Arbitrator dismisses latest COVID-19 related business interruption insurance claim

In the case of Certain Policyholders -and- China Taiping Insurance (UK) Co Ltd, Lord Mance, sitting as a sole arbitrator, dismissed the claims of various policyholders who claimed to have suffered losses as a result of the UK government’s orders or advice made or issued in response to the pandemic.

The key facts and issues

The claimant policyholders (the “Policyholders”) all operate in the hospitality sector in England and were insured by the defendant, China Taiping Insurance (UK) Co Ltd, throughout 2020.

In response to the COVID-19 pandemic, the UK government issued a series of orders and measures that required businesses operating in the hospitality sector to close for specific periods of time, resulting in significant losses to the Policyholders’ businesses.

An extension to the relevant BI policy (“Extension 1”) provided cover for circumstances where there was an interruption to, or interference with, the insured’s business in consequence of [our emphasis]:

“b) the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority… or
c) the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises.”

Under a further extension (“Extension 2”), the BI policy also provided cover for notifiable diseases (with COVID-19 being declared as a notifiable disease on 5 March 2020). However, the policy contained a closed list of diseases that would be insured against, which could only be added to with the prior written consent of the insurers. At the time of entering into the BI policy, COVID-19 was not included on that list.

In June 2021, the parties entered into an ad hoc arbitration agreement under which the resulting award would be final and binding, with no right of appeal. They also agreed that the award could be published as it had wider implications for many other policyholders and the insurance industry.

The insurer argued that the wording used showed a clear intention to provide localised cover, i.e. that the BI policy was intended to provide cover for local events or incidents, rather than a country wide, or international pandemic.

In addition, the insurer contended that the Policyholders’ losses were not covered by the BI policy as the instructions to close their businesses were issued by the central UK government, and not by the Police or other competent local authority in accordance with the express wording of the policy.

The main issues that Lord Mance had to decide were:

1. If Extension 2 does not cover COVID-19, did that mean that the cover in Extension 1 could extend to COVID-19;
2. If Extension 1 affords cover for notifiable diseases, does it apply to circumstances where the notifiable disease is national, rather than localised; and
3. Whether references to instructions issued by the Police or other competent local authority include instructions issued by the national government.

Did Extension 1 afford cover for notifiable diseases?

Lord Mance said that Extension 1 applied to notifiable diseases even though COVID-19 was expressly not covered by Extension 2. This is because there was no implied exclusion under Extension 1 even in respect of the notifiable diseases covered under Extension 2, still less in respect of COVID-19 which was not specified under Extension 1[1]. It would have been possible to insert an exclusion or to specifically draft a clause about the interrelationship between the two Extensions at the time the policy was entered into; but this had not been done.

If Extension 1 affords cover for notifiable diseases, does it apply to circumstances where the notifiable disease is national, rather than localised?

This part of the award considered the issue of the definition of ‘vicinity’. In reaching his decision, Lord Mance considered the submission of the insurer which was based on the judgment of the Divisional Court on the wording of similar policies issued by the insurers who were party to the FCA test case[2]. This approach considered the use of vicinity “in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions of the government”.

Lord Mance was circumspect regarding this submission as he considered that the Supreme Court (UKSC) in the test case[3] would have argued the point differently (it was not part of the appeal before it) considering the different approach the UKSC took in that case to causation. Lord Mance considered that if the Divisional Court had had the benefit of seeing the argument of the UKSC it may have reached a different conclusion. Lord Mance disagreed with the insurer's argument that the relevant actions or advice had to be due to an emergency in the vicinity of the premises threatening life or property in the vicinity (as opposed to BI loss in consequence of actions or advice of the police or other competent local authority due to a wider emergency).

In light of his reasoning in relation to the point below, Lord Mance decided not to express a definitive view on this issue.

Whether references to instructions issued by the Police or other competent local authority included instructions issued by the national government?

The main reasoning for the decision related to whether orders or advice issued by the UK government fell within the relevant BI policy. Lord Mance first gave the phrase ‘Police or other competent local authority’ its natural meaning. He agreed with the insurer that the Police are a local authority, and that another competent local authority, in the conventional sense of local (as opposed to central), is a body that issues advice in respect of the locality within its jurisdiction.

After giving the phrase its natural meaning, Lord Mance then considered the policy as a whole to see if a distinction could be made between a local authority and a central governmental or public authority. When reviewing other clauses of the policy, it was clear that the language used demonstrated an understanding of a ‘local authority’ and that the policy clearly distinguished between a local authority compared to that of a central governmental or government authority. The policy therefore did not provide cover for orders or advice issued by a central or country wide authority, with Lord Mance commenting:

“The fact that, with hindsight, there will be no insurance cover for the unforeseen pandemic which has afflicted national and international life is not a reason to interpret the key Policy wording in a sense which would distort its natural and objectively intended effect.”

Comment

This award amounts to a victory for insurers in relation to COVID-19 BI claims. What this decision demonstrates is that, following the judgments of the High Court and the Supreme Court in the FCA test case, claims for BI losses will be considered and determined: (i) according to the express and precise wording of the relevant insuring provisions within policies; and (ii) against the relevant individual background facts of each claim.

As a general point, policyholders should examine the precise wording of their BI policies carefully before making a formal claim. As for this particular award, policyholders should consider whether their BI policies specifically state:

1. Whether the event causing the closure of their business needs to be within the vicinity of their premises, and whether ‘vicinity’ is a defined term in the policy; and
2. Whether coverage includes the closure of business due to orders or advice from the government or, specifically, a ‘local government authority’.

It is important to note that Lord Mance’s award is only binding on those who signed the arbitration agreement; it does not stand as a legal authority that binds decisions of the courts. That said, in view of the detailed reasoning given by Lord Mance in reaching his conclusions, it would be remiss of judges and arbitrators not to consider this award when tasked with deciding similar claims in relation to similarly-worded BI policies.

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[1] Paragraph 28

[2] The Financial Conduct Authority v Arch Insurance (UK) Limited [2020] EWHC 2448 (Comm)

[3] The Financial Conduct Authority v Arch Insurance (UK) Limited [2021] UKSC 1