FCA business interruption test case
Pamela Freeland, Sarah Irwin and Ellie Berkley are following the highly anticipated hearing and provide daily summaries.
FCA case: Day 8
The claimants presented their closing submissions on the last day of the trial (30 July 2020) with submissions from Colin Edelman QC, Leigh-Ann Mulcahy QC, Ben Lynch QC, Josephine Higgs and Susannah Jones. Below, we provide a summary of the key submissions.
Colin Edelman QC and Leigh Ann Mulcahy QC made the following key submissions on behalf of the FCA:
- It was submitted that the defendants were trying to knock policyholders out at stage one by saying that they could not prove that, but for the incidence of Covid-19 in their relevant area, they would not have suffered the same losses.
- The FCA urged the court not to “jump on the Orient Express bandwagon”. Further, it was submitted that Mr Justice Butcher was right to comment that there were no insurance cases which applied the ‘but for’ test as part of their reasoning as to whether a cause was a proximate cause. It was argued that the ‘but for’ test would only be introduced at the trends clause stage, and not when considering the trigger for cover.
- It was argued that, once a policyholder triggers cover, it then needs to be identified how the business would have performed which would involve a projection of normal circumstances. The court must therefore determine what ‘normal’ circumstances would be for these purposes. Counsel argued that the decision in Orient Express had “completely gone off the rails” because it asked how the business would have performed in a very artificial context with the application of counterfactuals.
- It was submitted that there was one indivisible cause of the business interruption, or rather a collection of jigsaw pieces which together make up the full picture. When considering concurrent causes, such as in the FCA’s jigsaw analogy, Mr Justice Butcher commented that you would still need to be satisfied that you had at least two effective causes of roughly equal efficacy. Mr Edelman QC responded that this case was most likely not concerned with two or three concurrent causes, rather multiple causes which all make up the national picture and which each have equal causative contribution to the national outbreak.
- Lord Justice Flaux expressed difficulty with the ‘indivisible cause’ concept in terms of how it could be found to be a cause which attracted cover under the representative policy wordings, when the policies did not purport to cover a national outbreak. The FCA relied on the fact that a disease is amorphous in its nature and that it would be reasonably contemplated by the parties that an occurrence of an infectious disease could cause a large range of reactions that may be localised or widespread.
Orient Express, The Silver Cloud, and concurrent causes
- It was argued that Hamblen J in Orient Express ought not to have been applying the ‘but for’ test, and instead that court should consider whether a cause is ‘the’ or ‘an’ effective cause of the loss.
- In Orient Express, there were actually two concurrent causes which were both capable of causing the same loss independently. It was submitted that the court should have considered whether the damage to the hotel caused by the hurricane was a proximate cause of the business interruption. If so, then the court should have considered the quantum of the loss suffered by reference to the indemnity rule and what would have happened had the interruption not occurred.
- It was submitted that the arguments in that case were rejected due to the judge’s finding of what the insured peril was, which was far too narrow an application of the definition of the insured peril. This application, it was argued, does not make commercial sense, nor sense as a matter of fact or law.
- It was submitted that when considering the application of the trends clause, you first need to consider whether the trends clause brings into play a cause which can be said to be independent, but which is interlinked with or an ingredient of the insured peril in some way. If there is a combination of ingredients required to trigger cover, you must proceed on the basis that the entire combination is covered along with any associated loss. Once you have that combination, the counterfactual must consider a world without every ingredient of that combination for comparison purposes.
- It was argued that it would be impossible to separate out the impact of two causes, such as Government restrictions and the disease itself, which were so truly concurrent causes of the same loss.
- The claimants rejected the defendants’ argument that, even if cover was triggered, loss would be quantified with reference to the performance of the business before lockdown but with the other impacts of Covid-19 which existed at the time. To reverse away the emergency which provoked the Government restrictions or closure, and which was contemplated by the policy, would “put a coach and horses” through the policy cover.
- The claimants seek a finding that the Prime Minister’s announcement of 16 March and the 26 March regulations were capable of amounting to prevention of access where a business did not provide an essential service which fell within the limited exemptions to the stay at home advice.
- If access to premises is prevented to any extent, it was submitted that this would still amount to prevention. The word ‘prevention’ did not require total prevention. However, Lord Justice Flaux commented that if parties had intended a looser concept then more policy wordings would have used the term ‘hindrance’.
- Counsel referred to a recent French judgment which related to the closure of a Paris hotel by a national order where the insurer had argued that it was not completely closed because it had stayed open for caregivers and hotel staff. In that case it was held that this still amounted to closure of the hotel by authorities.
- The FCA also relied on a decision of the Court of Appeal of Ontario (Le Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Company, 2020 ONCA 487)
which dealt with a wedding venue that had suffered flooding damage. The US court found that the expression ‘necessary interruption of business did not necessarily require “a total cessation of business activity for a period of time for coverage to arise”.
The interveners advanced further arguments including:
- Hiscox Action Group submitted that the court had to be careful to read the relevant terms in the context of the full terms of the policy. This would make clear that ‘interruption’ did not have to mean a total cessation of activity and that an ‘inability to use’ did not have to be a complete inability to use.
- Counsel for the Hiscox Action Group opined that the court “was not being asked to rule on the case of the century on causation” but was required to set out principles on some fairly straightforward wordings to be applied following restrictions imposed as a result of a notifiable disease. We will wait to see whether the court accords with Mr Lynch QC’s interpretation given the depth and potential impact of the causation arguments advanced by all parties.
- It was submitted on behalf of the Hospitality Insurance Group Action that, whatever causal connection was required by the insuring clause, it would be satisfied on the agreed facts as it was clear that Government measures, including closure measures, were sufficiently causally connected to the disease in the relevant policy area.
- At the time of inception of the policy, it would reasonably have been in the parties’ contemplation that a contagious disease could have an impact across a wide area given previous outbreaks of other infectious diseases such as SARS and actions taken by foreign governments.
