Article | What is being done around the world to resolve COVID-19 coverage issues?
16th September 2020
The COVID-19 global pandemic has had a devastating financial impact on businesses across the globe, with many forced to cease or heavily restrict their trading due to government advice or orders. Some of those businesses have sought to recover part of their losses from their business interruption insurance policies, particularly where they contain communicable disease, prevention of access and other so-called “non-damage” extensions. However, despite some notable policyholder victories (including in the FCA Test Case Judgment delivered on 15 September 2020), there remains uncertainty over the proper legal interpretation of these clauses, such that the prospects of successful insurance claims still hang in the balance.
In this bulletin we summarise the Test Case Judgment and report on relevant developments and guidance that has emerged from various other jurisdictions to date.
England and Wales
The Financial Conduct Authority (“the FCA”) brought a test case on behalf of policyholders against certain insurers in relation to COVID-19 related BI losses.
The FCA, as the conduct regulator of insurers in the UK, took a representative sample of cases to court in which it put forward policyholders’ arguments with the objective of obtaining clarity and certainty for all parties involved in potential disputes as to whether COVID-19 related BI losses are covered. The FCA have said that, in their view, most commercial insurance policies are focused on property damage (and only have basic cover for BI as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic. The test case focused on the remainder of policies that could be argued to include cover.
Specifically, the Court was asked to decide, against a matrix of agreed/assumed facts, whether there is cover under certain “non-damage” extensions to business interruption policies. Judgment at first instance was handed down on 15 September 2020. In summary it is fair to say represents a victory for the policyholders.
The Court found that policyholders will generally be able to establish cover under policies containing “disease clauses” which require the occurrence of a notifiable disease within a specified radius or vicinity of the insured premises (the “relevant area”).
The disease clause cover was not limited to outbreaks wholly within the relevant area since (i) the wordings did not specify that and (ii) it is not a sensible construction either given the nature of notifiable diseases, including the way in which they are spread and are responded to by national as well as local authorities.
The policyholders did not therefore have to distinguish the effects of the nationwide outbreak from the effects of the local outbreak within the relevant area, in order to establish that they had suffered a loss caused by the occurrence of the notifiable disease.
In relation to 2 QBE wordings using “events” language, the Court agreed with insurers that the cover was for specific and localised events such that the policyholders could only recover where they could show that the case(s) of disease in the relevant area had caused the business interruption losses.
By contrast, the “denial of access” clauses were interpreted more narrowly, particularly where they contain a requirement for an emergency/incident/danger or disturbance etc. to have occurred. The Court said those wordings were intended to provide narrow localised cover and that action taken in response to the nationwide pandemic would not therefore suffice.
The FCA won the key battleground of causation and trends clauses. Insurers argued that, given the insureds would have had no trade due to the pandemic even if they had been open for business, they did not suffer an insured loss due to the presence of the factors specified in the disease and/or denial of access clauses. The Court found that when analysing the “counterfactual”, one needs to strip out the effects of the insured peril itself. The Court had defined the insured perils under disease clauses broadly to include the impact of the nationwide pandemic, such that when analysing causation and trends clauses in relation to that cover, the counterfactual essentially includes a world without Covid-19. Insurers’ counsel are already observing that the analysis in the Judgment is an oversimplification of complex arguments on causation and trends clauses that were made in the case.
Insurers need to update their policyholders who have made claims or complaints on the Test Case and its “implications” for their claims/complaints by 22 September 2020.
There will be a hearing in October 2020 at which (1) the parties will make submissions to the Court regarding the appropriate declarations to be made in light of its findings, and (2) insurers are very likely to seek permission to appeal. Permission will be granted where the Court considers that the insurers' arguments have a realistic chance of success or where there is some other compelling reason for the appeal to be heard. It is likely that the high volume of claims that remain in abeyance pending Judgment in this case, and the general importance of obtaining contractual certainty for insurers and policyholders alike, will provide sufficiently compelling reasons for permission to be granted.
In the event that permission to appeal is sought, the Framework Agreement entered into by the parties to the test case clarifies that a party should seek to have any appeal heard on an expedited basis and that the possibility and appropriateness of seeking a ‘leapfrog’ appeal to the Supreme Court (i.e. bypassing an appeal to the Court of Appeal) must be explored.
As well as the FCA test case, a number of policyholders have come together to bring class actions against insurers, such as a £40m arbitration claim being brought against Hiscox under “Notifiable Disease” extensions.
On 5 August 2020, the Central Bank of Ireland (CBI) issued a supervisory framework, setting out its approach to dealing with the issue of business interruption insurance cover for losses arising from the outbreak of COVID-19 in Ireland.
The extent to which, if at all, a company can rely on any business interruption insurance cover it may have in place in order to claim for losses arising from COVID-19 is, in principle, purely a contractual matter between the individual business and their insurance provider. On the other hand, the CBI states that it “has no tolerance for systemic consumer or customer harm to go unresolved”. The CBI recognises that many insurance policies clearly do not provide insurance cover for COVID-19 related business interruption losses, in which case no regulatory issue should arise. Its concern is with the approach of regulated insurance companies to their policies that either clearly provide such cover or where a “strong or reasonable argument” could be made that they do so.
For the purposes of assessing the situation, the CBI is using its compulsory powers to obtain relevant information from the insurance companies and is requiring the information to be certified as accurate and complete by a senior executive with authority to bind the insurance company.
