18 Feb 2021

UK decision on COVID-19 business interruption insurance could suggest success for Australian insureds

By Lucy Terracall, David Gerber and Chris Erfurt

In a decision that is likely to be influential in Australia and contradicts the position espoused by some in the Australian insurance industry, the UK Supreme Court decided that cover for business interruption for COVID-19 may be readily triggered and if so is likely to extend to all loss caused by government action, any cases of COVID-19 existing at the date of that action (whether or not in the insured's locality), and the related public response.

Australia is not the only country in which businesses and their insurers have sought guidance on the scope of COVID-19 business interruption insurance. On 15 January 2021, the UK Supreme Court (the UK's topmost court) handed down its decision in the UK's test case, with the practical effect that all of the insuring clauses which were in issue will provide cover to UK policyholders for business interruption losses due to COVID-19.

While the judgment in The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others [2021] UKSC 1 is not binding in Australia, and there are some differences in the precise wording of Australian policies, the types of insuring clauses in Australian business interruption insurance policies are generally the same (eg. either requiring infectious disease, or prevention/restriction of access to the insured premises, or a hybrid), many of the same issues arise, and the judgment will be influential.

Why the UK Supreme Court found for policyholders

The High Court decision predominately favoured policyholders, and the Supreme Court decision even more so. The insurers' appeals were entirely unsuccessful, and the FCA's appeal was allowed. In summary, the Supreme Court:

  • confirmed that each individual case of COVID-19 within an area was an occurrence and therefore triggered clauses requiring the occurrence of the disease within an area (disease clauses);
  • held, however, contrary to the High Court, that clauses requiring the occurrence of the disease within an area do not apply in respect of COVID-19 outside of that area;
  • nevertheless, found on causation that each case of COVID-19 in the UK which had occurred by the date of government action was an equal, effective, proximate cause of business interruption losses due to COVID-19, and the fact that there were other concurrent causes did not preclude or reduce cover because those concurrent causes were not expressly excluded. For example, in the context of a disease clause, cases outside of the area specified in the clause, government action or public reaction. did not preclude or reduce cover;
  • in doing so, held that (absent clear words to the contrary), an insurance contract is not to be interpreted by reference to the "but for" principle of causation in UK tort law, but in light of the insurance law concept of proximate cause;
  • further, held that clauses requiring business interruption losses to be adjusted to reflect trends in the business do not (absent clear words to the contrary) permit adjustment for trends or circumstances related to the insured peril (eg. for disease clauses, insurers cannot make adjustment in respect of cases outside of the area specified in the clause, government action or public reaction). This principle applies even in respect of the effects of those trends or circumstances which occurred prior to satisfaction of the policy trigger. For example, if the clause required a government restriction, and the public began to stay away from the business before that restriction because of general concern about COVID-19, losses associated with that trend do not get adjusted out;
  • on trending, the High Court suggested that if the question were asked, "but for what?" the correct answer would be "but for the occurrence of the insured peril", meaning all components of the insured peril and not merely the final element required to complete it. Both approaches avoid the paradox inherent in the Orient Express Hotels case, that the more widespread the consequences of an insured peril, the less the available cover. The UK Supreme Court decision found that the Orient Express Hotels case decision was wrongly decided;
  • held that clauses applying to loss as a result of closure of or restrictions on or inability to use business premises either imposed by government or due to disease should be interpreted more broadly than the High Court had found. In particular:
    • "restrictions imposed" encompasses mandatory measures (as the High Court found), but does not require force of law or the imminent threat of legal compulsion – a clear, mandatory instruction issued in the anticipation that legally binding measures may follow if compliance is not secured, will suffice. In the UK, one example of this was on 20 March 2020 when Boris Johnson instructed certain business to close;
    • "restrictions imposed", absent qualifying words to the contrary, need not be directed at the insured premises or business, and may be other restrictions (eg. upon the public's ability to move about); and
    • an "inability to use" (and by extension, restriction or hindrance on use) occurs when a policyholder is unable to use the insured premises for a discrete part of its business (eg. dine-in customers) or if it is unable to use a discrete part of its premises for its business activities (eg. a function room);

The Australian test case on COVID-19 business interruption insurance

There is also an Australian test case, approved by the Australian Financial Complaints Authority, which addressed a discrete issue unique in the Australian insurance market. Clayton Utz is acting for the policyholders in that case.

