposes of carrying on the business.

"Interruption" did not require a complete cessation of the business, but was intended to mean "business interruption" generally.

Supreme Court decision / observation

Prevention means stopping something from happening or making an intended act impossible (as distinct from mere hindrance).

The Court also held, consistent with its analysis of “inability to use”, that the wording may, depending on the facts, cover prevention of access to a discrete part of the premises and/or prevention of access for the purpose of carrying on a discrete part of the policyholder’s business activities.

In relation to the prevention of access and hybrid clauses, the Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses.

The Court rejected the Insurers’ arguments that the “but for” test must be applied to the prevention of access / hybrid clauses as regards concurrent Covid-19-related causes. This was because to do so would render cover “largely illusory” in circumstances where that cannot have been intended. The Court commented on the composite nature of the insured peril in these clauses (comprising several component parts) and stated that the prevention of access / hybrid clauses may fall into the same category of cases where there are two causes, each of which by itself would have been a sufficient cause of the loss. It would not be appropriate to apply the "but for" test in these circumstances.

The simplest basis on which to justify this is that when you have concurrent causes, the "but for" test cuts both ways. There is no principled reason for concluding that the presence of an uninsured cause of the loss negates the causative effect of the insured cause, rather than vice versa. It is only the presence of an explicit exclusion, as part of the parties' bargain which must be given effect, which justifies treating the excluded cause as proximate. That is entirely consistent with a long line of earlier authority.

The Court considered that where insurance is restricted to particular consequences of an adverse event the parties do not generally intend other consequences of that event to restrict the scope of the indemnity. The Court held that the elements of the insured peril are inextricably connected in that the elements and their effects on the policyholder’s business all arise from the same original cause – in this case the COVID-19 pandemic.

It is therefore predictable that, even if the elements of the insured peril had not led ultimately to the closure of the insured premises, they would have had other potentially adverse effects on the turnover of the business. Such potential effects should not diminish the scope of the indemnity because they arise from the same original fortuity which the parties to the insurance would expect to occur concurrently with the insured peril.

Although not part of the insured peril, they are “not a separate and distinct risk”.

This principle also applies to an originating cause of loss covered by the policy which is not expressly mentioned in the clause. Here the originating cause of any local occurrence of disease (and of public authority actions and public reactions to it) is the global COVID-19 pandemic.

Ultimately, the Supreme Court held the prevention of access / hybrid wordings indemnified the policyholder against the risk of all the elements of the insured peril acting in causal combination to cause business interruption loss.

This was so regardless of whether the loss was concurrently caused by other (uninsured but non-excluded) consequences of the COVID-19 pandemic, which was the underlying or originating cause of the insured peril.

UK High Court decision / observation

This requires something mandatory that has the force of law and was thereby promulgated by statutory instrument (such as the 21 and 26 March Regulations).

Guidance, exhortation and advice given by the Government including as to social distancing, are not "restrictions imposed".

This requires something more than just an impairment of normal use, and what constitutes an inability to use will depend on the facts of the particular case.

In line with the Court's analysis above, the Court rejected the insurer's argument that the occurrence had to be one which is "small scale, local and in some sense specific to the insured", finding that the COVID-19 outbreak in the UK could qualify as an occurrence.

"Interruption" did not require a complete cessation of the business, but was intended to mean "business interruption" generally.

Requires there to be a closure of all or part of the premises under legal compulsion.

Supreme Court decision / observation

The Supreme Court reached the same conclusion as it did for the disease clauses, considered above.

The Court agreed with the FCA and held there is complete inability of use of premises in two situations:

1. the policyholder is unable to use the premises for a discrete part of its business activities; or
2. if it is unable to use a discrete part of its premises for its business activities.

Inability rather than mere discouragement or hindrance of premise use must be established.

This did not mean that a stop or break to the business was necessary. Rather, the ordinary meaning of “interruption” is capable of encompassing interference or disruption which does not bring about a complete cessation of business or activities, and which may even be slight.

This may include a mandatory instruction given by a public authority in the anticipation that legally binding measures will follow shortly afterwards, or will do so if compliance is not obtained.