Following the conclusion of oral submissions, several parties were granted permission to submit short closing written submissions to deal with new authorities raised by the FCA and to compensate for the tight timescales for the interveners on the final day of submissions. Mr Edelman QC concluded his submissions by thanking the court for dealing so expeditiously with a case “so important to policyholders and their insurers” and commented that the parties would be desperate to know where they now stand.
Whilst Lord Justice Flaux and Mr Justice Butcher did not provide a firm date for the judgment, they advised that the parties could expect to see a draft judgment in mid-September. Both insurers and policyholders will eagerly await the decision which could have wide-ranging ramifications for policyholders and/or the insurance industry.
FCA case: Day 7
On day seven, (29 July 2020) the defendants completed their oral submissions. We summarise below the key points from the hearing.
Craig Orr QC continued with his submissions on behalf of Zurich. Key points included:
- The ‘danger or disturbance’ referred to in the policy does not encompass a national infectious disease and reference to ‘in the vicinity’ connotes a transient incident rather than a nationwide issue. There is no basis, it was submitted for the FCA’s argument that ‘vicinity’ should be given a fixed meaning, such as extending to a city, town, or region.
- The use of the word ‘following’ requires any competent public authority action taken to be action taken in response to the danger or disturbance in the vicinity and requires a causal connection. The claimants’ attempts to find a causal connection between a local danger and the national response was described as struggling to “fit a square peg into a round hole”.
- The claimants have adopted the argument that all Government advice and restrictions from the start of March 2020 presented an indivisible and interlinked strategy. It was submitted that this could not be the case as the Government was responding to a new infectious disease which attracted daily developments as to the mode of transmission, symptoms and fatality risk. The reaction was naturally piecemeal.
- The Government reaction was a response to the consideration of the risk of infection in each and every area of the country with the objective to protect the NHS. The response was not a reaction to the aggregated risk of infection in every area of the United Kingdom.
- Counsel highlighted relevant entries in the Scientific Advisory Group for Emergencies (“SAGE”) meeting minutes to evidence, in his submissions, that there was no meaningful causal connection between any danger in the vicinity of the insured premises, and the national action. The Government would have acted in precisely the same way irrespective of local incidents, as evidenced by the lockdown restrictions in the Scilly Isles which remained COVID-free.
- The policy wording on prevention to access was straightforward and should be given a narrow meaning. Access to a premises is different to use and prevention is different to hindrance. Therefore, to fall within the policy wording, access to the premises must be physically obstructed or rendered impossible and authority action must be mandatory with the force of law.
- The court was invited to elucidate general principles on causation and trends clauses as far as possible within the realms of the test case. The counterfactual advanced by Zurich was to reverse only the Government measures that prevented access to the premises, but to leave all other factors in place.
Mark Howard QC submitted the following key arguments in relation to QBE’s representative wordings:
- The claimants’ arguments were an attempt to reverse engineer the policy wording to achieve the broadest cover for the greatest number of policyholders. However, the court should be careful to adopt construction suitable to all circumstances which may arise under the relevant wordings, rather than just the particular circumstances which have arisen as a consequence of COVID-19.
- Counsel rejected the claimants’ argument that the radius requirements in the policies (one mile or 25-mile radius) acted as a qualifying condition for cover which meant that any one incident in the area would “tick the box” and provide full cover for all effects of the disease.
- Counsel gave the example of an English manufacturer who regularly obtains supplies from a Chinese supplier. If, due to an outbreak of an infectious disease, the supplier was locked down and unable to provide such supplies, would the policyholder have a claim for business interruption? It was alleged that, on the claimants’ case, all the policyholder would have to evidence was that there was one single case of the same disease within the required radius to trigger full cover for all consequences, whether or not that case was a proximate cause.
- Further, it was submitted that there is no language in the radius provisions in the policies to suggest that it was merely a qualifying condition. The parties have chosen an area which they consider to be an “impact zone” in which insurers agree to cover the risk of the occurrence of a notifiable disease. This does not mean that businesses cannot be impacted by something broader; rather, the policyholder has not sought such cover. It is fact that diseases can be highly contagious and this would be a relevant consideration as to the appropriate limit to be applied to cover.
On the topic of causation:
- It was submitted that the correct approach was the straightforward application of the ‘but for’ test on the basis of the assumed facts. On this case it was submitted that, but for the insured peril, the same business interruption would have been caused by other factors.
- It was observed by Lord Justice Flaux that, if the defendants’ arguments on construction were right, the claimants would not get to the application of counterfactuals as, on the agreed facts, the policyholder would have suffered the same loss in any event. The trends clause would then operate to make the principles at common law even clearer.
- Mr Justice Butcher expressed that he retained a residual concern, as expressed previously, that proximate cause is not always determined by the ‘but for’ test. Counsel referred to the Fairchild enclave (Fairchild v Glenhaven Funeral Services  UKHL 22) where the ‘but for’ test had been substituted for a ‘material contribution’ test where it was sufficient in mesothelioma cases to prove that an employer had materially contributed to asbestos exposure. It was argued that anomalies such as the Fairchild enclave should require exceptional circumstances and counsel quoted Lord Brown in Sienkiewicz (Sienkiewicz v Greif (UK) Ltd; Knowsley MBC v Willmore  UKSC 10.) as saying that “the law tampers with the ‘but for’ test of causation at its peril”.
- It was submitted that the Silver Cloud case is not authority for the sort of novel analysis attempted by the claimants. The decision by the court was limited to a factual finding that certain matters combined to make one proximate cause and a legal finding that the policy insured against that cause.
- Lord Justice Flaux commented that he was conscious of a risk of straying into factual determination which should be avoided as it is not within the scope of the test case and the court does not have the evidence to determine factual matters.
Simon Salzedo QC presented the following key arguments on behalf of Argenta:
- It was submitted that, for cover to attach under the relevant policy, there must be a causal link between the occurrence of the notifiable disease within the vicinity and the loss suffered. Any revision to the policy wording would demote the radius requirement into an ill-defined, arbitrary trigger of cover which would provoke capricious results, especially in non-pandemic cases.
