Business Interruption Insurance and Covid-19: aggregation and furlough - further guidance
In January 2021, the Supreme Court delivered its judgment in the FCA’s Test Case on non-damage business interruption (BI) cover for losses arising from the Covid-19 pandemic. See our previous Law-Now here.
The Supreme Court’s judgment did not resolve a range of complex coverage issues that have arisen in the adjustment of BI losses. A number of such issues arose in three similar actions concerning the UK’s restaurant and hospitality industries: Stonegate Pub Company Limited against MS Amlin, Zurich and Liberty; Greggs against Zurich; and Various Eateries Trading against Allianz.
The judgments in the claims are of particular interest for insurers and policyholders because they consider two key issues that were not resolved by the FCA Test Case: i) whether multiple losses can be aggregated so as to constitute only one loss; and ii) whether insurers are entitled to take into account government support payments in calculating policyholders’ losses.
Issues before the Court
Each of the claims involved the Marsh Resilience policy wording, which was one of the wordings the FCA’s Test Case confirmed was capable of providing cover for Covid-19 BI losses under three sections: a Disease Clause; “Notifiable Diseases and Other Incidents” cover; and “Prevention of Access – Non Damage” cover.
The key issues before the Court were:
- What is the trigger for the relevant sections of the policy?
- Can the claimed BI Losses be aggregated as one or more single occurrences, and if so how many and what are they?
- Were the claimed losses proximately caused by “Covered Events” which occurred during the relevant periods of insurance?
- Are any payments received under the Coronavirus Job Retention Scheme (Furlough) and/or any Business Rate Relief to be taken into account when calculating any sums recoverable under the policies?
There were other issues in consideration around the specific wording for cover under “Additional Increased Cost of Working” (“AICW”) which resulted in the Court finding that AICW could only cover loss which fell outside the definition of Increased Cost of Working with the sub-limit for AICW applying for each and every Single Business Interruption Loss.
Covered Events/Triggers
Although the insurers in Stonegate did not consider the issue of defining triggers/”Covered Events” wholly relevant given the impact of aggregation (see below), the Court provided commentary on what events could trigger claims, namely:
- Disease clause: The Court found that there were as many Covered Events as there were cases of Covid-19 either discovered at an “Insured Location” or within the “Vicinity” of one or more “Insured Location”.
- “Notifiable Diseases and Other Incidents”: The trigger was considered to be closure of an “Insured Location” and the number of triggers was the number of “Insured Locations” closed, unless a location opened and closed again in which case each re-closure would be another “Covered Event”. The closure being enforced by reiteration, continuation or renewal of the relevant regulations was not a new trigger.
- “Prevention of Access – Non Damage”: The “Covered Event” was the actions of the relevant agency, if the actions prevent or hinder the use or access to one or more “Insured Locations”. The number of triggers was found to be the number of materially different restrictions imposed or advised by the government or a relevant agency which prevented or hindered the use of or access to “Insured Locations”, not including advice which repeated or renewed existing prevention or hindrance of access. The Court left it to the parties to determine the exact number of “Covered Events” that could apply to this clause.
Aggregation
The Policy provided that all losses arising from any one “Single Business Interruption Loss” should be treated as a single loss for the purposes of the Policy. A “Single Business Interruption Loss” was defined as “all Business Interruption Loss and Business Interruption Costs & Expenses (excluding Additional Increased Cost of Working, Claims Preparation Costs, Public Relations Crisis Management Costs and Rewards Costs) and any amounts payable under Extensions that arise from, are attributable to or are in connection with a single occurrence …”.
Insurers in all three cases argued there were a number of different individual single occurrences with the result that there was only one single loss, including the outbreak of Covid-19 in Wuhan, the emergence of the Covid-19 pandemic globally and the first introduction or transmission of Covid-19 within England. However, the Court generally found that these were not single occurrences and/or not causally linked to the loss and/or too remote. The Court also rejected the notion that there was a single government response, amounting to a single occurrence, covering everything done in response to Covid-19.
The Court did not accept that the business interruption loss sustained by reason of the governmental or public response to Covid-19 cases could be said to have arisen from, have been attributable to or have been connected with each individual case of Covid-19 separately. In Various Eateries, the Court concluded that there was no justification for aggregation on a per “Insured Location” basis.
