COVID-19 Business Interruption Insurance

The High Court of Justice in England recently issued an opinion relating to business interruption insurance coverage in view of the Coronavirus Disease 2019 (COVID-19). The opinion of the test case The Financial Conduct Authority v Arch and Others, while not legally binding in the United States, may provide ammunition for domestic policyholders when litigating in the United States court systems, but will likely be discounted by United States insurers as factually inapposite. Here, the Financial Conduct Authority (FCA) filed the case on behalf of policyholders.

The parties in Arch agreed to present 21 lead policies for consideration by the Court. The Court identified three categories of wordings for the policies:

1. disease provisions, “which, in broad terms, provide coverage in respect of business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a speified radius of the insured premises;”
2. prevention of access provisions that include “[p]revention 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;” and
3. hybrid clauses, “which refer both to restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease.”

Regarding the disease provisions, the insurance carriers argued, inter alia, that had the disease not occurred within the specified radii of the premises, businesses would still have suffered due to government instituted closures and social distancing measures. The carriers would be liable only if there is an actual diagnosis in the coverage area. The Court rejected this argument as being overly narrow and held that the term “occurrence” does not require an actual diagnosis, but when an illness is “sustained” by a person.

Importantly, the carriers attempted to reduce liabilities by limiting the term “following” (or in consequence of or arising from) to denote proximate causation. Specifically, the carriers alleged that their liabilities end when the business interruption is not proximately caused by the occurrence of COVID-19. The Court disagreed. According to the Court, the terms “following,” “in consequence of,” and “arising from” refer to a temporal relationship between the business interruption and the notifiable disease.

Regarding the prevention of access provisions, the Court construed the terms more restrictively in favor of the carriers. Importantly, the Court opined that the coverage for the insured depends heavily on the wordings of the policy. For example, “prevention of access” generally does not cover hindrance to the premises. If a restaurant is ordered to close dine-in services, but still offers takeout and/or delivery, the Court declined to hold the carriers liable because the customers still can access the premise via takeout. Further, “only total closure rather than partial closure will amount to the prevention of access…” Relatedly, the Court did not “consider… social distancing and stay at home instructions constitute ‘enforced closures’.”

With respect to the hybrid clauses, the Court took a mixed approach based on the two above. Specifically, for the disease wordings in the hybrid clauses, the Court took a similar position as the disease provisions described above; for the prevention of access wordings, the Court construed the policy similar to the prevention of access provisions above.

For all three categories of wordings, the carriers attempted to narrow the scope of the insured peril associated with the trends clause to minimize liabilities. For example, for the “disease provisions,” the carriers attempted to limit the liability damage to business interruption due to the occurrence of a notifiable disease within a specified radius (i.e., local occurrences). Regional or global effects of the pandemic and government measures are part of a business trend. The Court rejected this position, and held that “the correct application of the counterfactual in the current case is to compare the actual performance of the business with that which the business would have achieved in the absence of the COVID-19 outbreak which led to restrictions… and the inability to use the premises.”

In the case of the prevention of access provisions, the Court opined that “the insured peril is a composite one involving three interconnected elements: (i) prevention or hindrance of access to or use of the premises (ii) by any action of government (iii) due to an emergency which could endanger human life.” For the hybrid clauses, “ [t]he composite peril involves (i) inability to use the insured premises (ii) due to restrictions imposed by a public authority (iii) following, here, the occurrence of a human infectious or contagious disease.”

The Arch case is specific to the wordings involved, as well as English law, and in light of its length and density, may be difficult to translate to a meaningful argument in a US court. Nevertheless, the decision provides some arguments for policyholders in the United States to assert, and for insurers here to distinguish and will likely be added to the ongoing legal battles in US courts.