- When considering the policy wording and cover, the interruption to the business has to be proximately caused by a notifiable disease within 25 miles of the premises. If it hasn’t been, that’s the end of the enquiry.
- When considering circumstances such as the recent local lockdown in Leicester, it could be possible for a policyholder to show that the authority action was taken in consequence of occurrences within the 25-mile radius. There would need to be a factual assessment as to whether the occurrences amounted to the cause of the restrictions.
- Argenta also seek a declaration from the court as to whether claims could be brought by policyholders for losses suffered prior to the date when COVID-19 became notifiable. This was resisted by the FCA on the basis that it was not included within the scope of the list of issues for the test case.
The test case continues on Thursday 30 July at 10am when oral submissions will conclude with closing submissions from the FCA and the interveners who will have the opportunity to respond to the arguments advanced by the defendants over the last four days. We will continue to bring you updates on the latest developments.
FCA case: Day 6
On the sixth day of oral submissions on 28 July 2020, the court heard submissions on behalf of five of the defendants. We summarise the key points from day six below:
Jonathan Gaisman QC picked up where he left off and concluded his submissions on behalf of Hiscox, including the following key submissions:
- The claimants had submitted that the loss caused by Government restrictions and the wider loss caused by the COVID-19 pandemic were indivisible. In response, it was argued that no attempts had been made to divide the losses and that this exercise would ordinarily include input from loss adjusters. The court should not, it was submitted, just assume that the exercise would be too difficult.
- The characterisation of all loss as indivisible, on the basis that the events were inextricably linked, was wrong. An assessment that loss is indivisible should be a matter of last resort and only when “there is simply no rational basis for an objective apportionment of causative responsibility for the injury between the tortfeasors” (Rahman v Arearose Ltd  QB 351.).
- Lord Justice Flaux commented that he observed a difficulty in determining all causation arguments put before the court in the test case as causation usually would be an issue to be explored on the given facts of a case. Mr Gaisman QC submitted that causation within the realms of the test case could only be determined with reference to orthodox legal principles.
Gavin Kealy QC presented key submissions on behalf of Ecclesiastical:
- The representative policy wording for Ecclesiastical included a carve out for loss caused by “closure or restriction in the use of premises due to the order or advice of the competent local authority as a result of the occurrence of an infectious disease”. The purpose of this carve out was to define and circumscribe the scope of the policy. A separate clause then writes back in cover for the occurrence of a specified disease within a 25-mile radius of the premises which “causes restrictions in the use of the premises on the order or advice of the competent local authority”.
- As a point on causation, it was compellingly obvious that the insured peril under the policy wording is not the relevant emergency or danger, rather the restrictions which are caused by the emergency. The emergency itself could not become the insured peril “by the back door”.
- There was a detailed discussion between counsel and both judges as to the shift of the evidential burden of proof when determining the cause of loss. Counsel submitted that every single case would depend on its facts and could require the input of loss adjusters to determine the division of the causes of the loss suffered. This is a common dispute when considering business interruption policies and was to be expected. It was submitted that it would not be legitimate for the court to conflate issues of fact with issues of legal principle. There may be evidential issues which will be difficult to resolve but this will not be known until a policyholder makes a claim.
- Lord Justice Flaux commented that, while open to persuasion, he considered that it would be dangerous to stray into assumed facts scenarios and that the court could only deal with issues of principle in relation to causation. It would then be for individuals to make of that what they will in relation to individual claims. We wait to hear the submissions made on behalf of the claimants in response.
Gavin Kealey QC made the following key submissions on behalf of MS Amlin:
- ‘Prevention’ of access must have physical or legal effect and “nothing short of impossibility will do”. If that means that only limited cover is provided, then this is not a reason to expand cover as was agreed between the parties.
- If a policyholder can access and use part only of its premises, this would not amount to a prevention of access but would instead be prevention of use. However, nothing short pf prevention of access is covered under the representative policy wording in question.
- Prevention must have legal effect. None of the Government advice was mandatory or compulsory and only the 26 March 2020 Regulations would have legal force and would qualify as prevention or prohibition. For example, the Government advice during lockdown was that individuals should only leave the house for exercise for one hour per day. However, this was never included in the 26 March 2020 Regulations and was therefore not binding.
- When considering causation, Lord Justice Flaux asked whether there could be a factor which was considered to be causative but did not satisfy the ‘but for’ test. Counsel submitted that even a material contribution to loss would need to satisfy the but for test or fall within an acknowledged exception. If you don’t overcome the ‘but for’ test, you don’t have a cause.
- It was submitted that the trends clauses in the representative policy wordings act to make explicit what is already implicit as a matter of law. The court should, it was submitted, follow the approach of the tribunal in Orient Express and it would be wrong to depart from this assessment of trends clauses.
John Lockey QC advanced the following key submissions on behalf of Arch:
- The trends clause applied to ask the question of what circumstances affected the business before and after the insured event, and what circumstances would have affected the business in any event had the insured event not occurred. This analysis, it was submitted, is indistinguishable from that applied in Orient Express which should be applied by the court.
- The cover provided under the policy is not pandemic cover. The fact that COVID-19 is a link in the causation chain that must be met to trigger cover does not mean that the disease or emergency becomes an insured peril in its own right.
- It was submitted that advice which recommended or required closure, such as the Prime Minister’s pronouncements of 20 and 23 March 2020, were sufficient to trigger cover under the policy (which is a different approach to that adopted by MS Amlin). However, the Government advice on 16 March 2020 for the public to work from home where possible did not amount to a recommendation of closure of any premises.
