Business Interruption Claims Arising From Covid-19 Lockdown

GATWICK INVESTMENTS AND OTHERS V LIBERTY MUTUAL [2024] EWHC 124

Insurance for losses arising out of the interruption of a business is often provided as an adjunct to cover for property damage.

Cover can additionally be obtained for business interruption where the insured’s premises has not itself been damaged, but the insured is prevented from access to its premises by some external factor.  This cover is available in various forms of “Non-Damage Denial of Access” (NDDA) clauses, “Prevention of Access (Non Damage)” (POA) clauses and “Action of Competent Authority” (AOCA) clauses. In this note, the term POA clause is used to refer to such clauses generally.

Here, cover is provided when access to the insured premises is prevented by (a) an endangering episode in the vicinity and/or (b) the authorities reacting to such an episode.

Early editions of texts on business interruption illustrated this type of cover by the example of a fire in a shopping mall where the insured premises were located, rendering buildings in the vicinity structurally unsafe and resulting in the prevention of access to the insured premises.

Since the 1980’s, POA clauses have provided cover for a broader range of circumstances.  Wordings for such clauses vary widely and the precise words used matter greatly.  A typical wording is as follows.

“Denial of access (non-damage) cover

We will cover you for any loss insured by this section resulting from interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period shown in your schedule arising directly from:

1. The actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a mile radius of your premises.
2. The unlawful occupation of your premises by third parties. …”

Thus, for example, cover can be provided for business interruption arising from terrorist activity, flooding, a gas leak, traffic accident or other dangers in the vicinity of the premises, to which the authorities respond by temporarily closing businesses.

This type of cover has been tested extensively in the context of the Covid 19 pandemic, with the result that the parameters of the POA clause have been clarified in a number of respects, as follows.

Whether POA Clauses provide only a narrow, locally focused cover – These clauses distinguish between the consequences of episodes occurring within the radius and those not doing so.  The courts consider that something more would be required than, for example, the mere presence within the radius of a person with diagnosable covid.  The requirements (a) for an occurrence of some sort, i.e. something that happens at a particular time, at a particular place, in a particular way and (b) that this must occur within a radius of the insured premises, means that this is, in principle, a narrow, localised cover (1).

The requirement for loss to be caused by an insured peril – Under English law, the insurer is, subject to the terms of the cover, liable for any loss proximately caused by a peril insured against.   (The term “efficiently caused” is sometimes used as an alternative to “proximately caused”, to denote that the search is for the dominant or operative cause in the sequence of events leading to the loss, assessed by reference to the nature of the cover provided.) A widely-used approach to establishing whether this requirement has been satisfied is to apply the “but for” test, i.e. to ask whether, but for the operation of the insured peril, the insured would have suffered the loss. 

One of the insured perils in the wording quoted above is (we paraphrase) interruption of the business where access to the insured’s premises is restricted arising from the actions of the police or other statutory body in response to a danger or disturbance within a mile radius of the premises.

The “danger” referred to in the wording quoted above has been held to include one or more cases of covid occurring within the radius (2). As to the requirement that the insured peril must be the cause of loss, the specific wording of the policy is always crucial.  However, in the case of cover against covid, the important question for the court does not concern the localised nature of the peril insured against.  Rather, it concerns the approach that should be adopted to causation in circumstances where the impact on the policyholder’s business is the combined result of at least one event that occurred within the radius and a large number of individual events that occurred outside the radius.  Here, the court considers that a “concurrent cause” approach to causation is applicable.  The covered occurrence within the radius, in combination with the large number of occurrences of a similar nature outside the radius, not covered under the insurance but not excluded either, is considered to be the effective cause of the governmental restrictions which led to the policyholder’s loss, thereby satisfying the requirement for causation.

This approach to causation applies even where the insured has taken out insurance only against the risk of closure of his own premises by a competent authority as a result of an outbreak of a notifiable disease at his premises (3).

Meaning of “the police or any other statutory body” – While insurers have argued that this phrase suggests actions taken locally, the courts have held that the wording “any other statutory body” is wide enough to encompass central government.  Moreover, the focus of the clause is not on whether the originator of the restrictions owes its existence to a statute (4).

Other matters clarified in the recent case law

1. It is not the case that every new set of restrictions qualifies as a separate interruption of the insured’s business.  There is no significance in new restrictions if there is a continuity of closure and no changes in the effect of the restrictions on the insured’s business (5).
2. The type of restriction covered by the clause is generally one having the force of law, but can extend to clear, mandatory instructions given on behalf of the UK government, such as the Prime Minister’s statement on 20 March 2020, when he instructed named businesses to close “tonight” (6). Further, restrictions need not be addressed directly at the insured (7).
3. A large number of business activities, such as professional firms and construction and manufacturing businesses, were not closed under the regulations.  However, general restrictions affected the operation of these businesses, such as the prohibition against people leaving the place where they were living without reasonable excuse.  The courts have held that the reference in a POA clause to “inability to use” the business premises can include an insured’s inability to use either the whole or a discrete part of the premises, for either the whole or a discrete part of its business activities.  Nevertheless, it will be rare for businesses that were not directly made the subject of specific restrictions to be able to claim under their POA clauses.  This is because, generally, such clauses require an actual inability to use, rather than a mere hindrance or disruption.  It is likely to be difficult for such businesses to demonstrate the requisite inability (8).
4. Under many policy wordings, the insureds have to give credit in their business interruption claims for furlough payments.

For more information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

Notes

1. FCA Test case [2020]  EWHC 2448 (Comm), para 406, 436, 466, 499.
2. FCA Test case [2021] UKSC 1 para 213; Corbyn & King v AXA Insurance [2022] EWHC 409 (Comm), para 220)..
3. London International Exhibition v  RSA [2023] EWHC 1481 (Comm) para 180.
4. Gatwick Investment Ltd v Liberty Mutual [2024] EWHC 124 (Comm) para 143.
5. Ibid para 163.
6. FCA Test case [2021] UKSC 1 para 120f.
7. Ibid para 128.
8. Ibid para144f.