The CBI has emphasised that it expects insurance companies to take a “customer first” approach to the resolution of any of the relevant issues. Where, for example, there is a doubt about the interpretation of a term in an insurance policy, “the interpretation most favourable to the customer should prevail” – in this regard, the CBI may intervene by communicating its views to the insurance company. Also, the CBI expects that insurance companies will proactively apply the beneficial impact of any resolution of an individual complaint (whether in the courts or otherwise) to all similarly affected customers.
Hundreds of businesses across the United States have filed individual and putative class action lawsuits seeking recovery under their insurance policies for financial harm incurred as a result of the various governmental closure or “stay-at-home” orders arising from the pandemic. (See Eversheds Sutherland Legal Alert, “US Legal and Regulatory Developments - Business Interruption Insurance for COVID-19 Related Losses.”) Of the substantive decisions issued by US courts to date, most have favoured insurers.
In the earliest business interruption decision, the Southern District of New York denied a preliminary injunction due to the plaintiff’s likely inability to demonstrate property damage triggering coverage. The plaintiff, a magazine publisher, sought to recover its business interruption losses under a business owner’s insurance policy with Sentinel Insurance Company Limited. Social Life Magazine, Inc. v. Sentinel Ins. Co. Ltd., No. 1:20-cv-03311-VEC (S.D.N.Y. Apr. 28, 2020). At a hearing in May on the preliminary injunction, the court questioned whether there was any damage to the Plaintiff’s property, noting that the virus “damages lungs. It doesn’t damage printing presses.” The court concluded, “New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going. . . . [T]his is just not what’s covered under these insurance policies.” Based on the property damage requirement, the plaintiff had not shown a probability of success on the merits; the owner of the business could still go onto the business premises, so the premises were not entirely uninhabitable or unusable. The court therefore denied the preliminary injunction. After the hearing, but before the court entered a written order, the plaintiff voluntarily dismissed the action.
A Michigan state trial court dismissed with prejudice a suit seeking to recover under a restaurant group’s business interruption coverage because the plaintiff did not—and could not—allege direct physical loss. Gavrilides Mgmt. Co. LLC v. Michigan Ins. Co., No. 20-258-CB (Mich. Cir. Ct. July 21, 2020). During a July hearing, the judge ruled from the bench that, under the common meaning of the policy language and federal case law, “direct physical loss of, or damage to, property” must involve something with material existence or that alters the physical integrity of property. The mere restriction of dine-in services at a restaurant did not meet the requirement physical loss or damage. The court also rejected the argument that the virus and bacteria exclusion in the policy was vague.
The Western District of Texas also recently dismissed a suit for business interruption coverage without leave to amend. Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-cv-00461-DAE (W.D. Tex. Aug. 13, 2020). The plaintiff barbershop businesses sought to recover under their policies, and the insurer moved to dismiss. The court held that “accidental direct physical loss” required tangible injury to property, and the plaintiffs had not alleged any physical alteration to their property. The court also concluded that the virus exclusion barred the plaintiffs’ claims; it found that the exclusion was unambiguous and enforceable, and that COVID-19 was pleaded as the underlying cause of the plaintiffs’ loss.
A trial court in the District of Columbia similarly ruled in favour of insurers on a motion for summary judgment. Rose’s 1, LLC v. Erie Ins. Exchange, No. 2020 CA 002424 B (D.C. Super. Ct. Aug. 6, 2020). The plaintiff restaurant owners sought to recover for their loss of income from the closure of their restaurants. The court held that the closure of the restaurants did not constitute a direct physical loss under the policy. The losses were not “physical,” even though the COVID-19 virus itself is tangible, because the plaintiffs did not offer any evidence that the virus was present at their properties. Moreover, the governmental closure orders did not themselves constitute a physical intrusion.
However, not all courts have found for insurers. In August, Western District of Missouri allowed a business interruption claim to withstand a motion to dismiss. Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020). The plaintiff hair salon and restaurants asserted putative class claims for declaratory judgment and breach of contract. On the insurance company’s motion to dismiss, the court held that the plaintiffs adequately alleged a “direct physical loss,” based on the allegation that COVID-19 particles attached to and damaged the plaintiffs’ property, making their premises unsafe and unusable. The court also found that the plaintiffs stated a claim for civil authority coverage by alleging that government orders required them to suspend operations or cease dine-in service.
In Germany, some business interruption insurance contracts do cover BI losses due to infections and diseases, although not surprisingly these policies do not explicitly mention COVID-19 as an insured peril.
As a consequence of the German Lockdown in 2020, there have been negotiations between insurers and policyholders over the cover of COVID-19 BI losses. Insurers offered each policyholder a settlement of 15 % of the claim, an offer which numerous policyholders accepted this.
Other policyholders filed lawsuits. In a preliminary injunction procedure, the Regional Court of Mannheim (“Landgericht”, first instance) ruled in favour of a policyholder to the extent that losses resulting from the Lockdown are covered. Interestingly the Court held that it did not matter for the purposes of coverage that the Lockdown was directed to the entire hotel sector rather than just the insured hotel in question.
In Germany, there exists no statutory test case for insurance disputes, such that disputes concerning individual COVID-related insurance claims will probably keep the German courts (Regional Court, Higher Regional Court “Oberlandesgericht”, Federal Supreme Court “Bundesgerichtshof”) busy for the next few years.
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