- It was alleged that many businesses suffered a reduction in turnover prior to the introduction of any restrictions or recommendations. However, such loss of turnover prior to the occurrence of the insured peril would not be recoverable and this reduction would form part of the defendants’ evidence that any estimated or budgeted profits would not have been reached even if the premises had been permitted to remain open. Many premises would not have realised their expected profit due to a general reduction in footfall, a lack of consumer confidence and wider economic consequences.
Craig Orr QC commenced submissions on behalf of Zurich and introduced the policies to the court. Counsel will resume submissions on 29 July but he made the following preliminary points:
- The representative policy wordings made clear reference to damage in the vicinity of the insured premises. This required the damage, or insured peril, to occur in the immediate locality of the premises.
- The extensions to the policy provide pockets of cover which are each limited by their own specific requirements and limitations which provide cover for a danger which causes public authority action that then prevents access to the premises. This did not equate to blanket cover for all losses or danger caused by a notifiable disease.
The test case continues on Wednesday 29 July when the court will hear further submissions on behalf of Zurich, and QBE and Argenta will conclude the defendants’ oral submissions. The claimants will then have the opportunity to respond in closing submissions on Thursday. The pressure on the tight court timetable continues with the parties and the court agreeing to continue to sit earlier from 10am to ensure that all parties’ submissions are heard. We will continue to bring you updates on the latest developments.
FCA case: Day 5
During the fifth day of oral submissions on 27 July 2020, the court heard from David Turner QC on behalf of RSA and Jonathan Gaisman QC on behalf of Hiscox.
The headline points from day five of the hearing are summarised below:
Key submissions made on behalf of RSA included the following:
- The “RSA 4 policy” makes specific reference to a covered ‘event’. It was submitted that a pandemic would not fall within the definition of ‘event’ when applying the ordinary usage of the term. An event must occur at a particular time and at a particular insured location.
- The insuring clause requires an occurrence of a notifiable disease within a 25-mile radius of the insured premises. This restriction, it was submitted, was plainly intended to act as a limiting factor on the insured perils. Cover would only attach where there was a causal link between the enforced closure of the insured business and the incidence of the disease specific to the vicinity of the premises. Actions outside the vicinity which triggered closure would not fall within the remit of an insured peril.
- The FCA’s case that the insuring clause would apply to the occurrence of COVID-19 nationally, rather than within the vicinity, was, it was argued, an attempt to subvert and rewrite the policy wordings and to remove the geographical limit included in the policy.
- The use of the term ‘enforced’ meant that any restriction imposed must be capable of being enforced legally. It was submitted that social distancing measures would not come into play when considering whether cover attached as access to the premises was not prevented or hindered for the purposes of the policy.
Jonathan Gaisman QC considered the Public Authority clause and the Non-Damage Denial of Access clause in Hiscox’s representative policy wordings and made the following key submissions:
- The court should be careful to approach the construction of policy wordings without the benefit of COVID-19 hindsight and should consider what the parties had intended at the time the policy was incepted. Further, each policy should be construed in light of its own wording and not as a blanket response to all representative wordings.
- The claimants’ approach of characterising all loss (caused by the disease, the Government reaction, and other economic consequences) as one indivisible peril is wrong and it was submitted that such an approach requires the court to rewrite the policies on the assertion that all damage is inextricably linked. To do so would be to rewrite the parties’ bargain.
- The claimants’ argument that indemnity under the policies should be extended to cover losses incurred after the emergence of COVID-19, but before the closure of premises was said to be “tearing up the rule book on causation”. Counsel warned that abandoning established legal principles could create “untold problems” for future courts.
- The relevant policy wordings required an incident or occurrence of a notifiable disease within a limited radius. ‘Incident’ and ‘occurrence’ are concrete, defined terms which would not apply to a national or international pandemic when given their ordinary usage. A pandemic was said to be “the antithesis of a local event”.
- It was further argued that there could be no causal link between a local occurrence of COVID-19 and the Government restrictions as the restrictions were caused by either the national outbreak, or the Government’s predictions and fears regarding future outbreaks.
- The purpose of the one-mile radius stipulated by a representative policy was to ensure that only local events / incidents were covered. On the claimants’ case, it was submitted that the radius requirement would have no purpose whatsoever.
- The term ‘restrictions imposed’ required compulsory restrictions with the force of law, such as the 26 March 2020 Regulations. The term could not apply to guidance, advice or instructions which could be ignored without legal sanction.
- The claimants’ argument was that, in respect of an occurrence of disease alone, underwriters were treated as having “thrown caution to the winds” and accepted or assumed an “unfettered liability” for all consequences of any notifiable disease, anywhere and with no connection to the business and to have done so in an “adjunct to an adjunct” of property cover. This outcome was described as highly improbable.
- It was argued that ‘interruption’ should be taken to mean a total cessation or suspension of the insured’s business which leaves the policyholder unable to use its premises. Whilst this would be a fact-sensitive assessment, it was likely that only businesses which were ordered to close in the 26 March 2020 Regulations could fall into this category. Even then, it was submitted that there would be substantial exceptions where businesses had been able to continue trading.
- Social distancing measures would not be enough to constitute an ‘inability to use’ the insured premises. Hiscox used the example of a supermarket which had to impose queuing measures to accommodate its customers. Those measures could not be said to have caused an ‘inability to use.’
- It was noted by Lord Justice Flaux that Hiscox had thrown the gauntlet down to the claimants in submitting that there was no English authority to say that ‘interruption’ could include partial cessation of business. We wait to see whether the claimants respond to this comment in their closing submissions on Thursday.
The test case continues on Tuesday 28 July at 10am when the court will hear submissions on behalf of MS Amlin, Ecclesiastical and Arch. The pressure on the tight court timetable is starting to show with two days left for the remaining six defendants to make submissions on their representative sample wordings.
FCA case: Day 4
On the fourth day of oral submissions on 23 July, the court heard from Mr Ben Lynch QC on behalf of the Hiscox Action Group interveners, Mr Gavin Kealy QC, who made submissions on causation on behalf of all defendants and Mr David Turner QC on behalf of RSA.
