The Court has this morning delivered the keenly awaited Judgment in the FCA Test Case litigation concerning COVID-19 Business Interruption claims. 

The Judgment provides guidance on disease clauses, hybrid clauses, prevention of access clauses and trends clauses. DAC Beachcroft LLP acted for Ecclesiastical Insurance Office Plc and MS Amlin Underwriting Limited.

A. Introduction

The case concerned a sample of policies from eight representative insurers and according to the FCA will impact some 700 policy types, 60 insurers and 370,000 potentially affected policyholders.  The nature and extent of the issues before the Court are reflected in the Judgment which runs to over 150 pages and some 573 paragraphs. 

The FCA commenced the test litigation with a view to obtaining certainty for policyholders (and insurers) in relation to numerous claims made by policyholders arising from losses said to be caused by COVID-19.  The Court reviewed some 21 “lead” policies which fell essentially into three categories (i) “disease clauses”; (ii) “hybrid clauses” and (iii) clauses concerned with the prevention of access to premises and similar perils.

At Trial it was suggested that the interpretation of all three categories depended on complex issues of causation - particularly the concepts of “but for” causation - but the Court has concluded that most if not all of the issues of causation raised at length can be answered by the correct construction of the wordings and the Court’s findings on the prevalence of COVID-19 (in Section H of the Judgment).

The Court has not, therefore, considered at any great length the complex arguments advanced during the Trial on causation in the context of “but for” and has, instead, focussed on the actual language of the relevant wordings. 

In approaching construction of the wording the Court has adopted what it describes as general principles, namely that the Court “must ascertain what a reasonable person, that is, 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” (Rainy Sky v Kookmin Bank (2011)).  The Court expressly stated that this means “disregarding evidence about the subjective intentions of the parties”. 

This approach requires the Court to consider the commercial consequences of competing constructions but commercial common-sense should not be invoked retrospectively or to re-write a contract in an attempt to assist an unwise party, or to penalise an astute party.  Where the parties have used unambiguous language the Court must apply it. 

When looking at words which were expressed as exceptions or exclusions the Court was not required necessarily to approach construction “with a predisposition to construe it narrowly”.  The Court cited with approval the decision in Crowden v QBE (2017) where the Judge said that the Court “… must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract.  The Court should not adopt principles of construction which are appropriate to exemption clauses … to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford”.

B. Disease Clauses

There were eight such clauses considered by the Court and although each was slightly different the Court took a general view on the appropriate approach.  The FCA’s basic case was that there was a Notifiable Disease in all parts of the UK by 6 March 2020 and that there was an occurrence of such a notifiable disease within the relevant radius of any premises (usually 25 miles) when a person or persons with COVID-19 was actually within those 25 miles.  That led to interruption of or interference with each business from 16 March as a result of the Government’s advice and/or announcements on social distancing, lockdown, etc.  The FCA argued that all losses were sufficiently causally connected where the interruption or interference with the business “followed” such occurrence and where such interruption would not have occurred had there been no COVID-19 outbreak or intervention by the Government.

Although the various insurers made various contrary submissions the thrust of those submissions was that there was only cover where a local outbreak of a Notifiable Disease, i.e. within 25 miles of the premises was the proximate cause of the interference with the business. 

The Court’s overall conclusion (mainly set out in addressing cover under an RSA wording) was that disease cover generally is not confined to the effects only of the local occurrence of a notifiable disease.  The construction the Court favoured was to avoid “the result that there would be no effective cover if the local occurrence were a part of a wider outbreak, and where precisely because of the wider outbreak, it would be difficult or impossible to show that local occurrence(s) made a difference to the response of the authorities and/or public”. 

In the light of that approach the Court felt that the “issues as to causation largely answer themselves”.  If properly construed there is cover for the effects of the disease which may occur both within and outside the specified radius and which may trigger response of the authorities and the public to the outbreak as a whole “then it would be inconsistent with the nature of the cover to regard the occurrence of the disease outside the radius, or the response of the authorities or the public to that occurrence of the disease, as being alternative, uncovered, the causes of business interruption …”.

