Landmark UK decision on COVID-19 business interruption claims: What does it mean for Australian insurers? – By Nathan Day

Landmark UK decision on COVID-19 business interruption claims: What does it mean for Australian insurers?

NATHAN DAY, SPECIAL COUNSEL, ILES SELLEY LAWYERS

OVERVIEW

Alandmark decision of the highest court in the United Kingdom – the Supreme Court – has shed light on whether, and to what extent, a business can recover losses related to the COVID-19 pandemic. The decision will have widespread ramifi cations as it places a heavy burden on insurers to cover policyholders for COVID-19 related losses. Indeed, it is estimated that it will force UK insurers to pay out claims totalling at least £1.2 billion.

This article examines the decision and assesses its implications for Australia.

BACKGROUND

A standard business interruption policy will cover a policyholder against loss arising from damage caused to its premises due to various causes (for example, a natural disaster). Such a policy will typically include “extensions” that provide coverage in the absence of physical damage.

In the context of the COVID-19 pandemic, the relevant extensions are categorised as follows: 1. disease extensions: generally covering business interruption losses caused by an infectious disease at or within a specifi ed radius of the policyholder’s premises; 2. prevention of access extensions: generally covering business interruption losses caused by public authority intervention preventing access to the policyholder’s premises; and 3. hybrid extensions: generally covering business interruption losses caused by (i) government restrictions imposed by reason of (ii) an infectious disease at or within a specifi ed radius of the policyholder’s premises.

The UK Financial Conduct Authority (FCA) brought a test case against eight UK insurers to clarify how these extensions should be interpreted in relation to COVID-19 related claims. At fi rst instance, the UK High Court of Justice largely found in the FCA’s favour. All but two insurers appealed.

FINANCIAL CONDUCT AUTHORITY V ARCH INSURANCE (UK) LTD [2021] UKSC 1

The Supreme Court unanimously dismissed the insurers’ appeals. Lord Hamblen and Lord Leggatt (with whom Lord Reed agreed) delivered the majority judgment. Lord Briggs (with whom Lord Hodge agreed) concurred with the majority judgment save for one “major” point (referred to in footnote 2 below) and “one minor point” of no immediate relevance.

Disease Extensions

The Supreme Court considered, as an exemplar, a disease extension covering business interruption losses “following” any occurrence of a “Notifi able Disease”1 at or within a 25-mile radius of the policyholder’s premises (“prescribed radius”). Whilst the Court below found that this extension covers the consequences of all COVID-19 cases provided that at least one COVID-19 case occurred within the prescribed radius, the Supreme Court rejected this view and instead found that it is limited to covering business interruption losses caused only by COVID-19 cases occurring within the prescribed radius.2

In interpreting the disease extension in this way, the critical issue becomes causation. That is, did the COVID-19 cases occurring within the prescribed radius cause the UK Government to introduce measures which interrupted the policyholder’s business. For example, assume that a policyholder had one COVID-19 case within a 25-mile radius of its premises before the UK Government required it to close. Did that one COVID-19 case within the prescribed radius cause the UK Government to close the policyholder’s premises so as to trigger coverage under the disease extension?

The Supreme Court considered a hypothetical case of 20 individuals working together to push a bus over a cliff. If one were to assume that only 14 individuals were needed to push the bus over the cliff, it could not then be said that the participation of any one individual was necessary to destroy the bus. And yet, it would be appropriate to regard each individual’s involvement as a cause of the loss.

The Supreme Court acknowledged the diffi culty in applying that hypothetical case to a scenario where the number of events required to bring about the loss is multiplied many times over so that, instead of there being 20 events, there are, say, 200,000 events. In the context of an insurance policy, whether one out of 200,000 events which, combined, bring about loss should be regarded as a cause of the loss so as to trigger coverage was found to depend upon the risks that the insurer agreed to cover.

In undertaking that analysis, the Supreme Court had regard to the parties’ presumed background knowledge when entering into the policy that: 1. an infectious disease can spread rapidly

and widely such that an outbreak would most likely comprise cases both inside and outside the prescribed radius; and 2. any government restrictions would be imposed in response to the outbreak as a whole and not just to those cases which happened to occur within the prescribed radius.

Taking this presumed knowledge into account, the Supreme Court found that the parties’ commercial intentions would be undermined if insurers could successfully argue that COVID-19 cases occurring outside the prescribed radius constituted a countervailing cause displacing the causal impact of COVID-19 cases within the prescribed radius.

For these reasons, the Supreme Court concluded that each individual case of COVID-19 occurring by the date of any government response was a separate and equally effective cause of that government response. Accordingly, a policyholder will be entitled to coverage under a disease extension if it can point to at least one COVID-19 case within the geographical region covered by the extension (i.e. the prescribed radius) before a government restriction interrupted its business.