Hiscox Action Group interveners
Counsel for the Hiscox Action Group (HAG) made brief submissions to complement and enhance the arguments advanced on behalf of the FCA. The key arguments raised were as follows:
- HAG rejected the narrow definition of ‘interference’ put forward by defendants. It should be accepted that terms are capable of covering a variety of circumstances and should not be confined to a narrow definition. The correct approach would be to give terms their natural meaning, even where capable of multiple applications.
- The argument advanced by defendants that ‘occurrence’ must have a localised meaning was similarly rejected. HAG submitted that the policy wording is intended to be clear and where the clause does not make clear that geographical restrictions apply, such words should not be read in to the policy wording.
The defendants’ submissions on causation
The key submissions made on behalf of all the defendants on the issue of causation are summarised as follows:
‘But for’ causation
- The general principles which govern the assessment of loss in contract are well established and not in dispute. The nature of an insurer’s promise under a policy is that it will hold the insured harmless against the insured peril. A breach of that contract gives rise to a claim for damages with the general object of such award to be to put the claimant in the same position, so far as money can provide, as they would have been had the breach not occurred.
- It is the FCA’s case that “the single proximate cause [of loss] is the disease everywhere and the Government and human response to it”. It was argued by the defendants that such argument bears no true resemblance to the insured perils in any of the wordings to be considered by this case.
- It was accepted that the counterfactuals presented by the defendants were artificial, but that is true of all counterfactuals, which by their nature, seek to create an alternative reality.
- The defendants submitted that the court must apply the ‘but for’ test of causation as it is an integral element of contract law which traditionally and correctly answers the question of whether an insured peril caused loss.
- There was a lively discussion between Mr Kealy QC and Mr Justice Butcher as to whether there was authority within insurance law to show that a cause of loss had been found not to be a proximate cause as it did not satisfy the ‘but for’ test of causation.
- Mr Justice Butcher posed the hypothetical scenario of a railway company which had insured itself against delays caused by a landslip. Overnight, a landslip occurred which prevented a train from leaving the station. In fact, it later became known that there had been a signalling problem which would have prevented the train from running in any event. Would this mean that the landslip was not a proximate cause even though it prompted the non-running of the train? Mr Kealey QC responded that there would be no cover in such an event as the insured peril was not the cause of the loss. The principle of insurance is to put the insured in the same position, but not a better position, as if the insured event had not occurred. To provide an indemnity in this scenario would be to place the insured in a better position than it would have been had the insured peril not eventuated.
- It was accepted that the factual burden of proof in such a hypothetical situation would pass to the insurer to show at least some evidence of another cause of the loss, and it would not be for the insured to prove all potential negatives.
- The defendants rejected the criticism from the claimants about the perceived inconsistencies in the counterfactuals advanced by each party. Such ‘inconsistencies’ were due to the different wordings of each policy and the claimants were wrong to advance one blanket argument to apply to all policies.
- A counterfactual should reverse the entire combination that makes up the insured peril, but never an individual aspect of such combination. To reverse more than the insured peril for the purposes of ‘but for’ causation would be “anarchic in legal terms and fundamentally wrong.”
- Where geographical restrictions apply to the insuring clause, the insured must show that, but for the outbreak of disease in such prescribed area, it would have suffered no loss. This would be a factual question which is not within the scope of the test case.
- There was a brief discussion about the recent example of the local lockdown imposed in Leicester, with defendants accepting that it could be possible on the facts for an insured to prove that such a localised lockdown was as a result of local occurrence of the disease.
- It was submitted that if the defendants had been prepared to provide cover on an epidemic scale, they would not have done so by way of such clauses or wordings. The claimants’ interpretation of insuring clauses would open a gateway to extended cover which was not envisaged by the parties at inception.
Concurrent causes and the authorities
- The defendants submitted that the case of Orient Express (Orient Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)  EWHC 1186 (Comm)) was correctly decided and should inform the court’s decision. Following Orient Express, there is no requirement or principle in law for the ‘but for’ test not to be applied.
- The claimants have advanced arguments in relation to The Silver Cloud (P and C Insurance Limited v Silversea Cruises Limited  EWCA Civ 769) case (as referred to in our article summarising the second day of the hearing). The defendants argued that the decision by the Court of Appeal was not relevant to any issues in dispute in the test case. The decision was dependent on specific facts which had been identified through expert evidence or which were common ground between the parties and the court had not therefore considered the arguments which required determination in the test case.
- The defendants rejected the claimants’ analysis that The Silver Cloud created a new hybrid category of ‘inextricably linked’ concurrent causes which could extend the principles relating to interdependent causes as decided in Wayne Tank (Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp  QB 57.) and Miss Jay Jay (The Miss Jay Jay  1 Lloyd’s Rep 264.). Instead, it was just a further authority as to the application of the law to interdependent concurrent causes.
- The defendants submitted that where there are two indivisible causes which are not interdependent, but where only one is insured, the insured would fail to satisfy the burden of proof. To prove causation, each cause must pass the ‘but for’ test.
The court heard submissions on behalf of RSA in relation to the wording of its representative policies. Key submissions included:
- The strength of English commercial law, including insurance law, is its consistency. The defendants are asking the court to adopt long-established rules of construction and causation.
- One RSA policy states that it provides cover where the policyholder suffers loss “as a result of closure or restrictions placed on the Premises as a result of a notifiable human disease manifesting itself at the Premises or within a radius of 25 miles of the Premises”. RSA submitted that the 25-mile radius imposed by the insuring clause requires the restrictions to be imposed as a result of the local incidence of the notifiable disease. It is RSA’s case that the Government restrictions introduced in March were as a result of the wider, national incidence of COVID-19 and the policy would not therefore respond.
- The RSA submitted that ‘closure or restrictions’ were only placed on premises by the 26 March 2020 Regulations. Earlier advice, guidance or directions were insufficient to meet the requirement under the policy.