The Court found that certain government actions were a single occurrence for the purposes of aggregation, including for example the Government COBR meeting on 16 March 2020 and the instructions given to all pubs, bars and restaurants to close on 20 March 2020 and not reopen. However, many losses from the 20 March 2020 may also have arisen from, were attributable to or were connected with the 16 March 2020 so these losses would then form part of a Single Business Interruption Loss by reference to the 16 March 2020 occurrence. In Greggs, the Court did not resolve how many government orders could be occurrences but accepted that it could be multiple.
For example, the Court also found that the following may also have each been single occurrences, depending on the policy periods and the specific business: the announcement of a lockdown on 23 March 2020; the announcement of early closing and other restrictions for restaurants on 24 September 2020; the introduction of the three-tiered system in England on 14 October 2020; the second national English lockdown announcement on 4 November 2020 and its implementation, and the announcement on 19 December 2020 of the English tier regulations.
The judge did not accept that there would be separate occurrences when measures were renewed, immaterially changed or relaxed. However, restrictions imposed on limited areas of the country would be regarded as separate occurrences.
The policy in this case was a policy to a single insured with multiple business locations. The approach adopted by the Court will not be applicable to all claims, as policy wordings use different language than was in issue in these cases, and not all policies will have an aggregation provision. However, in relation to this specific aggregation clause, the judgments confirm that, whilst there may be more than one single occurrence, including for example for each lockdown, each case of Covid-19 was not a single occurrence.
Loss within the Period of Indemnity
The parties disagreed about whether the Policy could afford cover where government action occurred after the end of the Policy Period, but within the indemnity period.
In Stonegate, the Court found that, at least from the point in early July 2020 when hospitality reopened in each nation, the government response was principally due to subsequent developments of the disease rather than earlier cases during the Policy Period (which expired on 30 April 2020). Consequently, such losses were not covered.
In Various Eateries, it was found that the cases during the Policy Period (which expired on 28 September 2020) were at least an equal proximate cause of any subsequent interruption or interference from the introduction of the tiers system just over two weeks later on 14 October 2020. These cases, however, were not an equally effective cause of the changes in regulations over one month later on 29 October 2020 or the lockdown from 5 November 2020.
The Court found that it was possible that occurrences of Covid-19 during the Policy Period could (subject to evidence) have caused loss during the indemnity period, including deaths of customers or cases of Long Covid following infection during the Policy Period, cancellation of events by reason of uncertainty, loss of momentum surrounding delayed relaunches or refurbishments and certain costs in starting up venues after the first lockdown.
Furlough/Business Rates Relief
In order for the payments to be taken into account when calculating any sums recoverable under the Policy, the Court considered that these would need to have normally been payable out of turnover and have ceased or been reduced as a consequence of “Covered Events”. This was found to be the case for furlough payments. The Court also stated that the furlough payments fall to be taken into account under general law as the insurers would have been subrogated to these payments.
The position on furlough was distinguished from the earlier Australian case Star Entertainment Group v Chubb as the “sum saved” provision in that case required the sum saved to have been in consequence of interruption or interference as a result of an outbreak of the disease within a 20 km radius. However, in the Stonegate judgment, the “sum saved” just need to have been received in consequence of “Covered Events”.
For business rates relief, the Court found that, if business rates would have been paid out of turnover, the business rates relief could be taken into account when calculating losses like furlough payments.
The decision in Stonegate confirmed that, absent wording to the contrary, insurers can take furlough payments and potentially business rates relief into account when calculating policyholders’ losses. This outcome is significant for the insurance market as claims have generally been adjusted on this basis.
Comment
Whilst these judgments are specific to the relevant policy wording and specific industries concerned, they are favourable to insurers, particularly with regards to furlough and causation where a narrower approach has been adopted than was argued for by policyholders. In terms of aggregation, under the Marsh Resilience wording, it is possible to treat separate UK restrictions as separate single occurrences for the purposes of making multiple claims under one policy; in practice, we anticipate this will result in a relatively small number of single occurrences, as opposed to treating each case of Covid-19 as a separate occurrence.
Given the relatively narrow approach taken by the judge in these cases, Stonegate has said they intend to appeal but has not yet done so. Issues relating to the quantification of these three claims have been held over to further hearings if they cannot be agreed in light of the judgment.