Five Judges of the NSW Court of Appeal found in favour of policyholders in holding that a disease extension with an exclusion for "quarantinable diseases" under the Quarantine Act 1908 and/or "listed human disease under the Biosecurity Act" did not exclude cover for COVID-19: HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296. The insurers have applied for special leave to appeal that judgment to the High Court of Australia.

In relation to exclusions that reference the Biosecurity Act, although COVID-19 is a "listed human disease" under that Act, it does not follow that those exclusions are effective to exclude cover for business interruption losses due to COVID-19, and that remains a live issue to be resolved.

The Australian insurance industry has published information asserting that business interruption insurance policies do not cover and were not intended to cover pandemics, but that is not what most wordings say, and the UK Supreme Court commented that:

"This was not, of course, a disease which anyone could have had specifically in mind when the policies in issue were written and marketed. But it is clear from the use of the definition of a “Notifiable Disease” in most of the relevant clauses, and equivalent wording in the remainder, that COVID-19 (when it appeared) fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover: see in particular paras 51 to 53 of the majority judgment. Thus it cannot be said that cover for business interruption attributable to the reaction to a disease like COVID-19 lay outside the purview of the policies in issue.

The consequence therefore is that, on the insurers’ case, the cover apparently provided for business interruption caused by the effects of a national pandemic type of notifiable disease was in reality illusory, just when it might have been supposed to have been most needed by policyholders. That outcome seemed to me to be clearly contrary to the spirit and intent of the relevant provisions of the policies in issue.”

Policyholders should review and closely consider their individual policy wording, irrespective of any advice they may have received from their insurer or broker. Failing to lodge a claim for business interruption or delaying that process may prejudice or undermine the policyholder's entitlements.

Disease Wording

A disease clause generally provides insurance cover for business interruption loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder’s business premises.

Cover for loss resulting from:

  1. interruption / interference with the business;
  2. following / arising from / as a result of;
  3. any notifiable disease / occurrence of a notifiable disease / arising from any human infectious disease manifested by any person; and
  4. within 25 miles / 1 mile / the "vicinity" of the premises / insured location.

UK High Court said that cover was not limited to outbreaks wholly within the relevant policy area as:

  1. the policies did not expressly state that the disease should only occur within the relevant policy area (as opposed to other cases elsewhere); and
  2. principles of construction required this conclusion as notifiable diseases include those capable of widespread dissemination, such as SARS, and these diseases may spread in a highly complicated and unpredictable fashion. Cases within the relevant policy area are not therefore independent of, and a separate cause from, cases outside the relevant policy area;

Overall, the UK Supreme Court agreed with (a) and (b) from the High Court decision.

The Court held that the clause covered business interruption losses resulting from COVID-19 (which was made a notifiable disease on 5 March 2020) provided there had been an occurrence (meaning at least one case) of the disease within the geographical radius. It held that the clause does not say that there is cover for an occurrencesome part of whichis within the specified 25 mile radius but rather that there is cover for “any … occurrence of a Notifiable Disease within” that radius.

It is therefore only an occurrence within the specified area that is an insured peril and not anything that occurs outside that area.

The Supreme Court ultimately construed the disease clauses more narrowly than the High Court and the FCA. However, because of its findings with respect to concurrent causation, they still will respond in the circumstances of the pandemic. The Court held that the cases outside the radius do not displace the proximate cause effect of cases inside the radius, because they are concurrent causes of the same loss and not expressly excluded.

Wording / issue

UK High Court decision / observation (for all wordings except the QBE wording)

"Vicinity"

"Vicinity" is to be widely construed as encompassing England and Wales, as "in the case of COVID-19, a highly contagious, and often fatal, disease, the relevant area would be the entirety of the UK because one would reasonably expect a national response which might affect the insured's premises wherever they were".

