The Court of Appeal clarifies Business Interruption Clauses in Commercial Insurance Policies

The shadow of Covid-19 continues to loom over businesses, particularly in the hospitality sector, with many organisations still rebuilding after the punishing period of lockdown. A significant judgment was recently handed down by the Court of Appeal in the test case of London International Exhibition Centre v Allianz Insurance Plc & Ors [2024] EWCA Civ 1026 (ExCel v Allianz) which considered the interpretation of “at the premises” clauses in business interruption insurance policies.

The Covid-19 pandemic had a profound and unprecedented impact on businesses, and the hospitality and leisure sectors bore the brunt. As the virus spread rapidly in early 2020, the UK government implemented stringent measures, including national lockdowns and social distancing, which severely affected all sectors of the economy. However, businesses in the hospitality and leisure sectors were naturally hit hardest given their reliance on physical attendance at their premises, both by staff and customers. The lockdowns and social distancing led to widespread closure of pubs, restaurants, hotels and resorts. Businesses naturally turned to their insurance policies to see if they were covered for the losses resulting from the interruption to their business.

However, as nothing like the Covid-19 pandemic had been encountered in the past hundred years, it was unclear from the wording of the relevant clauses whether the policyholders were covered for their losses and, in many cases, the insurers took a hard line by rejecting the claims, which in turn led to ongoing disputes.

In 2020 the Financial Conduct Authority (“FCA”) took the decision to resolve the lack of clarity and certainty surrounding the application of business interruption clauses by bringing a claim, effectively on behalf of the affected policyholders, against numerous insurers including Arch Insurance (UK) Ltd., Royal & Sun Alliance Insurance Plc (“RSA”), Zurich Insurance Plc, and others.

The resulting landmark Supreme Court ruling in September 2021 (FCA v Arch) broadly supported the policyholders but the judgment was complex and left some related questions unanswered. The FCA’s decision to take this course of action was of significant assistance to the policyholders as it meant that they no longer needed to independently fight for the resolution of the many issues of contractual uncertainty and causation with their insurers.

The key findings from the Supreme Court’s decision were that:

1. Disease clauses which cover business interruption due to the occurrence of a notifiable disease within a certain radius of the business premises, applied to Covid-19 losses. The Court interpreted the outbreak of Covid-19 as one single, indivisible event, which meant that businesses could claim for disruption even if the disease occurred outside the specific radius but had an impact within it. The conclusion was that every occurrence of Covid-19 was a concurrent proximate cause relating to government action resulting in losses and invoking business interruption clauses.
2. Clauses covering losses due to public authority restrictions preventing access to business premises could also be triggered by the Covid-19 lockdowns. The applicability depends on the precise wording of the policy. Where access was restricted due to government-imposed national lockdowns, the coverage could be triggered.
3. The Supreme Court rejected the insurers’ argument that losses had to be tied to specific local outbreaks.

The Court of Appeal case, ExCel v Allianz, concerned cover for disease occurring ‘at the premises’ of the policyholder. It therefore differs to the policies considered by the Supreme Court in FCA v Arch, which provided cover for disease occurring within a specified radius of the policyholder’s premises.

In ExCel v Allianz, ExCel had claimed from Allianz under its business interruption policy. However, Allianz denied liability. Allianz argued that their policy required evidence of the disease being present at the business premises to trigger the coverage. In addition, Allianz argued that the “but for” test should apply. In other words, the coverage should not apply unless it can be demonstrated that “but for” the disease being present at the premises, the losses would not have occurred. ExCel, by contrast, submitted that a broad interpretation of the policy was appropriate and that the implementation of government restrictions were sufficient to trigger the coverage.

The Court of Appeal ruled in favour of ExCel, considering it sufficient grounds that the impact of government restrictions in response to the pandemic could invoke the policy.

This ruling aligns with the decision in FCA v Arch, which favours policyholders and furthers the trend of courts interpreting insurance clauses more broadly in pandemic-related cases.

Toby Miller, a partner, commented “The Court of Appeal judgment is consistent with other key business interruption insurance decisions, which reinforce the principle that insurance policies must be interpreted according to their precise wording.” Toby further commented “This ruling aligns with the decision in FCA v Arch, which favours policyholders and enforces the trend of courts interpreting insurance clauses more broadly in pandemic-related cases. Many businesses which had previously been denied compensation will now be in a position to claim under their business interruption policies. However, it should be remembered that there remains a possibility that the decision could be appealed to the Supreme Court. If Allianz chooses to appeal, it would likely be in order to further clarify the legal principles surrounding causation and policy interpretation.”

Both FCA v Arch and ExCel v Allianz create strong legal authorities that will prove difficult for insurers to fight. Insurers will be dissuaded from construing overly narrow interpretations of their policies in scenarios of this sort, which resulted in delays and denials of valid claims in the early days of the pandemic. Moving forward, these rulings will likely result in policyholders’ claims being processed more efficiently and fairly.

Giambrone & Partners’ commercial lawyers urge all businesses to review their insurance policies to understand the scope of their coverage. Our commercial lawyers have an extensive understanding of interpreting insurance policies and can help to identify any ambiguous clauses or exclusions in your policy and provide clarity on whether your claim is likely to succeed based on the recent rulings, particularly around “disease” or “premises-based” clauses.

Insurers, for their part, will need to re-evaluate how they structure business interruption policies, particularly in wording disease and premises-based clauses. The Court of Appeal judgment has clarified that the "but for" causation test is neither always necessary nor always sufficient in these scenarios. Instead, insurers must recognise that should there be any future disease outbreaks, like Covid-19, they will have to extend a more flexible approach to causation. Insurers will need to be mindful that government responses to widespread outbreaks may trigger coverage regardless of whether the disease occurred inside or outside the premises of a business.

Toby Miller is a partner in our London office. He specialises in commercial litigation and dispute resolution having acted for clients at all levels of the English courts over a period of nearly 15 years. Toby regularly handles matters involving applications for injunctive relief including freezing orders, Norwich Pharmacal orders, and orders for delivery up. He also acts in both institutional (ICC, LCIA, GAFTA, LME), as well as ad hoc, arbitrations.

Toby has a diverse disputes practice but his work tends to be international in scope. His clients have ranged from domestic and multinational corporate clients (in the financial, gaming, hospitality and leisure sectors amongst others) to high-net-worth individuals. Toby also has a wealth of experience in alternative dispute resolution, in particular, mediation.

Toby has also acted for a range of commodities clients including traders (particularly metals traders), ship owners, charterers and insurers. He also has expertise in sports law, advising athletes and team players as well as assisting the gaming and betting sector.

Toby ensures that he has a full understanding of his clients' commercial objectives and works diligently to achieve the best possible outcome.

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16 September 2024