- An example advanced by RSA was of a customer who had developed COVID-19 related symptoms prior to 26 March 2020 and who, when following guidance in place at that time, to isolate for 14 days, cancelled a holiday cottage booking. It was argued that this could not be said to amount to a closure or restriction placed on the premises and this would not trigger cover under the policy.
- Anticipatory closure of insured premises or pre-emptive closure to prevent the spread of COVID-19 when there was no incidence of COVID-19 within the required 25-mile radius would not, it was submitted, satisfy the insuring clause as the closure could not be said to be as a result of the manifestation of the disease within the prescribed radius.
- RSA relied on the example of the Scilly Isles to argue that a causal link between Government restrictions and loss could not be satisfied. It is agreed between the parties that the Scilly Isles had not experienced a known case of COVID-19 but regardless had been subject to Government restrictions and closure.
The test case continues on Monday 27 July 2020 at 10am when the court will hear submissions on behalf of RSA, Hiscox and MS Amlin as to their respective representative policy wordings. We will continue to update you on developments concerning this landmark case as it progresses.
FCA case: Day 3
The FCA completed its third and final day of opening submissions on Wednesday 22 July with key arguments advanced by Mr Colin Edelman QC and Ms Leigh-Anne Mulcahy QC. The court also heard from Mr Edey QC on behalf of the Hospitality Insurance Group Action interveners.
The third day of FCA submissions focussed on its assessment of the representative policy wordings under consideration in the test case. In summary, the following key arguments were presented on behalf of the FCA:
Causation and counterfactuals
- The FCA argued that insurance has its own causation test to be applied in the context of a policy and that the defendants had placed too much reliance on counterfactuals as a means of determining causation.
- The counterfactuals presented by the defendants generally seek to model worlds in which different scenarios exist to allow the court to excise the effects of the insured perils. Some defendants have modelled a world in which the COVID-19 pandemic exists, but the government did not instigate a lockdown, in an attempt to mirror the situation in Sweden where less stringent action was taken by its government. The counterfactual approach was described as living in “cloud cuckoo land” – an artificial exercise when dealing with composite causes.
- It was argued that the counterfactual approach to causation would require policyholders to run through steps in the trigger chain to show that cover would respond such as prevention of access caused by government action caused by an outbreak of disease; but would then seek to remove some of those steps to determine causation.
- The FCA also highlighted inconsistencies in how the counterfactuals had been approached, with some defendants removing the occurrence of COVID-19, some removing all government action, and some removing government action in relation to prevention of access. It was submitted that a coordinated conclusion on the approach to the application of counterfactuals had not been presented.
- Lord Justice Flaux commented that he appreciated that an exercise to remove the incidence of the disease created a tension when presented with a composite package of causes which go hand in hand and which have been contemplated by the policy.
Prevention of access
- The defendants have raised different arguments in relation to what constitutes prevention of access to insured premises. Arguments raised by the defendants in their skeleton arguments include submissions that only total closure of premises qualifies as prevention of access; or that a physical obstruction is required; or that prevention means a legal prohibition.
- The FCA’s case is that neither the total closure of premises nor any physical obstruction is required to qualify as prevention of access for the purpose of the policies.
- The FCA used the example of a restaurant which was required to close but which was able to stay partially open in order to provide a takeaway service. The FCA submitted that this situation still prevents access to the premises.
- Some of the arguments put forward by the defendants include submissions that legal force is required for intervention to amount to public authority action for the purposes of the policies.
- Other submissions included a denial that action taken by the Government amounted to public authority action as it did not fall within the definition contemplated in the wording of the policy. Lord Justice Flaux commented that he found this argument to be surprising given that it would lead to action taken by Public Health England falling within the policy, but not action taken by the Minister of Health.
- The FCA also argued that ‘action’ could include pronouncement, advice or guidance and did not require legislation for cover to be triggered. The FCA illustrated this point with the example of the Government order for schools to close which was not first made by introducing legislation, simply because the public and businesses abided by that order. To say that this did not amount to action, the FCA says, would be illogical.
- Some of the representative policies under consideration in the test case provide that damage ‘following’ an insured peril is covered. Arguments have been put forward by some of the defendants that this definition requires proximate cause.
- The FCA submitted that the court should adopt a broader definition which allows for a loose causal link.
- The FCA also rejected arguments raised that the Government action or prevention of access did not follow local occurrences of COVID-19, but the national occurrence of the disease. This argument also fed into submissions made by the defendants as to the definitions and application of ‘occurrence’ and ‘vicinity’.
Occurrence and vicinity
- The FCA dismissed arguments that the use of the word ‘occurrence’ in any of the policies implied an essence of locality, or that any restrictions imposed by the Government had to have a local element.
- It has been accepted by one insurer that the more recent localised lockdown in Leicester could be covered under its policies due to the imposition of restrictions by local authorities within a locality limit. The differentiation between local or national occurrence has been dismissed by the FCA who submitted that the national occurrence of COVID-19 has been caused by an accumulation and multitude of local outbreaks. It is not the case that national restrictions were imposed due to outbreaks in only one area of the United Kingdom.
- Similarly, the FCA rejected submissions that the court should ‘read in’ to policies that any reference to the emergence of disease in the vicinity meant emergence ‘only’ in the vicinity. They argued that ‘vicinity’ is a flexible concept and that the entire United Kingdom could be treated as the vicinity of an insured’s premises for the purpose of policy cover. The claimant used the example of one singular person in London with COVID-19 and argued that this scenario would be sufficient to constitute danger across the whole of London and beyond, due to the potential of the disease to spread rapidly.
The court also heard from Mr Edey QC on behalf of the Hospitality Insurance Group Action interveners. Mr Edey QC sought to enhance some of the FCA’s arguments and made the following points:
- The difference between a notifiable disease and a pandemic was not of importance and should be disregarded for the purposes of assessing policy coverage.