"an outbreak of disease" 
"An outbreak of disease" is the "occurrence" of the disease, and occurs from the point in time at which at least one person who was suffering from COVID-19 was in the relevant area. The case does not have to have been actually verified by diagnoses or be symptomatic at that time, it is just required to be diagnosable.

"the insured peril"

"The insured peril" is the composite peril of interruption or interference with the business following the occurrence of the notifiable disease within the defined radius of the premises. The requirement for proximate causation is between the loss claimed by the insured and the composite insured peril.

QBE policy Disease wordings, which provide cover for “Loss resulting from interruption or interference with the business in consequence of any of the following events: … any occurrence of a notifiable disease within a radius of 25 miles” (QBE2) and “within a radius of one (1) mile of the premises” (QBE3).

"in consequence of" together with "events"  

These had the effect of narrowing coverage, and in the context of COVID-19, required insureds to prove that the case(s) of COVID-19 within the relevant policy area, as opposed to elsewhere, was the cause of the business interruption.

“within a radius of one (1) mile of the premises” 

This limit of the radius to 1 mile in the QBE3 policy supported the Court's view that the intention of the policy was to cover specific and localised events.

Wording / issue

Supreme Court decision / observation (for all wordings except the QBE wording)

"Occurrence"

"Occurrence" is synonymous to "event" and is widely recognised as “something which happens at a particular time, at a particular place, in a particular way". Each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”.

"Notifiable Disease"
The Court held this wording does not mean the outbreak nor the disease itself but rather the illness sustained by any person resulting from that disease. The words “occurrence of a Notifiable Disease” therefore refer to an occurrence of illness sustained by a particular person at a particular time and place.

QBE policy Disease wordings

"within a radius of 25 miles of the Premises"

The clause only covers business interruption losses resulting from cases of disease which occur within the radius of the insured premises. As a matter of plain language, cases of COVID-19 occurring outside the specified radius are not part of the peril insured against by the disease clause and should be rejected. Other disease clause wordings should be interpreted in a similar way including the QBE 1, 2 and 3 clauses.

While the wording of QBE 1 is different in that the clause has as its subject a disease, rather than an occurrence of illness sustained by a person resulting from a disease, the Court stated that the same analysis of the clause should be used. That is, the wording makes it sufficiently clear that the insured peril is not any notifiable disease occurring anywhere in the world but only in so far as it is manifested by any person while in the premises or within a 25 mile radius of the premises.

"insurer shall only be liable for loss arising at those premises which are directly subject to the incident"

In the case of QBE 2 and QBE 3 disease clauses, it was held that there was no significant difference between the disease clauses in these two wordings and the disease clauses in the other sample disease policy wordings (ie. RSA 3).

The Supreme Court held that the words "event" and "incident" did not have particular significance and that, in line with its conclusions on the other disease wordings, the description of the insured peril as “any occurrence of a notifiable disease within a radius of 25 miles of the premises” made clear that the clause covered losses caused by any cases of illness resulting from COVID-19 that occur within a radius of 25 miles of the business premises.

Causation test 

The Supreme Court agreed with the High Court that no reasonable person would suppose that, if an outbreak of an infectious disease occurred which included cases within the relevant radius in the disease clause and was sufficiently serious to interrupt the policyholder’s business, all the cases of disease would necessarily occur within the radius. Consequently, it is inappropriate to ask whether, but for the cases of disease within the radius, the loss would have been suffered. In particular:

“We agree with the FCA’s central argument in relation to the radius provisions that the parties could not reasonably be supposed to have intended that cases of disease outside the radius could be set up as a countervailing cause which displaces the causal impact of the disease inside the radius.”

On the proper interpretation of the disease clauses, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, the Supreme Court held it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.

Prevention of Access/ Public Authority Wording

This clause generally provides insurance cover for business interruption losses resulting from public authority intervention preventing access to, or use of, the insured premises.

