Covid-19 Business Interruption claims – a change in the tide?

The three claims were linked by a common policy wording held by each of the claimants known as the “Marsh Resilience” policy. Similar issues to those addressed in the FCA Test Case arose from the types of clause; disease and prevention of access/enforced closure (our article about the Supreme Court decision can be accessed here).

The three claimants, Stonegate Pub Company Limited, Various Eateries Trading Limited and Greggs plc, are large businesses operating in the food and entertainment sectors; Stonegate, for example, owns and operates 760 hospitality venues in the UK.

The insurers accepted that their respective policies provide some cover but not to the extent alleged by the claimants.  The difference between the respective positions was stark; Stonegate claimed in excess of £1 billion whereas its insurers contended the cover was limited to £2.5 million.

The “Covered Event”

The court was invited to decide what constituted a “Covered Event” under the policy wording.

Insurers did not argue the point because they considered it to be rendered obsolete by the aggregation argument (ie it didn’t matter how many events there were since the losses sustained would all aggregate together).  The judge accepted the claimants’ arguments that each time someone infected with Covid-19 entered one of their locations (under the Disease Wording), or that any one of their locations was forced to close because of Covid-19 (under the Enforced Closure Wording), that could be classed as a separate Covered Event.

It is therefore theoretically possible for there to be multiple covered events at multiple locations.

Aggregation

Aggregation is an insurance concept which governs what happens when a number of separate events, claims or losses are made under the same policy. Should the losses be treated as a single loss with one limit of indemnity or many losses and therefore many limits of indemnity?

The claimants argued that they were entitled to make a new claim, each with a separate indemnity limit of £2,500,000, for each and every Covered Event at each premises location during the Policy Period. The insurers’ cases sought to limit the number claims on the basis that the Covered Events should “aggregate” together.

The relevant clause stated:

“Where the Insured has made a [business interruption] claim affecting one or more Insured Locations that arise from, are attributable to or are in connection with the single occurrence…. the largest applicable will apply to all [business interruption] losses combined”

Following a lengthy consideration of various arguments and issues which might affect aggregation, the judge decided that a reasonable policyholder would understand the words “in connection with” to mean that only a relatively weak causal link is required to link losses together. This means a wide range of losses might fall to be connected with a single occurrence and therefore those losses would aggregate together within a single limit of indemnity.

The judge decided that an “occurrence” would be connected with significant government action undertaken in response to the spread of Covid-19. For example, the request for individuals to avoid non-essential contact and travel on 16 March 2020, and the order for hospitality businesses to close on 20 March 2020. However, it may be that many of the losses arising from the 20 March occurrence also arose from the 16 March occurrence. They would therefore form part of a single loss.

Greggs argued that there had been some 120 occurrences between March and December 2020 but the judge found that the more trivial or discrete announcements which essentially followed or did not significantly change earlier announcements would not be viewed as standalone occurrences. He determined that an occurrence would include the decision to close restaurants early on 24 September 2020, the introduction of the “Tier System” on 14 October 2020 and the second national lockdown on 5 November 2020.

The restrictive nature of this aspect of the decision was a significant blow for the claimants.

Causation

Causation was relevant to the question of whether losses sustained after the period of insurance were caused by the covered events occurring during the period of insurance. In essence, were losses sustained by Stonegate due to decisions made by the government in Autumn 2020 caused by the decision to lockdown in March 2020?

In terms of disease, the court determined that the government’s orders to close premises were primarily driven by current and projected cases of Covid-19, rather than previous cases. Past cases will have had some influence on government response for a short period due to the time lag in obtaining up to date Covid-19 data. However, new government actions outside of the policy period were caused by the cases occurring at the time those actions were taken, and not due to those which had occurred sometime earlier. The long-term impact of Covid-19 was therefore minimal and this severely restricts the losses which the claimants can recover.

Prevention of access was more straightforward. There is cover for any loss resulting from the prevention or inability to access the premises but the extent of the cover available is restricted by the length of that interference. That is relatively straightforward to determine.

Losses

There has been debate following the FCA Test about how government support (ie furlough and business rates relief) should be addressed when assessing policyholders’ losses. These decisions provide some clarity.

For both legal and accounting reasons, the judge held that any government support which policyholders received should be taken into account when assessing losses.

While this has reduced the amount policyholders will recover from their insurers, it makes practical commercial sense; these are indemnity policies and policyholders have received support from government (with no obligation to repay) which has extinguished the loss sustained. A payment by insurers would amount to a double recovery.

Comment

To some extent the decisions are fact specific given they emanate from a particular policy wording but there are key principles which insurers will likely rely on as they continue to adjust business interruption claims. Overall, the judgments are a significant win for insurers.

A point of interest is that these decisions were made by the same judge who heard the FCA Test Case at first instance. His decision in that case favoured insurers and was obviously appealed. Stonegate has already indicated it intends to appeal.

The three judgments are available here: Stonegate Pub Company Ltd v Ms Amlin Corporate Member Ltd, Various Eateries Trading Ltd v Allianz Insurance Plc and Greggs Plc v Zurich Insurance Plc

If you would like to talk about your Business Interruption insurance, or our commercial and corporate insurance services, please do get in touch with Ben or one of the insurance sector team.