The FCA Test Case
The FCA Test Case (“Test Case”) has set the landscape for COVID-19 BII disputes between policyholders and insurers. Unsurprisingly, aspects of the High Court and Supreme Court judgments proved to be highly relevant to this latest decision. We recap on those elements below.
The High Court Judgment
Click here to read our article on this judgment
The High Court found that, as a matter of construction, the majority of non-damage denial of access (“NDDA”) clauses do not provide cover for the pandemic.
In reaching that conclusion, the High Court considered that wordings in the Test Case policies, such as ‘emergency in the vicinity’ and ‘danger or disturbance in the vicinity’, meant the policies provided a narrow and localised cover that would not extend to a nationwide pandemic. This element of the decision was not appealed to the Supreme Court and left open a potentially unsatisfactory outcome for policyholders.
The Supreme Court Judgment
Click here to read our article on this judgment.
One of the key aspects of the Supreme Court’s decision was on the issue of causation, albeit in respect of disease clauses rather than NDDA clauses (since the lack of appeal meant it could not consider the impact on those).
Insurers sought to argue causation could not be established as, “but for” the incidences of COVID within the radius defined by the policy, the widespread impact of the pandemic meant the same or a similar loss would have been suffered by the policyholder in any event. The Supreme Court decided that the ‘but for’ test advocated by insurers did not work in a situation where there are a series of events, each of which caused the insured event, but none of which were sufficient on their own to cause the loss.
The Supreme Court decided that, as each case of COVID was a concurrent cause of the government’s restrictions, to prove causation, it was sufficient for the policyholders to show that, at the relevant time, there was at least one case of COVID in the radius, as defined by the policy.
Decision in Corbin & King v AXA
Corbin & King Limited and its subsidiaries (“Claimants”) issued a claim against their insurer, AXA, in relation to the NDDA cover in their insurance policy, which provided BII from November 2019 to November 2020. The Claimants’ losses arose from enforced closure of their restaurant and cafes by the COVID regulations. AXA asserted it was not liable to indemnify the Claimants.
Construction – Did the clause respond?
The first of the issues determined by Mrs Justice Cockerill was whether the NDDA clause responded. The clause stated:
"Denial of access (non-damage) cover
We will cover you for any loss insured by this section resulting from interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period shown in your schedule arising directly from:
1. The actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises.
We will not cover you where access to your premises is restricted or hindered as a result of:
4. Notifiable diseases as detailed in the Murder, suicide or disease cover”
AXA argued its clause was materially the same as the clauses considered by the High Court and that the Judge must, therefore, follow the High Court’s decision and find the clause did not respond. The Judge rejected this and found AXA’s clause did provide cover on two grounds:
- In terms of the question to be determined on construction, she held the goalposts had been moved by the Supreme Court’s decision on causation. That decision meant that each case of COVID caused the government to impose regulations (as opposed to the nationwide pandemic being the reason for those regulations, which had been the High Court’s assumption). Accordingly, the issue on construction was whether the clause was triggered by individual cases of COVID, which she decided it was.
- The Judge held AXA’s clause was not materially the same as the clauses considered by the High Court. The Judge noted that, when construing the policy, it should be looked at through the eyes of a reasonable SME policyholder advised by a broker. The most important points in construing this particular clause were:
- the clause was couched in general terms, did not state it was limited to ‘local’ dangers and referred to ‘any other statutory body’ which could cover centralised government (in contrast to clauses in the High Court Test Case decision, which referred to ‘local’ authority);
- the historical origins of the word ‘danger’ in an insurance context (such as bomb scares or gas leaks) were irrelevant and disease could be a danger;
- there was no basis to support AXA’s submission that “danger” had to be something that was temporary, particularly given the indemnity period under the NDDA clause was up to 12 weeks;
- the natural reading of ‘disease extension’ exclusion in the NDDA clause was that diseases not listed in the extension (in this case, COVID) would be covered under the NDDA clause.
The Judge then turned to the issue of causation and, whilst the Supreme Court’s decision in the Test Case was simply in the context of disease clauses, she held it was intended to apply more widely. Accordingly, she concluded ??the Supreme Court’s causation analysis must be adopted with this NDDA clause.
The effect was that all the policyholders (in this instance, the Claimants) had to show was, during the relevant period, there was at least one case of COVID within the radius defined by the policy (in this instance, one mile). Unsurprisingly, this factual issue was not challenged by AXA.
Quantum – Did a single limit or multiple limits apply?
Aggregation was not considered by the Supreme Court and so this aspect of the AXA decision is important.
The Claimants own a number of restaurants, cafes and other establishments in the UK. The Court was asked to decide whether the £250,000 sub-limit of the indemnity under the NDDA clause applied to (i) each premises or (ii) the Claimants’ business as a whole. The Judge decided it was the former and, therefore, separate limits applied, thus significantly extending the level of cover available to the Claimants. She gave two reasons:
- It was clear this was a composite policy which provided cover to several policyholders for their various premises; each of those policyholders had a separate interest represented by each of the restaurant or restaurants they owned.
- The wording of the policy referenced “Premises” and the policyholders had multiple premises which were in different locations and could be affected differently by the same type of danger.
The Court’s decision on coverage in this case is perhaps not surprising. The High Court’s decision on the construction of NDDA clauses did not sit well when viewed in light of the Supreme Court’s subsequent conclusions. Whilst the Judge in this case stated she was not finding the High Court decision was wrongly decided, there are clear signs of an emerging divergence from the approach adopted by the High Court. This is more favourable to policyholders.
Ultimately, whether a policy responds remains dependent on the wording of the clause in question but, the Judge referenced the guidance of the Supreme Court, that the issue should be considered through the eyes of an ordinary policyholder rather than “a pedantic lawyer who will subject the entire policy wording to a minute textual analysis”.
It remains to be seen how other insurers will consider the implications of this decision. Zurich, for example, has stated that the High Court found that its NDDA clauses do not respond and so it does not intend to change its stance. Shortly after the Corbin decision was handed down, the FCA reported that insurers have paid out £1.3 billion in business interruption claims. Might they even need to revisit aggregation on some of those in light of this decision?
Whilst AXA was granted permission to appeal, it has since confirmed it does not intend to do so. However, there are more decisions on the horizon with three further cases due to be heard in the High Court’s Specialist COVID-19 BII list in the coming months.Watch this space.