Cover for loss resulting from:

  1. prevention / denial / hindrance of access to the Premises;
  2. due to actions / advice / restrictions of / imposed by order of;
  3. a government / local authority / police / other body; and
  4. due to an emergency likely to endanger life / incident within a specified area.

The UK High Court adopted a more restrictive approach in interpreting these clauses than it did with the disease wordings.

Most prevention of access / public authority wordings would not cover losses caused by COVID-19 unless the Government Regulations specifically required a total closure of the insured's business as a result of a localised occurrence of COVID-19.

The Supreme Court interpreted the prevention of access / hybrid wordings in issue more widely than the High Court. This means policyholders should now review their wordings in light of this judgment to consider if the Supreme Court's findings on these workings mean they now have a valid claim. Essentially, the Supreme Court found it not necessary for the directions of responsible authorities to be explicitly within power under an in-force legal instrument, in order to provide the necessary element of compulsion. A clear, mandatory instruction issued in the anticipation that legally binding measures may follow if compliance is not secured, will suffice. Total closure of all aspects of the insured's business was also not required. It would suffice if the insured was precluded from using some portion of its premises for all activities of its business, or all of the premises for some part of the business.

Wording / issue

UK High Court decision / observation

Location and nature of the emergency / incident

The word "incident" should be given the same essential meaning as "an event": something which happens at a particular time, at a particular place, in a particular way.

The COVID-19 pandemic cannot constitute "an incident", as the disease is too geographically dispersed, prolonged and non-specific. Although the pandemic is everywhere, it is not necessarily present at a particular insured premises and does not mean that it amounts to a specific incident, even if someone with COVID-19 is present within the radius of the premises;

The further geographical requirement that the incident occur "in the vicinity" or within a particular radius of the premises indicates that the clause is intended to cover local incidents only.

For cover to apply, the action of the relevant authority would have to be in response to the localised occurrence of COVID-19, and not general action taken in response to the pandemic.

authority actions / advice / order

An "action" by an authority which "prevents" access requires steps which have the force of law, and must impose mandatory requirements.

The government announcements on 16, 20 and 23 March 2020 were merely advisory, and therefore could not trigger cover.

However, the Regulations issued by the UK Government on 21 and 26 March may trigger cover if they required mandatory closure of an insured's business. The only relevant matters which constituted “restrictions imposed” are those which were promulgated by statutory instrument, eg. the 21 and 26 March Regulations and required mandatory closure of an insured's business. "An outbreak of disease" is the "occurrence" of the disease, and occurs from the point in time at which at least one person who was suffering from COVID-19 was in the relevant area. The case does not have to have been actually verified by diagnoses or be symptomatic at that time, it is just required to be diagnosable.

prevention / hindrance of access

Prevention of access requires a complete closure of the premises for the purposes of carrying on the business as defined in the policy schedule. Prevention is to be contrasted with and is not synonymous with "hindrance". Hindrance means rendering something more or less difficult, and prevention means rendering something impossible. The prevention does not have to be physical, so that if the policyholder accessed the premises to carry out essential maintenance, that would not preclude there being a prevention of access.

Example:

A pub or restaurant that already had a takeaway service prior to the government regulations which required the restaurant to close so far as consumption of food and drink on the premises is concerned, would not be "prevented access" to the premises as their business was partially, not fully closed.

However, where a restaurant or pub only offered dine-in services prior to the regulations, access to the premises would be "prevented" as there would be a full closure of the premises for the purposes of carrying on the business.

Interruption 

"Interruption" did not require a complete cessation of the business, but was intended to mean "business interruption" generally.

Wording / issue

Supreme Court decision / observation

"Prevention of access"

Prevention means stopping something from happening or making an intended act impossible (as distinct from mere hindrance).

The Court also held, consistent with its analysis of “inability to use”, that the wording may, depending on the facts, cover prevention of access to a discrete part of the premises and/or prevention of access for the purpose of carrying on a discrete part of the policyholder’s business activities.