In addition, the Court also considered the Resilience Wording (described in the Test Case as RSA 4) and concluded that the word “Vicinity” in that Wording meant, essentially, anywhere within England and Wales.  This gave even broader cover, accordingly, than the other disease wordings.

For all disease wordings, therefore, the Court essentially found that the relevant test was the existence of the composite insured peril of COVID-19 with the Government and action provided that there was disease within the relevant radius and there would almost always be such disease because of the prevalence of COVID-19.

The Court came to a different conclusion, however, in relation to two QBE wordings, QBE 2 and 3 which even though they were disease wordings, required an “event” to trigger cover and because of that wording the Court concluded that it was necessary for the relevant “event” to have caused the business interruption or interference.  Occurrences of the disease at different times and in different places would not constitute the same event and so the clause provides no cover.

C. Hybrid Clauses

These were mainly policies issued by Hiscox and linked the cover for business interruption to a combination of disease and denial of access cover.  The argument put forward on behalf of Hiscox depended upon strict interpretation of the language of the wordings (Hiscox 1-4) and Hiscox argued for a narrow interpretation of the language and contended that any “occurrence” had to be local and specific to a relevant insured or its premises.  The Court, however, found that although any restrictions must “follow” the “occurrence” of a notifiable disease of a causal nature the Court regarded that as of no significance because they regarded the entire outbreak of COVID-19 in the UK as “an occurrence” and  found that any restrictions followed that outbreak. 

D. Prevention of Access and Similar Wordings

The Court considered a number of wordings and concluded in general terms that these wordings were in fact related to specific localised events rather than the general national response to COVID-19.  In most respects, accordingly, the Court concluded that there was no cover on these facts for these types of wording.  The Court considered also that subject to the specific language and specific wordings if there was anything short of complete closure there would be no prevention of access.  The position would be different where cover was in respect of the “hindrance” of use of premises as opposed to the “prevention” of access to premises.

E. Ecclesiastical

The relevant extension in the Ecclesiastical wordings also contain a “carve out” where closure or restrictive use of premises was due to the “order or advice of the competent local authority as a result of an occurrence of infectious disease ...”.

The FCA argued that this was not effective in this case because the relevant act was by Government.  Ecclesiastical’s argument was that the clause should be seen as a definition cover and not an exclusion clause and therefore one needed to consider other elements of the policy including in particular an extension in relation to “specified diseases”(which did not include COVID-19).

Applying the general principles identified above when approaching a clause such as this the Court considered that in the circumstances the carve out was effective and therefore no cover was to be granted under the Ecclesiastical wording.

F. Trends

The Court was asked to consider the effect of “trends” and “adjustment” clauses in the event that cover was found.  It found, generally, that even if there was no “damage” the trends clauses would nevertheless apply.  Equally, however, the Court found that one could not apply the trends clauses as a guide to the extent of cover. 

Perhaps more importantly, however, the Court found that it was not bound to follow the case of Orient Express in terms of the effect of trends clauses and, obiter, found that the case was wrongly decided.  In summary the Court found that it was not correct to exclude the underlying cause of damage in the “but for” world after loss.  This is likely to be of considerable significance in the future and may be the subject of appeal.

G. Conclusion

This was the first ever case to be determined under the Financial Markets Test Case Scheme and was dealt with at breakneck speed proceedings having only been commenced on 9 June.  The Judgment is likely to affect many insurers and thousands of policyholders and no doubt there will be detailed reviews by all concerned.

Consequential matters including any applications for leave to appeal will be addressed in a further hearing.  It will be interesting to see which parties seek to appeal which parts of this long and complex Judgment.

The full Judgment can be found on https://www.fca.org.uk/firms/business-interruption-insurance.