A second wave of Covid-19-related business interruption (BI) insurance litigation is underway in the UK, driven by unresolved coverage issues and disputes over the quantification of claims, according to Fenchurch Law.
Six months on from the UK Financial Conduct Authority’s (FCA) test case, thousands of Covid-19-related BI claims in the country have yet to be fully resolved, according to the law firm. FCA figures published on 14 June show insurers had accepted or were considering 46,854 claims, but only 34%, or 16,159, were paid in full. The figures do not include claims declined by insurers that may be disputed by policyholders, and excludes “contracts of large risks”.
According to Aaron Le Marquer, Fenchurch Law partner, the stage is now set for a raft of further litigation in relation to issues that were either undetermined in the test case, or where uncertainty continues to persist. Even for those firms that have had coverage confirmed, the focus has now turned to the issue of how much insurers are liable to pay, explained Mr Le Marquer, whose firm works solely for corporates and brokers.
Litigation is emerging as insurers and policyholders dispute the quantum of claims payouts, in particular around the aggregation of claims, deductions made for government support and loss of rent claims. There is discussion in the market and arbitration around Covid-19 BI claims aggregation, and future litigation is likely to determine these issues, said Mr Le Marquer.
“We are now seeing a second wave in relation to unresolved coverage issues such as prevention of access and disease ‘at the premises’, and quantum issues, particularly aggregation,” said Mr Le Marquer. “We can expect to see many more litigated cases in the second category over the course of the next year, because quantum disputes turn on the facts of the individual claim and cannot generally be determined on a principles basis. Insurers are fighting hard on claims valuations, and any policyholder with a significant claim in the millions may well end up having to litigate,” he said.
Various cases are now proceeding in the UK Commercial Court, in particular focusing on the issue of aggregation under the Marsh Resilience policy wording. Earlier this month, UK restaurant group Various Eateries revealed it is in dispute with Allianz over a payment of £2.5m on a BI claim for £16m. The restaurant group said it is collaborating with the insurer but has asked the court to settle issues in the wording of its Marsh Resilience policy, which were left unresolved by the FCA test case.
Separately, pub chain Stonegate is suing insurers MS Amlin, Liberty Mutual and Zurich for £845m based on BI losses from three separate triggers: notifiable disease, mandatory closure and prohibition of access to premises.
Stonegate said the insurers had only accepted liability for £17.5m of its total claim and £14.5m had been paid. Stonegate is an aggregation case that turns on how many sublimits are available to meet policyholders’ losses, explained Mr Le Marquer. “We can expect to see many more aggregation cases – including at the reinsurance level – because the outcome will depend on the individual facts and policy wording,” he said.
Due to the many variations and permutations of aggregation wordings, the complexity of existing case law – mainly for catastrophe and terrorism claims – and lack of judicial consideration for disease claims in the English courts, aggregation issues will be harder to test in court, said the lawyer. The complexity of aggregation issues also makes them unsuitable for determination as a general market test case in the same way that the FCA sought to determine the coverage trigger issue, he added.
The UK’s Supreme Court judgment on Covid-19 BI claims in January generally found in favour of policyholders on a number of key coverage areas, namely around radius and hybrid clauses, as well as causation, trend clauses and pre-trigger losses. However, the FCA case only dealt with non-damage BI coverage, while there were a number of other areas left unresolved or not covered by the test case, said Mr Le Marquer.
“Now we see cases come through the courts testing other aspects of cover,” he said. These include disease at the premises clauses, prevention-of-access claims, loss aggregation issues, claims adjustment for government support such as furlough, and loss of rent, he explained during a Fenchurch webinar update on Covid-19 BI litigation.
Restaurant group TKC London sued insurer Allianz, claiming that its property damage BI insurance was triggered by Covid-19. It argued that Covid-19 amounted to an accidental loss of property, while the deterioration of stock during lockdowns amounted to property damage and caused interference with its business.
The court rejected both arguments, “putting to bed” these particular issues, said Le Marquer. However, the court did not consider whether the presence of Covid-19 on the insured premises amounted to physical damage that triggered the policy. “This point remains untested in English courts. It is being argued at the moment in the US but there are significant challenges to that argument under English law. It is likely that this will be argued at some point in the future,” said Mr Le Marquer.
Cases are also likely that test Covid-19 BI claims made under disease wordings, which typically define and categorise diseases, such as notifiable diseases, infectious diseases, food poisoning, and/or specific diseases. In Rockliffe Hall vs Travelers Insurance, the court considered whether the golf club and hotel company had grounds to claim for Covid-19 losses under disease wordings, in particular the specific disease of ‘plague’.
However, the court dismissed these arguments, suggesting they were just “clever lawyer constructs and not credible suggestions”. “It is plainly a reading that runs directly against the wording of the whole clause and is also one that produces (against) Alice in Wonderland results,” the court ruling said.
The application of prevention-of-access or denial-of-access wordings for Covid-19 BI claims was left “undetermined” by the FCA test case, resulting in an “unsatisfactory” and “disappointing” outcome for policyholders, explained Mr Le Marquer. The test case examined prevention-of-access wordings in policies from MS Amlin, Zurich and Hiscox, but the High Court rulings on these issues – which were largely negative for policyholders – were not appealed by the FCA and therefore not considered by the Supreme Court.
However, the Supreme Court ruling in other areas means insurers’ denial of claims under prevention-of-access wordings is difficult to reconcile with the High Court ruling, and has led a number of policyholders to challenge this position in the courts. The first such case, Corbin & King v AXA, saw the upmarket restaurant group seek to establish that Covid-19 amounted to a “danger or disturbance” within one mile of the insured premises. This resulted in closure on the advice of a public authority, triggering coverage for BI losses under a denial-of-access, non-damage clause, Corbin & King argues.
The outcome of Corbin & King vs AXA is likely to highly influence coverage available under other typical prevention-of-access wordings in the market, and will therefore be closely watched by both insurers and policyholders, said Mr Le Marquer.