Causation test

In relation to the prevention of access and hybrid clauses, the Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses.

The Court rejected the Insurers’ arguments that the “but for” test must be applied to the prevention of access / hybrid clauses as regards concurrent Covid-19-related causes. This was because to do so would render cover “largely illusory” in circumstances where that cannot have been intended. The Court commented on the composite nature of the insured peril in these clauses (comprising several component parts) and stated that the prevention of access / hybrid clauses may fall into the same category of cases where there are two causes, each of which by itself would have been a sufficient cause of the loss. It would not be appropriate to apply the "but for" test in these circumstances.

The simplest basis on which to justify this is that when you have concurrent causes, the "but for" test cuts both ways. There is no principled reason for concluding that the presence of an uninsured cause of the loss negates the causative effect of the insured cause, rather than vice versa. It is only the presence of an explicit exclusion, as part of the parties' bargain which must be given effect, which justifies treating the excluded cause as proximate. That is entirely consistent with a long line of earlier authority.

Trends Clauses

The Court considered that where insurance is restricted to particular consequences of an adverse event the parties do not generally intend other consequences of that event to restrict the scope of the indemnity. The Court held that the elements of the insured peril are inextricably connected in that the elements and their effects on the policyholder’s business all arise from the same original cause – in this case the COVID-19 pandemic.

It is therefore predictable that, even if the elements of the insured peril had not led ultimately to the closure of the insured premises, they would have had other potentially adverse effects on the turnover of the business. Such potential effects should not diminish the scope of the indemnity because they arise from the same original fortuity which the parties to the insurance would expect to occur concurrently with the insured peril.

Although not part of the insured peril, they are “not a separate and distinct risk”.

This principle also applies to an originating cause of loss covered by the policy which is not expressly mentioned in the clause. Here the originating cause of any local occurrence of disease (and of public authority actions and public reactions to it) is the global COVID-19 pandemic.

Ultimately, the Supreme Court held the prevention of access / hybrid wordings indemnified the policyholder against the risk of all the elements of the insured peril acting in causal combination to cause business interruption loss.

This was so regardless of whether the loss was concurrently caused by other (uninsured but non-excluded) consequences of the COVID-19 pandemic, which was the underlying or originating cause of the insured peril.

Hybrid Wording

A “hybrid” clause combines the main elements of disease and prevention of access clauses.

Cover for loss resulting from:

  1. an interruption to the business;
  2. due to an inability to use the premises / enforced closure;
  3. due to restrictions imposed by a public authority; and
  4. following an occurrence of disease.

These clauses are a blend of a disease wording and prevention of access / public authority wording.

The UK High Court found in favour of the policyholders in that an "occurrence" of disease does not have to be localised. However, it interpreted "restrictions imposed" and "inability to use" more narrowly. It is likely that these wordings will provide cover if mandatory restrictions cause a business to be somewhat "unable to use" the premises for its normal business purpose.

For convenience, the Supreme Court focused on the language used in Hiscox wordings (while noting that the same analysis applied to the other relevant wordings).

It upheld the High Court's decision that “restrictions imposed” by a public authority would be understood as ordinarily meaning mandatory measures “imposed” by the authority pursuant to its statutory or other legal powers since “imposed” connotes compulsion and a public authority generally exercises compulsion through the use of such powers.

However, it did not accept that a restriction must always have the force of law before it can fall within the description. As with the other wordings considered, a directive couched in mandatory terms, would supply the necessary element of compulsion. 

Wording / issue

UK High Court decision / observation

Restrictions imposed

This requires something mandatory that has the force of law and was thereby promulgated by statutory instrument (such as the 21 and 26 March Regulations).

Guidance, exhortation and advice given by the Government including as to social distancing, are not "restrictions imposed".

Inability to use

This requires something more than just an impairment of normal use, and what constitutes an inability to use will depend on the facts of the particular case.

