Unlike New Zealand, many business interruption policies issued in England extended cover to interruption in consequence of a notifiable infectious disease.
Many of the underwriters of those policies declined their Covid-19 related claims.
The number of declinatures was sufficiently large, and the reasons for them were sufficiently contentious, that the English financial conduct regulator (the Financial Conduct Authority) brought proceedings in the English High Court on behalf of policyholders against eight underwriters to seek declarations about coverage under their policies. While this didn’t necessarily include all underwriters involved, it covered the majority of different policy wordings applicable.
The court allowed two action groups to appear at the hearing as well: the Hiscox Action Group, representing policyholders underwritten by the Hiscox Syndicate at Lloyd’s and the Hospitality Insurance Group Action, representing a large number of hospitality businesses whose claims had been declined.
The fact that 15 Queen’s Counsel appeared at the hearing, with some parties represented by two Queen’s Counsel, demonstrated the gravitas of the proceeding.
The court released its decision recently. We highlight some of the findings that give guidance to underwriters and claims adjusters alike about the correct approach to policy interpretation.
Principles of construction
Given that tens of millions of pounds, and possibly hundreds of millions of pounds were riding on its decision, the court went to some lengths to recount the principles of construction that apply to insurance policies at law.
The court stated that the overriding test is to ascertain what a reasonable person, that is, a person who has all the background knowledge that would reasonably have been available to the parties when the contract was formed, would have understood the contracting parties to have meant by the language used. This means the court must disregard evidence about the subjective intentions of the parties.
The court noted two further principles that apply within that overriding test: ejusdem generis (of the same kind) and noscitur a sociis (known by its associates). A recent example of noscitur a sociis was referred to as follows:
In Tektrol v International Insurance Co of Hanover Ltd [2005] EWCA Civ 845, an insurance policy excluded liability for "erasure loss distortion or corruption of information on computer systems". The court held, relying on noscitur a sociis, that in the context "loss" was a reference to loss by electronic means, rather than burglary of the computer. The court also considered the meaning of "malicious person" within an exclusion for "rioters, strikers, locked out persons taking part in labour disturbances or civil commotion or malicious person". In the context, given the other categories of persons listed, malicious person was held not to be a reference to someone who hacked in remotely to the computer systems.
The court also traversed the contra proferentem rule. Interestingly, the court held that the contra proferentem rule does not require that all exclusion clauses in an insurance policy be interpreted narrowly. That requirement is confined to exclusion clauses in contracts that limit or exclude liability in negligence or contract. The court approved of the following extract from the judgment of the English High Court in Crowden v QBE Insurance (Europe) Limited [2017] EWHC 2597:
65. In my judgment, applying this approach, the court must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract. The court should not adopt principles of construction which are appropriate to exemption clauses - i.e. provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability - to the interpretation of FCA insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford. To this end, the court should not automatically apply a contra proferentem approach to construction.…
Exclusion clauses are necessary to define the cover in the first place. As such, they are still primary terms of cover and are not aimed at taking away a right that is always there by operation of the law e.g. liability in negligence.
We suggest this approach is consistent with modern insurance policies. In the past, insurance policies often described what was insured by listing defined perils e.g. fire, flood or storm. The modern trend is to have a wide insuring clause simply requiring a fortuitous loss. The policy then narrows the breadth of the insuring clause by listing types or causes of fortuitous loss not covered. In this sense, the combination of the insuring clause and exclusions determines the cover.
Business interruption extensions
Many readers of this article will know that the main cover under a business interruption policy is only available if the interruption is in consequence of damage to property, usually the insured’s.
A number of extensions remove this requirement and provide cover in the specific circumstances stated that lead to the interruption. While the court had to consider many extensions, we will concentrate on one contained in a number of the policies before the court that will be familiar to most. One policy called the extension ‘murder, suicide or disease’; the others had variations on this name. The extension read:
We will indemnify you in respect of interruption or interference with the business during the indemnity period following:
any
…
iii occurrence of a notifiable disease within a radius of
25 miles of the premises.
The parties accepted that Covid-19 was a notifiable disease. The following issues arose:
• When did an "occurrence" of the disease take place, when a person in the 25-mile radius was infected or when he or she was diagnosed?
• What degree of causal connection is required by the word "following"?
• Where only one or two people suffered from the disease within the specified radius, was the cover limited to the extent that only those one or two people having the disease interrupted the business. Alternatively, did the cover also respond to the impact of the government’s instructions for all citizens to social distance, self-isolate, lockdown and restrict travel?
The court found in the same order:
• A person in the radius suffering from the disease triggered the extension. There were no words in the extension that pointed to a diagnosis by a medical person being required first.
• The peril the extension insured against was an accumulation of the following circumstances: interruption/interference of the business following (in this case) the occurrence of the disease within a 25-mile radius of the premises. The court held that the word "following" required a causal connection but the connection did not have to amount to the proximate cause, as contended by some insurers.
• The court noted the clause did not specifically limit the cover to the interruption/interference caused by the one or two people suffering from it in the radius. It found the fortuity insured by the extension was the disease coming near (within 25 miles) rather than the specific occurrences within the 25-mile radius. Once the disease had come near enough, all the impacts of it on the business (not just the impacts of the two people) were covered.
We understand some of the insurers have elected to appeal the decision. Given its importance and in order to speed up its resolution, the parties have been allowed to appeal direct to the Supreme Court (the highest court in England), leap-frogging the normal process of appealing to the Court of Appeal first.
We await the outcome with interest.
Please feel free to contact us if you require any further information.
Crossley Gates
cgates@keegan.co.nz
Frank Rose
frose@keegan.co.nz
