Case Background
On September 15, 2020, the High Court of Justice rendered its judgment in a test case brought by the Financial Conduct Authority (“FCA”) to determine whether various policies held by small businesses would cover business interruption-related losses due to the COVID-19 pandemic. The case was heard over a two-week period commencing July 20, 2020.
The FCA commenced the proceedings in June 2020 by the FCA with the view to obtaining the maximum possible clarity with respect to business interruption claims arising from the COVID-19 pandemic in the context of a standard form business policy wordings.
The Court considered a total of 21 “lead” policies and estimated that 700 types of policies over 60 different insurance companies would be affected by this decision given the similarity of the wordings. Each of these policies contained:
a “disease clause” directly providing coverage for disease-related business losses (usually as an extension);
a “hybrid clause” covering disease-related business losses within the scope of a larger business interruption clause; or,
clauses covering prevention of access and similar perils (and not directly referencing disease).
Generally, these policy extensions were “non-damage” extensions meaning that physical damage was not required to trigger a business interruption claim under the policy.
Factual Matrix
The Court summarized the COVID-19 pandemic generally from the initial notification of a “pneumonia” type-disease from the Wuhan region of China until it reached pandemic proportions. Specifically, the key consideration for the Court was the government-ordered shut down of all non-essential business on March 21, 2020. This shut down led to significant business losses for a number of businesses. Similar to what took place in Canada, the government shut down businesses including restaurants, tattoo shops, hair salons and other similar ventures. The shut-down period lasted until July 4, 2020.
Analysis
a. General Principles of Insurance Policy Interpretation
The UK’s regime of interpreting insurance policies is different from Canada, but not dissimilar in its end goal and result. The Court outlined the general principles of construction:
to ascertain what a reasonable person (a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract) would have understood the contracting parties to have meant by the language used; and,
where the language is unambiguous, the Court should apply the plain meaning of the provision in question.
b. Business Interruption Coverage
The standard business interruption coverage is generally triggered by the occurrence of physical or material damage to the insured premises. However, with respect to the relevant business interruption wordings at issue, the Court was asked to review and opine on a number of standard business interruption coverage extensions triggered by “non-damage”.
i. Disease Clauses
One of these types of extensions were referred to as “disease clauses”. Specifically, the “disease clauses” analyzed within this decision included:
the “Defective Sanitation, Notifiable Human Disease, Murder or Suicide” cover in Argenta policy;
the “Notifiable disease, vermin, defective sanitary arrangements, murder and suicide” covers in the MSA policies;
the “Murder, suicide or disease” cover in QBE 1 and the “Infectious disease, murder or suicide, food or drink poisoning” covers in the QBE covers; and
the “Infectious Diseases” cover and “Notifiable Diseases and Other Incidents” cover in the RSA policies.
While each clause was worded slightly differently, the common theme was that each provision, in broad terms, provided coverage in respect of business interruption in consequence of, following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises. The question before the Court was whether these disease clauses applied where there was no actual outbreak of disease at the business itself but, rather, the business loss only occurred due to an occurrence elsewhere. This issue arose largely because the provisions contained within the policies generally required an occurrence of a disease at the specific named premises.
The Court analyzed and reviewed each policy to determine whether there was coverage under the disease clauses contained within those policies. Each of the policies were similar, but slight differences were apparent in the extension wording and exclusions.
Referencing the first RSA policy reviewed by the Court, the FCA contended there was coverage as there was an “occurrence” of a “notifiable disease” within a 25-mile radius of the “Premises” leading to a business interruption (which was the requirement under this extension). However, RSA argued that the coverage only applied when there was a local outbreak of a notifiable disease (proximate causation within 25 miles). Essentially, this argument was based on the inclusion of the word “following” in the provision which indicated that the business interruption must occur following an occurrence of the notifiable disease. It also contended that several exclusions applied.
Ultimately, the Court agreed with the FCA’s position that the term “following” should be considered loosely and an actual COVID-19 outbreak was not required within a 25-mile radius to constitute an “occurrence”. Rather, the outbreak on a larger scale was enough to be considered an “occurrence” of a “notifiable disease”.