Occurrence

In line with the Court's analysis above, the Court rejected the insurer's argument that the occurrence had to be one which is "small scale, local and in some sense specific to the insured", finding that the COVID-19 outbreak in the UK could qualify as an occurrence.

Interruption

"Interruption" did not require a complete cessation of the business, but was intended to mean "business interruption" generally.

Enforced closure

Requires there to be a closure of all or part of the premises under legal compulsion.

Wording / issue

Supreme Court decision / observation

Disease elements of the hybrid clauses

The Supreme Court reached the same conclusion as it did for the disease clauses, considered above.

“Inability to use"

The Court agreed with the FCA and held there is complete inability of use of premises in two situations:

  1. the policyholder is unable to use the premises for a discrete part of its business activities; or
  2. if it is unable to use a discrete part of its premises for its business activities.

Inability rather than mere discouragement or hindrance of premise use must be established.

“Interruption"

This did not mean that a stop or break to the business was necessary. Rather, the ordinary meaning of “interruption” is capable of encompassing interference or disruption which does not bring about a complete cessation of business or activities, and which may even be slight.

"Restriction imposed"

This may include a mandatory instruction given by a public authority in the anticipation that legally binding measures will follow shortly afterwards, or will do so if compliance is not obtained.

The Supreme Court adopted a wider interpretation and commented that an instruction given by a public authority may amount to this if, from the terms and context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers provided such instruction is not only in mandatory terms, but also in clear enough terms to enable the addressee to know with reasonable certainty what compliance requires.

In most cases the relevant restrictions would be directed at the insured premises or the use of the premises by the policyholder, but they are not required to be so.

For example:

  • the Prime Minister’s instruction in his statement of 20 March 2020 to named businesses to close was capable of being a “restriction imposed” regardless of whether it was legally capable of being enforced since it was a clear, mandatory instruction given on behalf of the UK Government which those named businesses would reasonably understand had to be complied with, without inquiring into the legal basis or anticipated legal basis for the instruction.
  • Regulation 6 of the 26 March Regulations, which did not order particular businesses to close but which prohibited people from leaving their homes without reasonable excuse, was also capable of being a “restriction imposed” in the relevant sense.

Trends Clause/ Causation

Trends clauses generally provide that calculations of loss must be adjusted to reflect any overarching trends in the business.

Trends clause example:

"Under Rate of Gross Profit, Annual Turnover, [etc]….adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Incident or which would have affected the Business had the Incident not occurred so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Incident would have been obtained during the relative period after the Incident.”

The UK High Court said:

  • the trends clause is intended simply to put the policyholder in the same position as it would have been had the insured peril not occurred.

The Supreme Court said:

  • the “but for” test was determinative in ascertaining how the insured's business would have performed, in the counterfactual scenario where the insured peril had never manifested, since that is the effect of the language. The assumption that the insured peril had never manifested, however, necessarily entails that nothing closely connected to or intrinsically bound up with the insured peril must have manifested either;
  • since the COVID 19 pandemic was a necessary condition of the disease's occurrence within a designated radius of the insured's business and of its impact upon that business, the "but for" test must be applied on the basis that the counterfactual excludes the pandemic itself, government and social responses to it, as well as the specific occurrences triggering coverage;
  • any unrelated factors, such as foreshadowed strikes, cost increases, maintenance outages, lost customers, regulatory changes, increased competition and the like, are what the trends clause is aimed at and these may legitimately be brought to account;
  • trends clauses are part of the machinery contained in the polices for quantifying loss. They do not address or seek to delineate the scope of the indemnity, which is the function of the insuring clauses;
  • they should, if possible, be construed consistently with the insuring clauses in the policy; and
  • they should not be construed so as to take away cover provided by the insuring clauses. 
Wording / issue

UK High Court decision / observation

"But for" test

The "but for" test requires that the insured be put in the same financial position as it would have been had the insured peril not occurred.

The "insured peril" should not be narrowly defined. For example in relation to disease wording, the peril should not be the local occurrence of the disease alone, and the other effects of the pandemic could not be set up as part of the counterfactual as a business "trend" to reduce the claim.

