‘Testing’ for Covid-19: The results so far

As businesses globally continue to struggle with the challenges produced by COVID-19, test cases have emerged as an efficient way to determine, in principle and based on assumed facts and sample wordings, whether business interruption losses in this context are covered by insurance.

To date, the most significant test case determined is that brought by the UK Financial Conduct Authority (FCA) on behalf of policyholders who sustained loss due to the pandemic and associated Government action.

The decision, delivered by the High Court of Justice in London on 15 September 2020, is extensive and runs for over 160 pages – perhaps unsurprising considering the test case relates to eight different insurers and 21 different wordings. The decision is not a complete victory for either party, with the Court finding in favour of policyholders on certain issues and for insurers on others. Whilst the sheer number of contested issues make summarising the decision a difficult task, the following are five aspects which have attracted interest.

1. The Court was tasked with interpreting clauses which cover business interruption losses arising from disease occurring within a particular vicinity (say, a 25 mile radius) of insured premises. Insurers argued that cover was limited only to loss arising from the particular occurrence(s) of disease within the specified vicinity and not loss resulting from the broader pandemic. The Court disagreed with the insurers’ argument on this point, determining that cover was available for loss flowing from the pandemic and associated Government action, provided at least one infection had occurred in the specified vicinity.
2. The Court also considered the proper approach to assessing loss in the context of clauses covering loss resulting from an inability to use insured premises due to restrictions imposed. The insurers argued that the relevant ‘counterfactual’ was the position an insured would have been in, but for the relevant Government action, as opposed to the position the insured would have been in but for the pandemic. The difference between the two competing approaches is significant in circumstances where many businesses would still have sustained loss as a result of the pandemic, without the Government restrictions being implemented. Ultimately, the Court sided with policyholders, observing that the insurers’ argument “involve[d] an unrealistic and artificial exercise, and one which fails to recognise that the occurrence of the disease is an essential element of the insured peril, and of what the insured has covered itself against”.
3. When considering the phrase, “prevention of access” the Court determined that it must mean something more than a mere “hindrance”. Taking the example of a restaurant which can no longer serve food and drink for consumption on the premises, yet can serve takeaway food, the Court found that, if the takeaway component of the business was a pre-existing and substantial component of the insured’s business, then there was no “prevention of access”. Having said that, a restaurant which started a takeaway service due to the restrictions (but which did not offer one previously) may still be able to establish “prevention of access”.
4. Where cover is enlivened by “restrictions imposed by a public authority”, the Court found that this pre-requisite could only be satisfied by restrictions implemented by way of statutory instrument and, importantly, Government advice does not constitute “restrictions imposed”. The result is the same where cover is dependent upon an “order” of a competent authority.
5. Finally, the Court analysed certain clauses covering loss arising from an “incident” which results in a denial of access to insured premises. The FCA contended that the general “emergency” or “danger” constituted by the pandemic as a whole was an “incident” for the purpose of such clauses, however, the Court rejected this argument and determined that “incident” means “something which happens at a particular time, at a particular place, in a particular way”.

The implications of the High Court’s decision are significant in the context of the UK insurance market. The FCA estimates that approximately 700 wordings issued by 60 different insurers and, in turn, 370,000 policyholders may be affected by the outcome. Having said that, the test case is not yet over – the FCA and six of the eight insurers involved have sought leave to appeal to the UK Supreme Court.

In the meantime, the test case filed jointly by the Insurance Council of Australia and the Australian Financial Complaints Authority was heard by the NSW Court of Appeal on 2 October 2020. The Court is tasked with determining whether COVID-19 is a quarantinable disease “under the Quarantine Act 1908 and subsequent amendments”. The Court’s decision will inform whether loss sustained by many Australian businesses is excluded from cover and is eagerly awaited by insurers and the wider business community alike.