- In relation to the one mile and 25 mile radius area requirements imposed by some of the representative policies, the court had struggled to understand why such requirement would be included if it were not to exclude cover in the case of a pandemic. Mr Edey QC submitted that its purpose is simply to preclude cover where there is no instance of the relevant disease in that particular locality and that any wider exclusion could have been effected by way of a specific pandemic exclusion.
Day four of the FCA test case continues on 23 July 2020 at 10am when the court will hear from Mr Lynch QC for the Hiscox Action Group interveners. The defendants will then have an opportunity to start presenting their counter arguments, including submissions in the morning session on the response to the FCA’s case on causation, which will be presented collectively on behalf of all the defendants.
FCA case: Day 2
On the second day of opening submissions on behalf of the FCA, Mr Colin Edelman QC and Ms Leigh-Ann Mulcahy QC advanced arguments pertaining to causation, trends clauses, and the construction of specific policy wordings.
In summary, the following key arguments were presented on behalf of the FCA:
- The FCA explored the case law which deals with concurrent causes of loss and the approach which should be taken where there are two or more effective causes.
- The FCA relied on the principle in The Miss Jay Jay (The Miss Jay Jay  1 Lloyd’s Rep 264.) which considered a situation where there are two interdependent causes of loss, which are both necessary for the damage to have occurred but which are causatively insufficient on their own. In such a circumstance, if one cause was insured and the other was not insured, cover would apply under the policy, unless the uninsured clause was specifically excluded.
- The FCA submitted that this principle extends to where there are independent causes with some commonality between them and that consideration needs to be given to what is intended by the policy within a commercial context.
- The FCA also argued that the ‘but for’ test is not always suitable in such circumstances as there are deficiencies when applied to two equally efficacious causes, such as in a multiple wrongdoer case, where it would result in the absurd situation of no cause being found. In such an instance, the ‘but for’ test would need to be adapted to apply to both causes together.
- Whilst the defendants seek to rely on Orient Express (Orient Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)  EWHC 1186 (Comm).), the FCA argued that the case of Silver Cloud (P and C Insurance Limited v Silversea Cruises Limited  EWCA Civ 769.) is more relevant and should be applied. In Silver Cloud, the judge held that there was an inextricable connection between two concurrent causes of loss: the first, the 9/11 act of terrorism, and second, the state warnings issued in response. Both had been causative of the loss suffered and there had been no intention to exclude loss directly caused by the underlying activity which prompted the insured event of the state warning.
- The headline point for the FCA’s case on this issue is that if it is decided that the FCA’s position on how causation applies at the primary level of the policies is correct then it would be very surprising if the trends clause then subverts that primary assessment of causation when addressing quantum. The trends clause cannot “come to the rescue” to save a failed causation argument.
- When considering the trends clause without the “baggage” of COVID-19, it would be approached as an accounting exercise. Instinctively the trends clause is thought to relate to extraneous circumstances that affect the business and not the cause of the loss itself. The purpose of the trends clause is to look at matters that are extraneous to the policy and to extricate those matters from the cover being provided by way of a loss adjustment. It should not be used to exclude the damage caused by the insured loss itself.
- To illustrate the view on what circumstances the trends clause should be applied to, an example was developed in submissions of a fire occurring in a restaurant for which the renowned head chef handed in their notice (as they had always intended to do) either just before or just after the fire. That, the FCA submitted, was the type of circumstance that it would expect the trends clause to consider. Absent the fire, the revenue for the restaurant would reduce because of the loss of the renowned chef who made the restaurant so popular.
- Reversing the decision in Orient Express would be to “restore sanity” and to return BI policies back to what they were designed to do. The issue with Orient Express is that too much focus is placed on the damage and not the cause of the damage. This, it was submitted, was based on a misunderstanding as to how an all risks policy operates. The correct approach would have been to focus on the insured peril – that was the hurricane and when focusing on that it logically follows that the trends clause should not be applied to exclude the damage caused by that insured peril.
- The FCA argued that the decision in Orient Express is of limited assistance as it was itself an appeal of a tribunal decision under the Arbitration Act 1996 and was therefore not a full review of the facts at first instance.
- The court in Orient Express had failed to grapple with the substance of the decision in Silver Cloud in that the causes of loss were described as being inextricably linked; that it failed to give account to realistic counterfactuals; and that it produces an unintended windfall argument.
- Reference was made to a US case, cited in Orient Express, which related to a property damage BI policy held by a motel that was damaged by Hurricane Hugo. The FCA argued that this case demonstrates the absurdity of the result if the counterfactual to be applied is only that the insured damage did not occur (and not also that the cause of that damage did not occur). In that case, the insured argued that it was entitled to recover a “windfall profit” applying the but for scenario where the hurricane had occurred and damaged the surrounding area but had left the motel unscathed. The insured argued that it would have benefited from an influx of guests, construction workers needing a place to stay whilst working to repair the local area. That argument was rejected by the court on the basis that if such a counterfactual were applied, it would permit a windfall profit, which was not what the parties could have intended and therefore the parties must have intended that the cause of the insured damage (the hurricane) was included together with the insured damage it caused for the purposes of applying the trends clause. The dissenting judge in that decision considered it correct to apply a counterfactual in which the hurricane still hit but left the motel unscathed and it was the views of the dissenting judge that were preferred by Hamblen J in Orient Express.
- The FCA commenced its submissions on the construction of policy wordings by addressing arguments in relation to the Hiscox policies. This included terms in dispute such as ‘inability to use’, ‘restrictions imposed’, and ‘occurrence’.
- Whilst Hiscox argue that the word ‘occurrence’ requires a reading in of some requirement of locality such as an outbreak on a small-scale, the FCA argued that this was not expressly or impliedly written into the policy and that the policy acted to apply wherever the occurrence of the insured peril.
- There was some debate as to whether Hiscox had accepted that the regulations brought in by the Government on 26 March 2020 were ‘restrictions imposed’ for the purposes of the policy. We await Hiscox’s submissions next week to ascertain their response to this point.