Generally, each “disease” clause included a similar format: a requirement for an occurrence of the disease within a set “vicinity” or “radius”. The issue with respect to each provision was whether:
coverage only occurred when a COVID-19 outbreak occurred within the vicinity of the business; or,
the national response to the risk of COVID-19 was enough to satisfy the definition of “occurrence”.
ii. Hybrid Clauses
The Court also interpreted a number of clauses termed as “hybrid” clauses. The policies that contained “hybrid” clauses included a number of Hiscox policies and an additional RSA policy. The “hybrid” clauses provided coverage for “financial losses” resulting from an “interruption to your activities” that was caused by “any inability to use the insured premises due to restrictions imposed by a public authority” as a result of “an occurrence of any human infectious or human contagious disease.”
The Court recognized that, under these “hybrid clauses”, a legislated restriction must be imposed by a public authority for coverage to be found. This meant that social distancing or customer avoidance of premises would not trigger coverage under the “hybrid clauses”. Only restrictions such as the March 21 shutdown of businesses qualified as “restrictions imposed” by a “public authority”. Furthermore, the extensions required an “inability to use” the premises, meaning that partial use or partial restriction (i.e. maximum patrons in a restaurant) would not satisfy this condition. However, the Court acknowledged that this would be a factual analysis considered on a case by case basis.
Ultimately, an “inability to use” connotes something more than a hindrance or disruption of normal use. Specifically, UK Regulation 6 (which prohibited persons from leaving their residence without reasonable excuse) would not satisfy the “inability to use” terminology because there was still an ability for residents to attend at the businesses. Instead only the full closure of the businesses was held to satisfy this term.
In similar fashion to the “disease” clauses, the Court held that a national response to the outbreak, even though the outbreak may not have occurred in or around the business area, would be enough to trigger these “hybrid” clauses. The outbreak itself did not have to be confined to the area around the subject business.
iii. “Prevention of Access” Clauses
The final category of business interruption policies considered by the Court including wording based on the “prevention of access”. These policies did not directly reference a disease or outbreak, but provided coverage where there was a prevention or hindrance of access to or use of the premises as the consequence of a government or local authority action or restriction.
The clauses analyzed came from several identical Arch policies which provided coverage when “prevention of access to the premises due to the actions or advice of a government or local authority due to emergency which is likely to endanger life or property” arose. Further, there was an exclusion preventing indemnification for “notifiable human infectious or contagious disease.” The insured peril in this case was held to be the interruption of government actions in response to an emergency likely to endanger life or property and not the disease itself.
“Prevention of access” was held to have a strict interpretation and only applied where the business was actually closed due to government intervention (similar to the hybrid clauses). A simple “hinderance” to access did not satisfy this term (i.e. social distancing or limited capacity).
The Court considered the example of a restaurant or pub providing takeaway (takeout) service. Where such services were provided prior to the shutdown, there would not be a “prevention of access” since the restaurant workers could attend at the premises and prepare food for delivery or takeaway. While the operation of the business may be impeded or hindered, the Court did not consider that circumstances to be an insured peril. Similarly, the restrictions on free movement imposed prior to the closure of certain businesses did not constitute a prevention of access thereby entitling the business owners to coverage.
The Court further determined that a prevention of access to the premises would only occur in circumstances where the government ordered a complete, not partial, closure of the premises. Anything short of a complete closure would not constitute prevention of access. The Court mandated a fact specific analysis. As such, using the above example of a business with a takeaway service, the prevention of access was not made out unless the takeaway service was a de minimis part of the business prior to the closure. To the contrary, a business that created a remote or internet service in response to a closure would be afforded coverage under the “prevention of access” clause (e.g. in the sense of a cinema or theatre providing an internet streaming service that was not previously implemented prior to COVID-19).
c. “Trends” Clauses
One of the more contentiously argued aspects of this case related to the application of the “trends” clauses contained within the policies. Essentially, the “trends” clauses stipulated that the insurer was only required to pay for the loss of gross profit to reflect any special circumstances or business trends affecting the business. The insurers argued the proper interpretation of the “trends” clause required consideration of what loss of business profits would have arisen with the COVID-19 outbreak, but without government intervention (i.e. arguing that the 2020 year would have been worse for these businesses anyways due to the economic impact of COVID-19 thereby lowering the projected gross profit).
