A group of hospitality policyholders failed in their attempt to obtain cover under a business interruption policy as it was determined, in an ad hoc arbitration, that the UK central government did not constitute “a competent local authority.”
Background Facts
Arbitration proceedings were brought on behalf of a large group of policyholders that operate businesses in the hospitality sector in England (the Policyholders) against China Taiping Insurance (UK) Limited (the Insurer) under a business interruption (BI) policy (the Policy) regarding BI losses suffered during the COVID-19 pandemic due to the actions of the UK government.
The Policyholders sought cover under the first extension to the Policy headed “Denial of Access” (Extension 1) which provided cover for “interruption of or interference with [the Policyholders’ business] in consequence of … (b) the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority …; (c) the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises.”
The Policy also contained an extension headed “Disease, Infestation and Defective Sanitation” (Extension 2) which provided cover for “interruption of or interference with [the Policyholders’ business] in consequence of the occurrence at the Premises ... of a notifiable, human, infectious or contagious disease.” The Policy contained a list of “diseases” which could only be amended with the prior written consent of the insurer. COVID-19 was not included on that list (either from inception or subsequently).
Lord Mance, sitting as the sole arbitrator, was asked to address the following three issues:
- Did Extension 1 provide cover for BI losses suffered following the restrictions put in place as a result of COVID-19 where Extension 2 (which dealt with cover for notifiable diseases) did not?
- If Extension 1 could provide cover, was it only for localised events or occurrences, rather than, as with COVID-19, national pandemics?
- Did the phrase “Police or other competent local authority” cover the actions/instructions of the UK central government?
The award was delivered in September 2021.
The Award
Does Extension 1 cover notifiable diseases?
In short, the Insurer argued that BI losses arising from COVID-19 could only fall for cover under Extension 2 (and then only if COVID-19 was on the list of diseases, which it was not). The Insurer’s position was that the Policyholders could not rely on Extension 1 to provide cover for a notifiable disease that was not on the list for Extension 2.
Lord Mance, however, found in favour of the Policyholders and held that cover for notifiable diseases was not, in effect, excluded under Extension 1 simply because of a potential overlap with the express cover for notifiable diseases that existed elsewhere in the Policy (in particular, in Extension 2). He concluded that “[t]here is no implied exclusion under Extension 1 even in respect of notifiable diseases covered under Extension 2 … still less in respect of COVID-19 which was not specified under Extension 1.” [1]
Lord Mance noted that it was open to the Insurer to have inserted an exclusion to carve out notifiable diseases from the cover afforded under Extension 1, or to have included a clarification of the interrelationship between Extensions 1 and 2. Any such exclusion or clarification was notably absent from the Policy.
If notifiable diseases are covered by Extension 1, will cover be afforded in respect of national, rather than localised, notifiable diseases?
The Insurer’s position was that the wording of the Policy required an element of localisation. Extension 1(b) is limited to “the closing down or sealing off of the Premises or property in the vicinity of the Premises” and Extension 1(c) is limited to circumstances where there is “an emergency threatening life or property in the vicinity of the Premises” (emphasis added). Furthermore, Extension 1 involves instructions, actions or advice of “the Police or other competent local authority” (emphasis added).
Extension 1(b)
Lord Mance applied the same methodology as that which was adopted by the High Court of England and Wales in relation to certain policy wordings at issue in the FCA test case.[2]
The High Court held (at paragraph 471) that “… the actions or advice of the government, taken nationally and affecting all insured businesses will inevitably be in the vicinity of the insured premises if they lead to the prevention or hindrance of use or access of the insured premises … Nowhere in this wording is there any limitation of qualifying actions or advice of government to such actions or advice specific to the insured premises or their vicinity.” In other words, there was no requirement that the actions of the government must have been directed at a specific insured premises and that “vicinity.”
Accordingly, Lord Mance held that he was “… unable to see any basis for reading Extension 1b) down generally so that it only operates in respect of a localised danger, disturbance or other peril … If the cover afforded by Extension 1b) is in any sense “localised,” this must be not because the danger, disturbance or other like peril involved has to be local, but because this is a very likely, though not inevitable consequence of the requirement that the instructions given to address it are “issued by the Police or other competent local authority.”” As such, the Policy could be triggered by actions of the Police or other competent local authority in response to countrywide occurrences of COVID-19.
