As previously reported in this blog, the U.K. Financial Conduct Authority (FCA) brought a case against a variety of insurers under 21 policy wordings seeking clarification of sample clauses because the carriers refused to pay any U.K. claims relating to COVID-19 business interruptions largely for hospitality businesses. The policyholders seem to have won most of the coverage issues, and indeed the carriers have announced that they would book significant losses.
The basic issues involved the coverage for a series of extensions (specified loss clauses) to basic Business Interruption (BI) coverage, which covered the closure of a business due to an order of a competent governmental authority based on the existence of a notifiable disease in the vicinity of the covered business. These extensions have relatively low limits under $50,000. Given these low limits, it was financially impracticable for individual policyholders in the United Kingdom to separately litigate their claims against their insurers. As such, the insurers appeared to be denying claims on the assumption that most policyholders would not be in a financial position to press their claims. The recent decision in the case brought by the FCA will now allow tens of thousands of U.K. small-business policyholders an affordable path to coverage.
As to the various contamination-by-communicable-disease clauses in U.K. policies, the carriers argued that the clauses required some type of localized disease, and not a national pandemic, to be triggered. But, in the face of widespread orders requiring business closures that were issued in the United Kingdom on both the local and national level, there seemed to be no logical reason for those arguments, and the court smartly rejected them, noting that such insurer arguments would make the coverage illusory. Insurers are taking similar denial positions in the United States in policies containing communicable disease coverage, so the FCA decision may help to deter such conduct.
By agreement of the parties, the case brought by the FCA did not involve the general U.K. business-interruption clause, which requires physical loss or damage. (The Financial Conduct Authority v. Arch and Others,  EWHC 2248 (Comm), para. 80.) Rather, the court relied on the definition of damage in the extensions for closure coverage, which does not require any physical damage, and differentiated between that definition (para. 380) and the definition in the general business-interruption coverage clause. Thus, the decision does not provide any insight into whether “physical loss or damage” requires actual physical structural alteration or whether COVID-19 causes such “physical loss or damage,” both of which issues are being heavily litigated in the United States.
On other clauses, the U.K. court either found against coverage or found only limited coverage. The carriers had argued that the covered closure must constitute a total inability to access the insured premises and that partial continued operations such as carryout from a restaurant or bar were enough to preclude coverage. The court partly rejected this argument (para. 270) and found that substantial hindrance of operations was enough to trigger coverage. Nonetheless, under the policy wordings at issue, partial inability to use premises is not enough to trigger coverage where, for example, the business previously had a carryout operation that could be continued despite the order, or where customers and indeed employees could transact business from home. Similarly, mere recommendations to stay home and work from home were found insufficient to trigger a policy. On the other hand, there was coverage if the business basically had to start a new mode of operation to remain partially open, i.e., had to start a new carryout operation where it had not previously had one.
It is difficult to translate the closure-related decision in the FCA case to U.S. policies because policies issued here often expressly provide cover for partial closures or hindrance to operations. Nonetheless, many insurers are taking the stance that U.S. business-interruption policies require a complete closure to trigger coverage. As such, the FCA decision should provide useful precedent against draconian U.S. carrier arguments that coverage is triggered only if the business is totally closed and physical access is completely blocked off.
Most of the clauses litigated in the FCA case included a provision that trends in business revenue should be considered in calculating the loss. The carriers argued that those trends should include all kinds of extraneous issues, including losses from COVID-19 spread not in the vicinity, customers just staying home, and closure orders in other areas. The court correctly rejected those arguments and found that the trend clause simply meant that lost revenue should be estimated based on the insureds’ likely revenue if COVID-19 had not occurred. Again, this insurer argument was obviously disingenuous and showed that carriers will seek to use any technicality to avoid payment. No U.S. case has reached this point yet, but when COVID-19 and civil-unrest claims piggyback on each other, interesting issues may arise about how to assess a revenue baseline for damages.
One of the policies at issue in the FCA case contained a prevention-of-access extension that had an exclusion for infectious disease defined by a local government. The FCA tried to argue that this could be interpreted differently from the same clause providing for coverage of closure by national and local orders due to infectious disease and that the prevention-of-access exclusion to this clause did not apply to national orders. The court rejected that argument and thus found no coverage for prevention of access due to an infectious disease in this extension. Opinion, para. 354 et seq.
The U.K. carriers also argued that insureds cannot claim (para. 399) that the COVID-19 pandemic is assumed to be everywhere. In general, the court rejected this argument, but it accepted that, for clauses which cover a specific “incident,” there must be some proof (para. 405) of the presence of COVID-19 in the local area defined by the clause, i.e., within five miles of the insured business. It is sufficient to have a governmental statistic showing the presence of COVID-19 in that local area; there is no need for positive tests (as has been argued in some U.S. cases). Partial closure by order is still covered as an incident (para. 417) if there is proof of specific COVID-19 in the area. However, government advice such as a social-distancing advisory that means not as many people will go into a shop, is not enough to trigger coverage; an actual closure order is required. As insurers in the United States are asserting that only confirmed cases, or even confirmed samples, of COVID-19 might fulfill coverage requirements, the FCA decision may assist policyholders to counter such arguments and the coverage denials based thereon.
The rulings in the FCA case seem most helpful for promoting coverage under the various contamination-by-communicable-disease clauses contained in U.S. property policies. For example, the breadth of one such clause is now being litigated under cross motions on the pleadings in Thor Equities v. Factory Mutual Insurance Civ., No. 20 Civ. 03380 (S.D.N.Y.). These motions deal with the application of various exclusions to such a clause in a property policy. The same policy form is at issue in several other cases filed by policyholders, so the insurers refusal to pay is not limited to the United Kingdom.
While it seems unlikely that the United States will ever have a test case like the one brought by the FCA, the current proposed Multi District Litigation (MDL), which would combine a number of cases brought by policyholders challenging denials of COVID-19-related coverage, does seem close to a partial solution. The MDL panel has rejected combining all possible cases because, unlike the unitary U.K. law applicable in the FCA case, the MDL would have had to consider the law of 50 states. The MDL is now considering setting up “mini MDLs” for several specific carriers, who often sold polices to small to mid-size businesses. These “mini MDLs” may allow resolution of a few basic issues in one proceeding against a specific carrier, after some preliminary discovery. While this may not yield as good a result for insureds as litigating thoroughly in their own state to avoid bad precedents in the carrier’s chosen state, it might provide a better opportunity for small claimants to get the speedy relief they need in an economical fashion.