The FCA has indicated that it believes that the issues arising in the test case will potentially impact over 60 insurers, 700 types of policies and some 370,000 policyholders. The case was only commenced in early June and was dealt with by the Court within the Financial Markets Test Case Scheme under an extremely expedited timetable. The Judgment will continue to be closely considered by all the parties including in terms of next steps.
The Judgment provides the Court's views on the interpretation of the representative sample of policy wordings that were before it the court for consideration.
The Judgment provides substantive findings in particular on:
- disease clauses
- hybrid clauses
- prevention/denial of access clauses
- causation
- trends and adjustment clauses
Overview
The Judgment is lengthy and complex, and covers 21 different types of policy wordings, including different variants of Notifiable Disease and Prevention of Access clauses. It is clear that in the Court's judgment the matters in issue can turn upon the placement of a few words within and the precise structure of any given policy, as the case may be.
The Judgment indicates that the majority of the disease clauses in the representative sample provide cover. It also indicates that certain prevention of access clauses provide cover, but this depends on the specific wording of the clause and for example how the business was affected by the government's response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.
Discussion
Subject to the ever-present importance of applying the terms of the Judgment to any individual wordings, some of the key findings include:-
- For ‘disease clauses’ in general (but not with two of the QBE sample wordings), any radius requirement for e.g. 25 miles is construed as imposing a proviso ('tick box') rather than imposing a causal requirement.
- Thus for the many of the disease clauses, from the date when the disease occurred in the relevant policy area (e.g. 25 mile radius), there is cover in principle for any business interruption which an insured can show resulted from COVID-19, including by reason of the actions, regulations and advice of the government, and the reaction of the public in response to the disease. Cover was not confined to business interruption loss resulting from occurrence of the disease within the Vicinity but encompassed all COVID-19 BI loss so long as there was an occurrence in the Vicinity. It was held that:-
- The use of the word "following" is a loose causal test, and the court would regard that as being satisfied by the occurrence of a case of the disease within the radius if that occurrence was part of a wider picture which dictated the response of the authorities, and the public, which itself led to the business interruption or interference.
- The same overall conclusion would have been reached for the insurers’ disease clauses if the wording had, contrary to the Court's view, required proximate/effective causation.
- As a consequence, the fortuity covered is not the specific occurrence of the disease within the specified (say 25 miles) radius of the insured property but is either (a) the Notifiable Disease nationally, of which the individual outbreaks form indivisible parts or (b) alternatively, “each of the individual occurrences was a separate but effective cause” such that all cases were “equal causes of the imposition of national measures”. - COVID-19 is not "manifested" where someone is asymptomatic and undiagnosed.
- An “occurrence” of the disease requires someone to be suffering from it but not necessarily to have been diagnosed with it (and, thus, would seemingly occur where someone with COVID-19 is asymptomatic and undiagnosed). There are clearly significant issues to be grappled with as to the practicalities around proof and what may be required.
- The Court found that “Closure or restrictions” had to be mandatory and, accordingly, commenced on the date of the relevant Regulations (which, depending upon the category of business, will often mean 26 March 2020).
- In policies that provided cover for business interruption loss consequent upon “The actions or advice of a competent Public Authority due to an emergency likely to endanger life or property in the vicinity of the Premises which prevents or hinders the use or access to the Premises", the Court found that:-
- Prevention of access/use or hindrance of access/use could be satisfied by the government imposed closure of businesses and restriction of movement.
- However, the (undefined) words “emergency” and “in the vicinity” connoted a “narrow, localised form of cover”. In that context “vicinity” meant neighbourhood or area surrounding the insured premises. The government action/advice in relation to the pandemic was not, therefore, due to an emergency in the vicinity of the premises. Thus those wordings did not respond to the national pandemic. - The word "Vicinity" as expressly defined within the Resilience policy (categorised as 'RSA4' for the purposes of the test case) means the whole of the UK for COVID-19. Thus on that definition, “Vicinity” could have a nationwide extent and in the case of COVID-19 did, such that all occurrences of COVID19 were within the relevant “Vicinity”. For various other policies it was held to mean something more localised and immediate.
- The Resilience 'Prevention of Access Non Damage' clause covered “the actions or advice of the police, other law enforcement agency, governmental authority or agency in the Vicinity of the Insured Locations….which prevents or hinder the use of or access to Insured Locations during the Period of Insurance”. Unlike for other similar clauses, there was no requirement that the actions or advice of the government be consequent upon e.g. a danger or emergency in the Vicinity of the Premises. Rather, the Court found that it is sufficient that the actions or advice are in the Vicinity of the Insured Locations, which would be satisfied by national measures. Consequently the Court found that, irrespective of the definition of Vicinity, there would be action by government regarding COVID-19 in the Vicinity of the Premises even if it was also outside it.
- For hybrid policies (those categorised as 'hybrid' since they contained policy terms which refer both to restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease), the position can be illustrated by the findings in relation to the Hiscox policies.
- Hiscox contended that there should be a narrow interpretation of the language (as to the Hiscox 1-4 type policies). However, on this aspect the Court did not accept Hiscox’s case that the “occurrence” of an infectious or contagious disease has to be one which is “small scale, local and in some sense specific to the insured”. The court considered that there can be “an occurrence” of a notifiable disease for the purposes of the clause if there is an outbreak of such a disease, and therefore that the COVID-19 outbreak in the UK could qualify as “an occurrence” of a notifiable disease.
Orient Express, causation and trends clauses
- As a consequence of the Court's approach to the construction of the policies, the causation arguments were of limited relevance because, where there was cover, the relevant counterfactual excluded the COVID-19 pandemic and all elements of the government and the public response to it. Therefore, all the losses consequent upon COVID-19 remained and were recoverable.
- Orient Express was effectively bypassed by the Court's approach to policy construction. Had it been necessary to decide the issue, then the judges would have said that Orient Express was wrongly decided.
- The Court largely accepted insurers' arguments that “damage” based trends clauses which form part of the policy's quantification machinery would apply to non-damage BI extensions even where that had to be read-in to the wording actually used. However, given the Court’s approach to the construction of the insured peril, this made no difference to the outcome.
- In general, the trends clauses in the policy would not reduce the indemnity because, on the Court’s interpretation, losses resulting from the COVID-19 pandemic were caused by an insured peril (as construed by the Court) and so no part of that insured peril should be stripped out in the assessment of what the position would have been (i.e. the counterfactual) absent the insured peril occurring.
- The trends clauses will still be applied though so as to reduce the claim for external trends, but not trends which themselves were caused by COVID-19.
Prevalence of the disease
- As a result of rulings made at the CMCs prior to the trial, the Court was not able to make findings about the actual prevalence of COVID-19 at particular dates or in particular locations, but was able to make findings about the types of proof which would discharge the insured’s burden and whether the evidence pleaded by the FCA was sufficient in principle to discharge that burden.
- The Judgment notes the areas of common ground between the parties and comments on some of the areas of contention. However, the Court declined to go further in the absence of expert evidence (in particular on averaging and undercounting).
Moving forwards
The Court will be considering the parties' positions as to appropriate declarations to be made in light of the Judgment, and any associated matters including for example any applications for permission to appeal. That hearing is currently expected to be listed to take place during October.