Extension 1(c)
Lord Mance stated that, on the High Court’s approach in the FCA test case, “the Policyholders would have therefore to demonstrate that it was “an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions of the government.”” He further commented that “[t]he Divisional Court thought it “highly unlikely” that this could be shown.”
Given that the High Court’s approach to these clauses was not questioned or challenged on appeal, Lord Mance regarded it as “highly persuasive” and possibly even binding. However, he qualified this statement on two grounds.
First, the High Court had treated the wording of RSA 2.1 and 2.2 (which was, in all material respects, the same as the wording in Extension 1(c)) as analogous to the wording of MSA 1 (another of the policies discussed in the FCA test case), which covered police or other intervention “following a danger or disturbance in the vicinity of the premises.” This leaves open for consideration whether cover under RSA 2.1 and 2.2 and Extension 1(c) extends to an emergency outside the vicinity threatening life or property within the vicinity.
Second, Lord Mance considered that the High Court may have approached the issue differently and reached a different conclusion if it could have availed of the UK Supreme Court’s analysis, in particular, on the question of causation under the policy wordings before it, on which “the Divisional Court had erred in significant respects in its understanding” by applying a “but for” test of causation. Instead, occurrences of Covid-19 ought to be considered as concurrent causes of any business interruption loss. He noted that the general approach to causation by the Supreme Court would be applicable in respect of the whole range of policy wordings.
Although Lord Mance agreed in principle with the Policyholders on their interpretation of Extension 1(c), he noted that the present arbitration did not require it to be resolved definitively.
Do references to instructions issued by or actions or advice of “the Police or other competent local authority” encompass instructions issued by or actions or advice of the national UK government?
Lord Mance concluded that “in so far as the Policyholders claim to have suffered recoverable loss in consequence of the alleged instructions, actions or advice … such claim fails in that the instructions, actions or advice alleged were not issued by or of “the Police or other competent local authority” within the meaning of either Extension 1b) or 1c).”
Lord Mance concurred with the Insurer that, when the phrase “the Police or other competent local authority” is given its natural meaning, it refers to “the Police as a local body and other competent local authority in the conventional sense of a local (as opposed to central) body taking action or issuing instructions or advice in relation to the locality within its jurisdiction or in relation to property within such locality.” Following his examination of the Policy as a whole, Lord Mance identified various provisions which demonstrated a clear distinction between, on the one hand, local authorities and, on the other hand, central governmental authorities. Consequently, a reasonable policyholder should understand that the cover is limited to local, as opposed to central governmental, activity, instructions or advice.
This is an interesting departure from the broad meaning given to the words “competent local authority” in the FCA test case. In their argument, the Policyholders drew upon the approach of the High Court in its interpretation of a Prevention of Access clause in a policy issued by the Ecclesiastical Insurance Office (EIO), which excluded cover for loss caused by “closure or restriction in the use of the premises due to the order or advice of the competent local authority as a result of an occurrence of an infectious disease …” In the FCA test case, the High Court concluded that “the phrase "competent local authority" means whichever authority is competent to impose the relevant restrictions in the locality on the use of the premises, including central government.” However, Lord Mance dealt with this by deciding that the issue and wording in the EIO’s case differed in material respects from those in the Policy in question. Instead, he favoured the more natural reading of the requirement of instructions, actions, or advice by or of “the Police or any other competent local authority” which, in his view, “is and has always been to define cover by reference to bodies with local, rather than countrywide or central governmental, authority.”
Lord Mance concluded his analysis of this question by stating that, irrespective of denial of insurance cover for COVID-19 losses which can be seen with the benefit of hindsight, the Policy should not be interpreted in a way which would “distort its natural and objectively intended effect.”
Significance of the Award for Policyholders
The fact that this award was very much a victory for the Insurer serves as a useful reminder to policyholders that, while the judgment of the Supreme Court in the FCA test case mostly came down in their favour, this will not necessarily be the outcome in every claim for BI losses in relation to COVID-19.
Policyholders are reminded that any claim they decide to bring for BI losses will be considered in light of the specific wording of the provisions in each individual BI policy in question, and determined against the relevant background facts which are concerned with that claim.
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Trainee solicitor Charlotte Warke contributed to this LawFlash.
[1] It is not immediately clear whether this is a typographical error in the award and should instead read “… not specified under Extension 2.”
[2] The Financial Conduct Authority v. Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm) and [2021] UKSC 1
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