- The FCA submitted that an ‘ability to use’ did not mean a total inability to use premises. For example, the phrase could apply to a restaurant which was still able to provide takeaway services but had shut down part of its business due to the restrictions. Hiscox had argued in the pleadings that the policy wording required a complete cessation of all business activities which was not accepted by the FCA.
Day three of the FCA test case continues on 22 July 2020 at 10am, when the FCA will continue with its submissions on policy wordings and the court will hear opening submissions from interveners.
FCA case: Day 1
The highly anticipated hearing in the Financial Conduct Authority (“FCA”) business interruption test case commenced on 20 July 2020, (remotely) before Mr Justice Butcher and Mr Justice Flaux. It was the first of three days that are to be devoted to the claimants’ submissions and a number of key issues were presented by Mr Colin Edelman and Ms Leigh-Anne Mulcahy on behalf of the FCA.
In summary, the following key arguments were presented on behalf of the FCA.
Prevention of access
- The action taken by the government was clearly imperative in nature and, in effect, ordered owners and employees not to access their premises. Policyholders would have been in breach of the law and policy terms and conditions had they chosen not to comply with the measures implemented by the government. The government’s response to COVID-19 therefore amounted to government action or advice thus triggering the relevant insuring clauses.
- To suggest that the lockdown did not result in prevention of access or hindrance of access to premises is both “factually and legally wrong.”
Prevalence of COVID-19
- To show prevalence of COVID-19 in the policy area, policyholders should use evidence from a suitably qualified institution. Whether this evidence is capable of being relied upon should then be tested in each individual case, but that it should be for the insurer in question to show that such evidence of prevalence was unreliable – i.e. the burden should not be placed on insureds.
- Some of the policies require COVID-19 to be present within a certain radius of the business and the defendants argue, in the pleadings, that this shows they never intended to provide cover for a pandemic. The FCA argued that geographical restrictions operate as a way for insurers to control their risk, but that those geographical restrictions do not define the policy clause in question. However unexpected, the requirement is a “notifiable disease”, which does, the FCA submitted, cover a pandemic like COVID-19.
- The FCA also dealt with the defendants’ argument that it must be shown that a local case directly caused closure of an insured business. The FCA says this argument is incorrect, as the prevalence of the disease caused the government to implement a nationwide lockdown and that this context must be kept in mind when considering policy coverage.
Causation of loss and trends clauses
- The correct approach to causation is “agreement-centred” - that is to deal with the issue of the construction of the policies themselves.
- The FCA argued that the defendants’ position that Orient Express constitutes “settled law” is incorrect and that this case should not be used to aid the construction of the policy wordings under consideration.
- The FCA submitted that if the court were to apply the decision in Orient Express to the present-day scenario, this would result in all-risk policies providing less cover than a policy insuring a specified peril. The FCA argued that this exemplifies why the decision in Orient Express cannot be applied to this case.
- In the alterative, the FCA argued that the defendants’ approach to loss is incorrect, as they consider a counterfactual scenario where closure does not occur but the disease is still present. This approach disregards a key “ingredient” of some of the policy wordings under consideration, which insure against a notifiable disease.
Day two of the FCA test case continues on 21 July 2020 at 10.30am. The FCA will be picking up where it left off - with further analysis of the decision in Orient Express and its submissions as to why that decision should not be applied when assessing insured losses under the representative sample of policy wordings under consideration.
Update following the second case management conference on 26 June 2020
Pamela Freeland and Sarah Irwin provide the update.
The second case management conference (“CMC”) in the Financial Conduct Authority’s (“FCA”) highly anticipated business interruption test case was heard remotely (and live streamed) before Lord Justice Flaux and Mr Justice Butcher.
The court had to deal with an extensive agenda, which included various applications for permission to rely on factual and expert evidence, along with applications from non-parties to intervene in the case pursuant to the provisions of the Financial Markets Test Case Scheme.
The headline points from the second CMC are:
- The Court received three applications from non-parties to intervene in proceedings.
- Separate applications submitted on behalf of the Hiscox Action Group (“HAG”) and the Hospitality Insurance Group Action (“HIGA”) were both granted. Whilst the Court had no doubt that the FCA would advance the majority of the points relevant to these two groups of policyholders, it accepted it was important to ensure that all relevant arguments were put before the court. Permission was granted on the condition that oral submissions and skeleton arguments submitted by the interveners are to supplement the FCA’s submission and should avoid duplication.
- An application filed on behalf of an individual RSA policyholder was denied on the basis that the policy in question did not fall within the scope of the test case.
- The court refused an application from RSA to adduce factual evidence which would have added further policy wordings in to the mix (to evidence alternative wordings that it says were available to policyholders). The refusal to grant permission provides a clear indication from the court that it is determined to restrain attempts to further extend the scope of the case, in light of what is already a challenging timetable.
- The court refused the FCA’s application to rely on expert evidence concerning the extent to which certain specified diseases included within a policy being considered were likely to cause a widespread outbreak across the UK in modern times. The court held that such evidence (created post contract) was inadmissible for the purposes of analysing the construction of the relevant policy term.
- The court heard lengthy debate regarding the FCA’s reliance on the Cambridge analysis data as to the prevalence of COVID-19 and its incidence in the vicinity of policyholders’ premises.
- The FCA was granted permission to amend its particulars of claim and the court confirmed that it would be open to hearing arguments limited to whether such evidence would be sufficient, as a matter of principle, to discharge the burden of proof placed on a policyholder if it was assumed that the Cambridge analysis was the best evidence available.
- The court will revisit the potential for a second trial to separately consider the issue of prevalence in seven days’ time, following written submissions. Lord Justice Flaux indicated that a second trial, if so desired by the FCA, could take place in early September to allow insurers time to find and instruct their own experts on this issue.
- The Court also dealt with various procedural directions in preparation for the trial which is to be heard by Lord Justice Faux and Mr Justice Butcher for eight days from 20 July 2020.