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The FCA business interruption test case – five things you might have missed

The judgment will, of course, have significant ramifications for insurers who are exposed to BI claims arising out of the COVID-19 pandemic.

The majority of the commentary on the case has, quite correctly, focused on the court’s analysis of the non-damage BI insuring clauses that formed the basis of the claim. However, within the 162-page judgment the court made a number of comments that will be of general interest to insurers. Here are five things you may have missed from the decision.

1. “Prevention” and “hindrance” are not easy concepts to apply in practice

A significant part of the court’s remit was to determine whether, and to what extent, the denial of access extensions were triggered in the various wordings it was asked to review. The denial of access extensions are typically triggered where there has been a “prevention” or “hindrance” of access to the premises. Following the restrictions imposed by Parliament in March 2020, many businesses changed how they traded in order to maintain a source of income. For example, restaurants sold ingredients to customers to cook at home and some theatres broadcast performances to remote audiences. Given that these businesses were able to trade in some capacity, a legitimate question arises as to whether they have been prevented from accessing or using their premises.

In determining whether the restrictions constituted a “prevention” of access to the premises, the court said that the key question was whether the nature of the business described in the schedule had fundamentally changed. For example, a restaurant that offered dine-in only services prior to the pandemic but subsequently converted to a takeaway-only business was deemed to have suffered a prevention of access to the premises as the change would be deemed to be fundamental to the business. By contrast, a restaurant that offered both takeaway and dine-in services prior to the pandemic but subsequently converted to a takeaway-only business would not have suffered a prevention of access to the premises as the nature of the business had not fundamentally changed.

However, applying this principle in practice is unlikely to be straightforward. Even using the relatively simple examples above, the court went on to concede that a restaurant that only offered a de minimis takeaway service before the pandemic but which subsequently converted to a takeaway-only business would be deemed to have suffered a prevention of access to the premises. The concept of a “fundamental change” to the insured business is inherently imprecise and is likely to give rise to factual disputes as to whether the denial of access cover has been triggered.

2. The importance of clear drafting and formatting

What is the difference between these two conditions?

Condition A Condition B

“What is not covered 

...

Any loss:

 a) during the first four hours

b) during any period other than the actual period when access to the Premises was prevented

c) as a result of labour disputes

d) occurring in Northern Ireland

e) As a result of infectious or contagious diseases any amount in excess of £10,000”

“What is not covered 

… 

Any loss: 

a) during the first four hours

b) during any period other than the actual period when access to the Premises was prevented

c) as a result of labour disputes

d) occurring in Northern Ireland

e) As a result of infectious or contagious diseases.

Any amount in excess of £10,000”

The two are almost identical (indeed the words used are in fact identical) but the formatting is not – whereas in Condition A the words “any amount in excess of £10,000” formed part of part e) of the exclusion, in Condition B the phrase is freestanding.

Condition A is the actual wording of one of the exclusions to the Prevention of Access-Public Emergency extension (a form of denial of access extension) contained in the wording referred to as RSA 2.2, one of the wordings considered by the court in the Test Case. Condition B is how the exclusion should have been expressed, and indeed counsel for the relevant insurer argued that the exclusion should effectively be rewritten on the basis that it was an obvious drafting mistake.

The way the words “in excess of £10,000” are to be interpreted has a material effect on the scope of cover. If Condition A is the correct interpretation, losses resulting from infectious or contagious diseases are not excluded from the scope of the denial of access extension in RSA 2.2, they are merely subject to an inner limit of indemnity of £10,000. Furthermore, cover under the denial of access extension as a whole is not subject to a £10,000 limit of indemnity unless the loss results from an infectious or contagious disease. The cover is presumably subject to the full BI limit if indemnity. By contrast, if Condition B is the correct interpretation, losses resulting from infectious or contagious diseases are excluded from the scope of the denial of access extension and any claims that do fall under the extension are subject to a maximum indemnity of £10,000. The very subtle difference in the formatting in fact gives rise to very different outcomes for the insurer and policyholder.

The FCA argued that Condition A should stand and that there were no grounds to rewrite it. The court agreed:

“So far as exclusion e) is concerned, we agree with Mr Edelman QC that there is no obvious error in the positioning of the words “any amount in excess of £10,000” within the exclusion and that insurers might very well have good commercial reasons for inserting an inner limit in respect of disease cover. Whilst the provision as it stands could be better worded, we do not agree with Mr Turner QC’s submission that it does not read grammatically. In any event, that is no reason for the change proposed, which rewrites the clause and, conveniently for RSA, creates a complete exclusion where previously there was only a financial limit…[463]”.