The Supreme Court adopted a wider interpretation and commented that an instruction given by a public authority may amount to this if, from the terms and context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers provided such instruction is not only in mandatory terms, but also in clear enough terms to enable the addressee to know with reasonable certainty what compliance requires.

In most cases the relevant restrictions would be directed at the insured premises or the use of the premises by the policyholder, but they are not required to be so.

For example:

• the Prime Minister’s instruction in his statement of 20 March 2020 to named businesses to close was capable of being a “restriction imposed” regardless of whether it was legally capable of being enforced since it was a clear, mandatory instruction given on behalf of the UK Government which those named businesses would reasonably understand had to be complied with, without inquiring into the legal basis or anticipated legal basis for the instruction.
• Regulation 6 of the 26 March Regulations, which did not order particular businesses to close but which prohibited people from leaving their homes without reasonable excuse, was also capable of being a “restriction imposed” in the relevant sense.

UK High Court decision / observation

The "but for" test requires that the insured be put in the same financial position as it would have been had the insured peril not occurred.

The "insured peril" should not be narrowly defined. For example in relation to disease wording, the peril should not be the local occurrence of the disease alone, and the other effects of the pandemic could not be set up as part of the counterfactual as a business "trend" to reduce the claim.

The UK High Court distinguished Orient Express from the COVID test cases as it was concerned with different types of insured perils. Nothing in the analysis in the Orient Hotels case had any impact on the correct construction of the wordings it was considering in the COVID test cases.

The High Court did say that if it had to rule on the Orient Hotels case it would have determined that it was wrongly decided and the High Court would not have adopted it in the COVID test cases.

The Orient Hotels decision misidentified the insured peril (by treating the “Damage” as the insured peril, rather than Damage caused by a covered fortuity – hurricanes) and the proximate cause of the loss was not “Damage” but “Damage caused by hurricanes”.

The Orient Hotels decision resulted in the absurd result that the more serious the fortuity the less cover was available: if the hurricane had only damaged the hotel, there would have been a full recovery.

The "proximate" cause is not the cause nearest in time to the loss but the "dominant cause" of the loss. Therefore in Orient Express, the proximate cause should have been business interruption arising from damage caused by the hurricanes.

The relevant causation test to be applied in this case is the "proximate cause" test, rather than the "but for" test. This test requires insureds to show that the dominant cause of the loss was the insured peril.

The Court held the test for causation will depend on the particular wording connecting the insured peril. For example, policies that refer to business interruption “following” an occurrence (or similar) require a looser causal connection than proximate cause.

The Court held even if a proximate cause was required, this would be satisfied as:

[111]…Even if the word “following” imports the requirement of proximate causation we would consider that, given the nature of the cover as we consider it to be, this is to be regarded as satisfied in a case in which there is a national response to the widespread outbreak of a disease. In such a case we consider that the right way to analyse the matter is that the proximate cause of the business interruption is the Notifiable Disease of which the individual outbreaks form indivisible parts.

Supreme Court decision / observation

The Supreme Court explains why the “but for” test of causation is sometimes inadequate and that there can be situations (of which the present case is one) where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself. The situations include:

• the failure to exclude causes which would not be regarded an effective or proximate cause (ie. it is in some circumstances too wide);
• the failure to exclude some cases where one event could or would be regarded as a cause of another event, (i.e. it is in some circumstances too narrow); and
• the failure to exclude cases in which a series of events combine to produce a particular result but where none of the individual events was either necessary or sufficient to bring about the result by itself (ie. it is too blunt). 

The Court commented that there are there are two proximate causes of loss and in both categories the combination of the two causes together made the loss inevitable and neither would have caused the loss without the other. The Court was satisfied that:

“there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself".

The Supreme Court agreed with the High Court in that it could not be said that any individual case of illness resulting from Covid-19, on its own, caused the UK Government to introduce restrictions which led directly to business interruption. Rather, the Government measures were taken in response to information about all the cases of Covid-19 in the country as a whole and, as such, the situation was one in which “all the cases were equal causes of the imposition of national measures”.