Hybrid Extensions / Prevention of Access Extensions

The Supreme Court considered a number of hybrid extensions, including one of which covered business interruption losses caused by the policyholder’s “inability to use” its premises due to “restrictions imposed by a public authority” following an occurrence of “a notifi able human disease within one mile of the business premises”.

The Supreme Court considered that the “disease element” of the hybrid extension should be interpreted in the same way as the disease extensions. The Supreme Court otherwise found that: 1. a “restriction” does not need to have the force of law (i.e. by way of legislative instrument) to trigger coverage; for example, the UK Prime

Minister’s public statement instructing specifi c businesses to close constituted such a restriction; 2. whilst most “restrictions” would be directed at the policyholder’s premises (i.e. directions to close the premises), other restrictions preventing public access can also trigger coverage; and 3. a policyholder will demonstrate an

“inability to use” its premises if it was unable to use its premises for a discrete part of its business or if it was unable to use a discrete part of its premises for its business.

Quantifying the insured loss

In quantifying the loss recoverable from the insurer, a comparison will generally be undertaken of the policyholder’s revenue during the 12-month period before the event triggering policy coverage as against the revenue for the period in which the policyholder was affected by the insured peril (otherwise known as the “indemnity period”). It was found that in undertaking that calculation: 1. the revenue for the indemnity period should be assessed on the assumption that there was no COVID-19 pandemic; and 2. any downturn in trade caused by the

COVID-19 pandemic before coverage is triggered (otherwise known as

“pre-trigger losses”) are not factored into calculating the revenue for the indemnity period; in other words, the “assumption should be made that pretrigger losses caused by the pandemic would not have continued” during the indemnity period.

AUSTRALIAN IMPLICATIONS

Australian insurers have to date been largely focused on the Quarantine Act exclusion. In particular, many Australian business interruption policies contain an exclusion in their disease/hybrid extensions excluding loss resulting from a disease declared to be a quarantinable disease under the Quarantine Act 1908 (Cth) “as amended”.

From an insurer’s perspective, the diffi culty with this exclusion is that the Quarantine Act 1908 (Cth) has been repealed. This has forced insurers to argue that: 1. the Biosecurity Act 2015 (Cth) should be read as an “amendment” to the

Quarantine Act 1908 on the basis that it, in effect, replaced the Quarantine Act 1908 (Cth); and 2. as COVID-19 has been declared to be a listed human disease under the

Biosecurity Act 2015 (Cth), all losses relating to COVID-19 are excluded.

However, this argument was unanimously rejected by the New South Wales Court of Appeal in HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296 (“HDI Global”). Insurers are now anxiously awaiting the outcome of the Insurance Council of Australia’s application for special leave to appeal this decision to the High Court of Australia.

To date, there has been no judgment in Australia dealing with the issue as to whether a disease/hybrid/prevention of access extension has been triggered in the

context of the COVID-19 pandemic. The UK Supreme Court judgment is the only guide we have on how these clauses will be interpreted.

Assuming that HDI Global is not disturbed by the High Court of Australia and assuming that the UK Supreme Court judgment is followed in Australia, these cases will have massive implications for Australian insurers, forcing them to pay out upwards of an estimated $10 billion in business interruption claims.

Having said that, Australian insurers will obtain some comfort from the UK Supreme Court decision insofar as it found that a policyholder will only be entitled to coverage under a disease/hybrid extension if it can prove that there was a COVID-19 case within the geographical region covered by the extension before Government restrictions were introduced. That finding may prove fatal to regional businesses if, for example, such businesses are unable to point to any COVID-19 case within the geographical region covered by its policy before the introduction of government restrictions.

CONCLUSION

The UK Supreme Court judgment sounds an alarm bell to Australian policyholders to urgently check whether they may be entitled to coverage under their business interruption policy and, if so, to urgently notify their insurer accordingly. Once they have notified their insurer, it will then be a matter for insurers and policyholders to see whether the High Court of Australia disturbs the New South Wales Court of Appeal’s rejection of the Quarantine Act exclusion in HDI Global. If that decision is upheld and if the UK Supreme Court judgment is followed, insurers will find themselves in the position of having to pay out very substantial business interruption claims. Ultimately, whether a policyholder is entitled to claim COVID-19 related losses will depend on its individual circumstances and policies. For this reason, it is prudent for policyholders to seek urgent advice tailored to their particular situation. B

Endnotes 1 Defined in the subject policy as “an illness sustained by any person resulting from … any human infectious or human contagious disease … an outbreak of which the competent local authority has stipulated shall be notified to them.” 2 Lord Briggs (with whom Lord Hodge agreed) preferred the view taken by the Court below that the disease extension covers the consequences of all COVID-19 cases provided at least one

COVID-19 case occurred within the prescribed radius.