Orient-Express Hotels Limited v Assicurazioni Generali Spa (UK) [2010]

The UK High Court distinguished Orient Express from the COVID test cases as it was concerned with different types of insured perils. Nothing in the analysis in the Orient Hotels case had any impact on the correct construction of the wordings it was considering in the COVID test cases.

The High Court did say that if it had to rule on the Orient Hotels case it would have determined that it was wrongly decided and the High Court would not have adopted it in the COVID test cases.

The Orient Hotels decision misidentified the insured peril (by treating the “Damage” as the insured peril, rather than Damage caused by a covered fortuity – hurricanes) and the proximate cause of the loss was not “Damage” but “Damage caused by hurricanes”.

The Orient Hotels decision resulted in the absurd result that the more serious the fortuity the less cover was available: if the hurricane had only damaged the hotel, there would have been a full recovery.

The "proximate" cause is not the cause nearest in time to the loss but the "dominant cause" of the loss. Therefore in Orient Express, the proximate cause should have been business interruption arising from damage caused by the hurricanes.

 

Test for causation 

The relevant causation test to be applied in this case is the "proximate cause" test, rather than the "but for" test. This test requires insureds to show that the dominant cause of the loss was the insured peril.

The Court held the test for causation will depend on the particular wording connecting the insured peril. For example, policies that refer to business interruption “following” an occurrence (or similar) require a looser causal connection than proximate cause.

The Court held even if a proximate cause was required, this would be satisfied as:

[111]…Even if the word “following” imports the requirement of proximate causation we would consider that, given the nature of the cover as we consider it to be, this is to be regarded as satisfied in a case in which there is a national response to the widespread outbreak of a disease. In such a case we consider that the right way to analyse the matter is that the proximate cause of the business interruption is the Notifiable Disease of which the individual outbreaks form indivisible parts.

Wording / issue

Supreme Court decision / observation

"But for" test

The Supreme Court explains why the “but for” test of causation is sometimes inadequate and that there can be situations (of which the present case is one) where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself. The situations include:

  • the failure to exclude causes which would not be regarded an effective or proximate cause (ie. it is in some circumstances too wide);
  • the failure to exclude some cases where one event could or would be regarded as a cause of another event, (i.e. it is in some circumstances too narrow); and
  • the failure to exclude cases in which a series of events combine to produce a particular result but where none of the individual events was either necessary or sufficient to bring about the result by itself (ie. it is too blunt). 

Causation test

The Court commented that there are there are two proximate causes of loss and in both categories the combination of the two causes together made the loss inevitable and neither would have caused the loss without the other. The Court was satisfied that:

“there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself".

The Supreme Court agreed with the High Court in that it could not be said that any individual case of illness resulting from Covid-19, on its own, caused the UK Government to introduce restrictions which led directly to business interruption. Rather, the Government measures were taken in response to information about all the cases of Covid-19 in the country as a whole and, as such, the situation was one in which “all the cases were equal causes of the imposition of national measures”.

On that basis, it was reasonable to conclude that under the disease and hybrid wordings, in the case of an occurrence of the coverage trigger (insured peril) which in isolation would not have given rise to losses of the magnitude experienced, but which did so in the context of the conditions under which it occurred, those losses were covered in full subject to the other terms, conditions and limits of the insurance. By analogy with marine insurance cases dealing with proximate cause, the Supreme Court concluded that the entirety of the losses sustained were proximately caused by the occurrence of the insured peril, notwithstanding that there were other, contributing causes without which they would not have been sustained.

Trends Clauses

The Supreme Court held that, consistent with its decision on causation, the simplest and most straightforward way in which the trends clauses should be construed is by recognising that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause.

The trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case effects of the COVID-19 pandemic.

This conclusion together with the observations on causation means that, absent clear wording, insurers cannot reduce the indemnity otherwise due to the insured on the basis that the losses were caused equally by other (uninsured but not excluded) perils the underlying cause of which was also the COVID-19 pandemic.