The FCA, on the other hand, argued that the trends clause required a comparison of the business profits between a normal year and a year with COVID-19 (and its related COVID-restrictions). In short, the effect of the government restrictions could not be removed from the lost business profit analysis. The Court agreed with the FCA and found that the business in a normal year as compared to what it was with COVID-19, and all restrictions that were applied, was the proper analysis for purposes of assessing the loss.
d. Causation
Causation was another significant issue addressed by the Court. Specifically, the insurers argued that the “but for” test was not made out because, regardless of the government shutdown, COVID-19 would have created a reduction in business profit. The insurers relied on the case of Orient Express wherein the Court considered whether business losses at a New Orleans hotel were caused directly by Hurricane Katrina or by the inability to access New Orleans during the cleanup. In that case, the hotel’s potential recovery under the policy was reduced on the basis that the cause of the business loss was not damage but, rather, was simply due to the inability of patrons to access the hotel. The Court did not accept that Orient Express was binding or persuasive and cited academic criticism that called this decision a “curious outcome.”
Ultimately, the Court did not accept the insurers’ argument with respect to causation. Even though the cause of the government shutdown might not have been specifically insured, the government shutdown was insured leading to coverage.
e. Evidence
Finally, the Court considered what type of evidence would be required to make out a claim under the business interruption policies. The Court was unable to provide a general guideline as to what evidence may prove prevalence of a disease in order to satisfy a business interruption claim. Each case would need to be assessed on a case by case basis to determine whether prevalence of the disease was made out.
Conclusion
Ultimately, as outlined above, the Court considered three types of business interruption policies, considered to be “non damage” extensions, each with varying degrees of coverage:
“Disease” clauses where business interruption is caused by the occurrence of a notifiable disease within a set radius. This is the broadest extension and provides coverage simply based on a “notifiable disease” occurring within the set radius. No specific governmental shutdown or response is required. The Court held that there would not specifically need to be a case of COVID-19 within the set radius of the business, and a national response could satisfy this aspect of the policy. Further, a complete shut down of the business was not necessarily required.
“Hybrid” clauses whereby a requirement of an inability to use the premises was required for coverage to be afforded.
“Prevention of access” clauses whereby a premises was rendered completely unusable as a result of a government response to an emergency was required for coverage to be afforded. Specifically, “prevention of access” would not include a restaurant having to eliminate its in-person dining option while still providing take-away or where limited seating due to capacity restrictions resulted in a reduction of revenue. However, where a business formed a take-away/out or delivery option after the onset of the COVID-19 pandemic, the “prevention of access” wording would provide coverage.
Implications for Canada
Generally speaking, the High Court’s decision in the Financial Conduct Authority provides some indication as to how Canadian Courts may deal with a business interruption claims in relation to COVID-19. However, given the three distinct types of business interruption extensions, it is not possible to say with certainty how each specific policy will be considered.
Business interruption policies in Canada tend to require “direct physical damage” or “direct physical loss” whereas, in the UK decision, the Court considered “non-damage” extensions. As such, it appears that this case will only be applicable to the extent that the business interruption policy in question includes a “non-damage” extension.
A cursory review of an example of a Canadian business interruption policy reveals much more narrow wording than was at issue in the Financial Conduct Authority case. As noted above, an example of a commonly seen Canadian business interruption policy covers “direct physical loss” occurring at the “risk location.” The following are an example of the types of extensions applicable to Canadian business interruption policies:
Denial of Access: Canadian policies generally cover a denial of access to the risk location by a Government authority, but require the denial of access to be due to damage to other property nearby for up to the number of days specified (e.g. a Government authority shutting down an entire row of shops for a criminal investigation);
Negative Publicity: Generally, these policies cover income loss resulting from interruption or interference with business as a result of infectious or contagious disease manifested by the insured’s employees with specific exclusions for “pandemic outbreak.”
Extra Outbreak Expense: Limited to the amount set out on the declaration page but provides coverage for extra expenses as a result of a pandemic for a set period of time.
These wordings demonstrate that the example Canadian business interruption policy and the non-damage extensions that may apply to these policies are clearly narrower than the UK business interruption policies. However, insurers and insureds will want to closely examine the specific wording of their business interruption policies and applicable extensions to determine whether they fall within the purview of the UK decision.
Where there is a “non-damage” extension at issue, an analysis of the extension wording will be required to determine whether it is comparable to the “disease”, “hybrid” or “prevention of access” category. In such circumstances, this decision will be of assistance in understanding the insurer’s risk of coverage with respect to similarly worded business interruption policies/extensions.
For more information on business interruption claims, please contact Domenic Venturo Q.C., Celeste Small or Noah Hodgson.
Article prepared by Noah Hodgson.
Special thanks to Bob Shaw of Rogers Insurance for his contributions and insight into this article.