The reality is that this change to the formatting was more than likely a mistake on the part of the insurer but the court had little sympathy for this:

“…Even if RSA were able to establish that in positioning the words in the exclusion, they had made a mistake, the mistake was entirely theirs, to which insured policyholders cannot be said to have contributed, so there is no scope for the application of the doctrine of rectification….[463]”

This is a good example of how even very slight and seemingly innocuous drafting errors can greatly change the meaning of clauses and serves as a salutary reminder of the importance of carefully checking contractual agreements (including grammatical and formatting issues).

3. A 25-mile radius is a very large area

Many of the infectious disease extensions that the court considered were triggered by the occurrence of a notifiable disease within a 25-mile radius of the insured’s premises. The FCA pointed out to the court on a number of occasions that a 25-mile radius equates to about 2,000 square miles, or an area the size of Oxfordshire, Berkshire and Buckinghamshire combined. To be more precise, a circle with a 25-mile radius has an area of almost exactly 1,963.5 miles which is just less than the size of Trinidad and Tobago (1,980 square miles), more than the US state of Rhode Island (1,545 square miles) or just less than the combined area of Oxfordshire, Berkshire and Buckinghamshire (2,217 square miles). On any analysis this is a very large area.

Insurers’ willingness to offer cover for BI losses resulting from infectious diseases occurring in such a large area undoubtedly played a role in the court’s interpretation of the relevant disease extensions:

“The potentially widespread effects of the diseases in question were recognised by the fact that the “relevant policy area” was stipulated to be a radius of 25 miles, which, as the FCA reminded us on a number of occasions is an area of about 2,000 square miles, or as we were told, an area the size of Oxfordshire, Berkshire and Buckinghamshire combined. The ways in which a disease could have such an effect must have been recognised as including via the reaction of the authorities and / or the public. The parties thus knew or must be taken to have known that what was being insured under Extension 4(d) was business interruption deriving from a range of diseases some of which might spread over a wide and unpredictable area, and which might have an effect at a considerable distance from a particular case, including through the reaction of the authorities; and where it might well be impossible to distinguish whether that reaction was to the disease within or outside the relevant policy area…[160]”

Thus, the court was persuaded that cover in respect of the infectious disease extension was not limited to outbreaks or occurrences of a notifiable disease that occurred exclusively in the so-called “relevant policy area” (i.e. the radius stipulated by the applicable wording) but could be triggered by an outbreak affecting other parts of the country

4. The contra proferentem rule

Insureds and their representatives often seek to invoke the contra preferentem (often incorrectly transcribed as contra proferentum) rule to argue that any exclusions in a policy should be construed strictly against the insurer. The argument is often deployed alongside an unnatural and uncommercial interpretation of the wording of the exclusion. Recent decisions in the Supreme Court and the High Court have emphasised that there is no pre-disposition to construe a policy exclusion narrowly and that the words used should be construed in the context of the policy as a whole with due regard for its purpose. Unlike exemption clauses (i.e. clauses which seek to exclude or limit a party’s liability under a contract and which are to be construed narrowly), policy exclusions merely delineate the scope of cover and the ordinary principles of contractual construction apply.

In the FCA Test Case decision, the court reiterated that this is the correct approach and paragraphs 71 to 79 of the judgment serve as a helpful summary of the principles to be applied when interpreting an insurance policy. The contra preferentem rule still has a place in the interpretation of an insurance contract but should be deployed as a tool of last resort when there is a genuine ambiguity that cannot be resolved by first applying the ordinary principles of contractual interpretation.

5. The scope of cover should not be interpreted by reference to the absence of an exclusion

It is not uncommon for insureds and their representatives to argue that the absence of a specific exclusion covering their loss means that their loss should be covered. The argument is most often used when the circumstances of the claim do not trigger the policy insuring clause(s). Outside the context of all risks policies, any such arguments should be given short shrift and the court helpfully confirmed this:

“Arguments which rely on what is absent from the drafting of the contract are to be treated with caution and in many cases provide little assistance: Netherlands v Deutsche Bank AG [2019] EWCA Civ 771 at [59]. In the context of an insurance policy, if one cover is subject to an exclusion whereas another is not, the absence of that exclusion in respect of the latter cover is not decisive as to its scope: Burger v Indemnity Mutual Marine Assurance Co [1900] 2 QB 348 at 351. [66]”

Further related insights analysing the FCA business interruption test case and its implications for insurers:

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