COVID-19 and its wider consequences will not be ‘trends’ or ‘circumstances’ that must be assumed still to have taken place, when working out what the insured would have earned had the insured peril not taken place, for the simple reason that the insured peril was part of them and cannot meaningfully be separated out. The most obvious examples of notifiable diseases, likely to result in closure of or restricted access to the insured's premises should they occur within a 25 mile radius of it, are precisely those, like COVID-19, that are most likely to produce the wider legal and economic consequences and resultant impact upon the insured's business that were in fact experienced. To quantify loss on the basis of a counterfactual scenario in which the pandemic outbreak and all its consequences still occurred, but there were no cases at or within the requisite proximity to the insured's business for coverage, would render the cover largely illusory. It would be as illogical as dividing up the insured peril into its successive stages and assuming that only the last of them did not take place.

Orient-Express Hotels Limited v Assicurazioni Generali Spa (UK) [2010]

The Supreme Court overruled this case for the following reasons:

  • (applying its analysis on causation) in a case when both the insured peril and an uninsured peril which operates concurrently with it arise from the same underlying fortuity, provided that damage proximately caused by the uninsured peril is not excluded, loss resulting from both causes operating concurrently is covered. The High Court in Orient-Express Hotels was wrong to hold that the business interruption loss was not covered by the insuring clause to the extent that it did not satisfy the “but for” test; and
  • (applying its analysis on trends clauses) the correct approach would have been to construe the trends clause so as to exclude from the assessment of what would have happened, if the damage had not occurred, circumstances which had the same underlying or originating cause as the damage. In other words, the trending clause counterfactual had to exclude not just the trigger of cover itself, but all matters intrinsically bound up with it.

This case can no longer be cited by insurers as authority for the "but for" doctrine operating to deny claims where there are two concurrent causes of business interruption loss of income.

Pre-trigger losses

The High Court permitted adjustments to be made under the trends clauses to reflect a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered. This could significantly reduce a policyholder's indemnity.

This was rejected by the Supreme Court, consistently with its reasoning with respect to the trends clauses.

In calculating loss, according to the Supreme Court, "the High Court was wrong to hold that the indemnity……should be reduced to reflect a downturn in the turnover of the business due to COVID-19 which would have continued even if cover had not been triggered by the insured peril". This was consistent with the Supreme Court's reasoning as regards both causation and the trends clauses.

Wording / issue

Supreme Court decision / observation

Causation

"to reduce the indemnity to reflect a downturn caused by other aspects of the pandemic, whenever they began, would be to refuse to indemnify the policyholder for loss proximately caused by the insured peril on the basis that the loss was also proximately caused by uninsured (but not excluded) perils with the same originating cause."

Interpretation of trend clauses

The High Court's application of trend clauses to pre-trigger losses also was rejected by the Supreme Court.

Adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19.

The Supreme Court used the example of a pub that suffered a 30% downturn in turnover during the week ending 20 March, due to public concern about contracting Covid-19, but it was not ordered to close (and its policy not triggered) until the Government’s instruction of 20 March.

On the Insurers’ case and the High Court decision, the reduction in turnover during the indemnity period would have been calculated by reference to the reduced turnover figure immediately before trigger, ie. the indemnity would be smaller than if the pub had not suffered a reduction in business during the week preceding the Government’s instruction to close.

The Supreme Court concluded that the trends or circumstances for which adjustments may be made do not include trends or circumstances caused by the insured peril or its underlying or originating cause.

The purpose of a trends clause is to seek to ensure that the adjusted figures will represent as nearly as possible the results which would have been achieved during the indemnity period had the insured peril (and its underlying or originating cause) not occurred.

Ultimately, the indemnity should be calculated by reference to what would have been earned had there been no Covid-19, disregarding any demonstrable revenue drop prior to the policy being triggered that resulted from Covid-19 or its effects. For example, if a restaurant had a Michelin star chef who left the week before the government action, in calculating loss the downward effect of the chef leaving must be taken into account.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.