The English Financial Conduct Authority (FCA) brought the test case on behalf of insureds against a number of insurers seeking to clarify a number of issues of principle on the cover provided by business interruption (BI) policies, so that claims under those policies could be resolved more quickly.1
The English High Court issued a lengthy judgment last week, upholding many of the arguments made by the FCA on behalf of policyholders. The judgment is wide-ranging and addresses many issues. In the New Zealand market, there are four key issues arising from the case that insurers and insureds should consider when assessing cover under BI policies in New Zealand.
1. Is there cover under the standard insuring clause?
The standard insuring clause in a BI policy only covers interruption to a business that is caused by material damage, such as damage to buildings or other assets. In the case of a disease like COVID-19, there is no material damage. This typically means that interruption caused by COVID-19 will not be covered under standard policy wording, and an insured will need to look to extensions under the policy.
The Court in the FCA case confirmed this, recording “The Court is asked to construe a number of wordings which contain non-damage 'extensions' to the 'standard' [BI] cover … there is no dispute … about whether there is cover under such 'standard' BI cover"—there is not.
2. Does an extension apply to provide cover?
Some BI policies in New Zealand cover interruption that is caused by actions of a public authority leading to the closure of a business or inability to access business premises. By way of illustration, one of the clauses considered in the FCA case indemnified the insured for losses resulting from:
Prevention of access to The Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property.
Less commonly, policies may also contain an extension for interruption caused by the insured's inability to access its business premises as a result of disease (or, in special cases, interruption due to the disease itself). Again, the FCA case provides an example specific cover resulting from:
any human infectious or human contagious disease … an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it.
Specific disease cover is not common in New Zealand. However, if an insured had such cover prior to the outbreak, they may potentially have cover for interruptions caused by COVID-19 or a lockdown.
Whether there is cover under a prevention of access or disease extension will depend on the particular terms of the clause at issue. The English High Court provided some following guidance as to the meaning of terms that are commonly used in such clauses:
- “Manifest": “Clearly someone who is displaying symptoms of a disease can be said to 'manifest' it". This will also be the case where a disease is diagnosed (even if the person is not symptomatic), but a disease does not manifest where a person is neither symptomatic nor diagnosed as having it.
- “Occurrence": “there will have been an 'occurrence' of COVID-19 within an area when at least one person who was infected with COVID-19 was in the relevant area", even if they have not been diagnosed.
- “Prevention": “impossibility [is] the touchstone of prevention", and it is to be contrasted with a mere hindrance.
- “Restrictions imposed": “what these words mean is something which is mandatory, and they do not include something which is less than mandatory. … [W]hat is being referred to is something that has the force of law". In other words, mere advice from the government might not amount to a restriction.
- “Unable to use": “'Unable to use' means something significantly different from 'hindered in using' or similar … [T]here will not be an 'inability to use' premises merely because the insured cannot use all of them…".
3. If an extension applies, is cover nevertheless excluded?
In New Zealand, many BI policies contain exclusions for pandemics and human disease notifiable under the Heath Act 1956 (such as COVID-19). Where there is an extension providing cover, and an exclusion excluding cover, it will be necessary to see whether the two clauses can be reconciled.
In many cases, the policy will expressly provide that the exclusion prevails in the event of a conflict. In a number of policies we have reviewed, the Health Act exclusion has taken precedence over extensions that would otherwise potentially provide cover.
In some cases, however, it may be less clear. Once again, we can take an illustrative clause from the FCA case, in this instance from a policy that provided cover under an extension for interruption caused by the occurrence of a notifiable disease within 25 miles of the premises. There was a general exclusion that provided:
The insurance by this Policy does not cover any loss or Damage due to … epidemic and disease or due to any limitation or prevention of the use of objects because of hazards to health.
All other terms and conditions of this Policy shall be unaltered and especially the exclusions shall not be superseded by this clause.
The Court held that this general exclusion for epidemics and disease could not reasonably be interpreted to cut down more specific cover for disease that had been provided by an extension; the policy could not give with one hand and take away with the other. The Court also interpreted the final phrase in the quote above as providing that the general exclusion was subject to other terms and conditions in the event of a conflict.
However, there is also a principle of interpretation (which has been accepted by the New Zealand Court of Appeal) that in another case could lead to the opposite conclusion: where a loss has two effective causes, one covered by the policy and the other excluded, the exclusion prevails.
4. If there is cover, how should the loss be quantified?
BI policies commonly include “trends clauses", which require loss to be assessed by reference to the difference between (for example) the revenue earned by the business in the real world (that is, taking account of losses caused by the insured risk) and how the insured's business would have performed in a hypothetical, “counterfactual" world in which the insured risk did not occur.
This can sometimes be easier said than done. For example, under a policy providing cover for loss of access due to actions of the government following COVID-19, should the counterfactual be:
- a world in which the government never imposed a lockdown, but COVID-19 was still present in the country and causing lower demand and having other, wider impacts (leading to a lower recovery), or
- a world in which there was no outbreak of COVID-19 at all (leading to a higher recovery)?
A central theme in the FCA case was that constructing the counterfactual requires a careful definition of the scope of the insured risk. The Court tended to view that, on the policy wordings that it considered, the insured risk was a composite of the elements leading to the interruption, not only (for example) the relevant government action. This meant that the Court generally considered the appropriate counterfactual to be one in which there was no COVID-19 at all.
It has been reported that the insurers have been granted permission to make a 'leapfrog' appeal directly to the Supreme Court, but no appeal has yet been filed. In the meantime, the case provides useful guidance as to the proper interpretation and application of business interruption policies to claims relating to COVID-19.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.