Property Insurance Update – Insurers’ defences to COVID-19 claim

26 June 2020

The UK High Court test case addressing business interruption cover for COVID-19 business closures has been set down to commence on 20 July 2020 (8 days). The eight insurers involved have now filed their defences to the claim setting out the reasons why these claims are not covered.

In this update we provide an overview of insurers’ position on coverage for COVID-19 claims. Insurers argue that COVID-19 claims are not covered because the pandemic is not localised to the insured area, but is a global issue and that pandemics are not intended to be covered. Insurers also argue that many businesses had their trade restricted but were not closed, and would have experienced that loss of trade even without government lock down measures.

Insurers' Defences

COVID-19 is not confined to the insured area (proximate cause)

Many of the policies in issue provide cover for closure caused by the presence of an infectious disease within a certain distance, usually 25 miles or one mile, from the insured premises. All of the insurers put forward arguments around proximate cause in their defences, arguing that the pandemic is a global or national rather than local issue.

Ecclesiastical and MS Amlin jointly stated “Neither the pandemic nor the countrywide reaction to the pandemic by the government which happens therefore to cover the area within a radius of 25 miles from the premises without reference to or reliance upon the specific case or cases within the relevant area is sufficient.”

Argenta accepted that most of its policyholders would have had an occurrence of COVID-19 within its 25 mile radius of each insured premises, but that COVID-19 at those locations was not a cause, let alone a proximate cause, of the policyholder’s loss. It said that “there is no basis on which a single local occurrence can be treated as a cause of the pandemic, or of the governmental response to the pandemic, or of the public response to the pandemic, or of the further consequences of such responses. All of these things have a common cause in the pandemic itself, but not in the occurrence of cases within a specific locality.”

Hiscox, in its defence to the denial of access cover, argues that “the 'incident' has to be within the one mile radius of the premises. An event which is only incidentally within and entirely or preponderantly outside the radius is not an 'incident' within the radius.”

The government orders did not prevent access to or close the business premises

Insurers also argued that the government advice regarding social distancing and working from home did not result in the premises being unusable or closed. Rather it resulted in a restriction on trade, but this is not what is insured.

Arch said “None of the official orders or advice precented access to the premises…. social distancing, working from home, lockdown, etc. did not prevent access to insured Premises, even if they resulted in less use (or, in some cases, no use) being made of insured Premises.”

Zurich argued that while restrictions were imposed on businesses, many of them were technically allowed to stay open but were restricted (such as restaurants being able to provide take-away meals) or to trade “by virtual or distance means”.

Hiscox argued that the inability to “use” the premises must be that of the insured itself, not its customers. It also argued that there “needed to be a cessation of business” and not just that “the insured’s business activities have become more inconvenient or burdensome or difficult to perform, or are subjected to external limitations or are less profitable. A constriction in flow is not an interruption.”

Trade losses would have been incurred regardless of the lock down measures

Insurers also argued that the social and economic effects of the pandemic were not insured losses.

Argenta argued “It is clear that ‘but for’ the insured peril (i.e. an occurrence of COVID-19 within 25 miles of the relevant premises) policyholders would in all or almost all cases have suffered the same or substantially the same loss in any event, irrespective of any local occurrence of the disease.”

Arch argued that “COVID-19 affected levels of employment, consumer behaviour, economic activity and confidence” and that the policy “does not insure against the financial consequences of COVID-19 nor of the Government intervention in response to COVID-19."

Hiscox’s defence made reference to Sweden, where businesses were not restricted with the same lock down measures as the UK, but still suffered significant economic loss to demonstrate that those losses are not insured losses within the policy.

Wordings are not ambiguous and contra preferentum rule does not apply

Insurers also disputed that the contra proferentem rule should be applied. This rule states that any clause considered to be ambiguous should be interpreted against the interests of the party that created that clause. Insurers rejected this assertion, stating that their wordings are unambiguous.

Several insurers also set out that the policies were sold by brokers, whose responsibility it is to advise their clients. QBE said in its defence: “Each of the policyholders of policies with the QBE Wordings acted through an authorised insurance broker intermediary at the time of the placing of the policies with the QBE Wordings whose duty, inter alia, was to advise on the suitability of the insurance being obtained.”

RSA also pointed to the role of brokers in formulating their wordings “RSA4 was drafted by Marsh/Jelf who acted as agents for the relevant insureds. In such circumstances, the insureds (and not RSA) would fall to be treated as the proferens."

Financial Conduct Authority Reply

The Financial Conduct Authority’s reply to the defences is due on 3 July. In the interim, it is calling for public submissions on the defences for it to consider inclusion in its Reply.

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