On that basis, it was reasonable to conclude that under the disease and hybrid wordings, in the case of an occurrence of the coverage trigger (insured peril) which in isolation would not have given rise to losses of the magnitude experienced, but which did so in the context of the conditions under which it occurred, those losses were covered in full subject to the other terms, conditions and limits of the insurance. By analogy with marine insurance cases dealing with proximate cause, the Supreme Court concluded that the entirety of the losses sustained were proximately caused by the occurrence of the insured peril, notwithstanding that there were other, contributing causes without which they would not have been sustained.

The Supreme Court held that, consistent with its decision on causation, the simplest and most straightforward way in which the trends clauses should be construed is by recognising that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause.

The trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case effects of the COVID-19 pandemic.

This conclusion together with the observations on causation means that, absent clear wording, insurers cannot reduce the indemnity otherwise due to the insured on the basis that the losses were caused equally by other (uninsured but not excluded) perils the underlying cause of which was also the COVID-19 pandemic.

COVID-19 and its wider consequences will not be ‘trends’ or ‘circumstances’ that must be assumed still to have taken place, when working out what the insured would have earned had the insured peril not taken place, for the simple reason that the insured peril was part of them and cannot meaningfully be separated out. The most obvious examples of notifiable diseases, likely to result in closure of or restricted access to the insured's premises should they occur within a 25 mile radius of it, are precisely those, like COVID-19, that are most likely to produce the wider legal and economic consequences and resultant impact upon the insured's business that were in fact experienced. To quantify loss on the basis of a counterfactual scenario in which the pandemic outbreak and all its consequences still occurred, but there were no cases at or within the requisite proximity to the insured's business for coverage, would render the cover largely illusory. It would be as illogical as dividing up the insured peril into its successive stages and assuming that only the last of them did not take place.

The Supreme Court overruled this case for the following reasons:

• (applying its analysis on causation) in a case when both the insured peril and an uninsured peril which operates concurrently with it arise from the same underlying fortuity, provided that damage proximately caused by the uninsured peril is not excluded, loss resulting from both causes operating concurrently is covered. The High Court in Orient-Express Hotels was wrong to hold that the business interruption loss was not covered by the insuring clause to the extent that it did not satisfy the “but for” test; and
• (applying its analysis on trends clauses) the correct approach would have been to construe the trends clause so as to exclude from the assessment of what would have happened, if the damage had not occurred, circumstances which had the same underlying or originating cause as the damage. In other words, the trending clause counterfactual had to exclude not just the trigger of cover itself, but all matters intrinsically bound up with it.

This case can no longer be cited by insurers as authority for the "but for" doctrine operating to deny claims where there are two concurrent causes of business interruption loss of income.

Supreme Court decision / observation

"to reduce the indemnity to reflect a downturn caused by other aspects of the pandemic, whenever they began, would be to refuse to indemnify the policyholder for loss proximately caused by the insured peril on the basis that the loss was also proximately caused by uninsured (but not excluded) perils with the same originating cause."

The High Court's application of trend clauses to pre-trigger losses also was rejected by the Supreme Court.

Adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19.

The Supreme Court used the example of a pub that suffered a 30% downturn in turnover during the week ending 20 March, due to public concern about contracting Covid-19, but it was not ordered to close (and its policy not triggered) until the Government’s instruction of 20 March.

On the Insurers’ case and the High Court decision, the reduction in turnover during the indemnity period would have been calculated by reference to the reduced turnover figure immediately before trigger, ie. the indemnity would be smaller than if the pub had not suffered a reduction in business during the week preceding the Government’s instruction to close.

The Supreme Court concluded that the trends or circumstances for which adjustments may be made do not include trends or circumstances caused by the insured peril or its underlying or originating cause.

The purpose of a trends clause is to seek to ensure that the adjusted figures will represent as nearly as possible the results which would have been achieved during the indemnity period had the insured peril (and its underlying or originating cause) not occurred.

Ultimately, the indemnity should be calculated by reference to what would have been earned had there been no Covid-19, disregarding any demonstrable revenue drop prior to the policy being triggered that resulted from Covid-19 or its effects. For example, if a restaurant had a Michelin star chef who left the week before the government action, in calculating loss the downward effect of the chef leaving must be taken into account.