CM June 2021 CM magazine

LEGAL MATTERS
RASH JUDGMENT
COVID-19, disease clauses and
business interruption.
AUTHOR – Peter Walker
A
physician once joked with me
that if a doctor did not know
what was wrong with a patient,
the diagnosis was that it was due
to a virus. This is not a joke to
be made during the COVID-19
pandemic, which has affected our lives so badly,
and the law is not immune.
That was brought home to some judges of the
Supreme Court in FCA v Arch Insurance (UK)
Ltd [2021] 2 WLR 123, when they considered
COVID-19 in the context of insurance and
business interruption. Credit managers will need
the assurance that during the epidemic indebted
business enterprises will have adequate financial
resources to pay those debts should things go
wrong.
This was the background to the effect of
COVID-19 and the consequent first lockdown
causing businesses to close temporarily. The
hospitality and entertainment sectors were
particularly affected, although there were others.
Affected businesses claimed on their insurance
policies for compensation as a result of the
business interruption. The insurers objected
that for various reasons the situation was not
covered in their policies. Some insurers claimed
that the disease was not named in the policy.
Others asserted that their policies covered local
outbreaks only.
There were complaints to the Financial
Conduct Authority (the FCA). The Association of
British Insurers suggested that at the time of the
first lockdown there were claims amounting to as
much as £900m. It was time for the lawyers and
a procedure known as the Financial Markets Test
Scheme, the first time it had been used since the
Scheme’s introduction in 2016. Its purpose is to
provide clarity where there were issues of general
importance.
The Arch Insurance case was therefore a test
case, and Lord Hambledon and Lord Leggatt in
their joint judgment pointed out that 370,000
policyholders were potentially affected by the
decision in this case. There were many types of
insurance policies but four types of clauses.
DISEASE CLAUSES
The first of these were ‘disease’ clauses,
providing cover for business interruption due to
notifiable diseases. These were covering business
interruption losses as a result of public authority
interventions. There were combinations of the
two, i.e. ‘hybrid clauses’. There were finally ‘trends
clauses’ which quantified business losses by
reference to the performance of the business if
the insured peril had not occurred.
Factors in the case were the various Government
regulations introduced by means of various
statutory instruments in the first lockdown
of March 2020. They listed various categories
of business. The Supreme Court judges were,
however, interested particularly in contractual
interpretation.
They considered this in the context of disease
clauses. A typical clause would require the insurer
to indemnify the insured for certain losses arising
from human infections or contagious disease,
which required notification to a local authority.
There would be a maximum indemnity period of
perhaps three months.
Some clauses would refer to any occurrence
of the disease at the insured’s premises or within
a radius of 25 miles. Lord Hambledon and Lord
Leggatt concluded that an insurance claim on
this basis would only succeed if there was an
occurrence of COVID-19 on the claimant’s business
premises or within that radius of 25 miles. They
applied their reasoning to other similar clauses in
other insurance policies.
In another insurance policy, considered by the
Supreme Court judges, had an exclusion clause.
The policy did not cover loss or damage arising
from epidemic and disease as well as many
other events. These exclusions were included
in a clause relating to contamination, pollution
and ‘kindred risks’. A policyholder could not be
expected understand this to relate to the business
interruption provisions.
The judges of the supreme court continued to
consider hybrid clauses referring to the occurrence
of a notifiable disease, but they narrowed the
definition by reference to its consequences.
Where, however, the clause refers to an area of
whatever distance, the same interpretation as
that in a disease clause applied. One insurer did
not limit it by area, so the clause would apply
wherever there was a notifiable disease subject to
other restrictions in the policy.
One of those restrictions included those
imposed by a public authority, but the judges
considered whether they were mandatory with
the force of law. The Government had previously
given instructions, but these were not enough to
fulfil this requirement. There were now, however
statutory instruments, but the FCA contended
that the cover applied from before this time, so
that the insured could claim earlier.
LOCAL AUTHORITY POWERS
Lord Hambledon and Lord Leggatt agreed that
mandatory instructions clearly meant that a local
authority had statutory or other legal powers. They
pointed out that sometimes a public authority
Advancing the credit profession / www.cicm.com /June 2021 / PAGE 38