Member Article

Further guidance for insurers and policyholders on business interruption claims is now available following an award made by Lord Mance in Certain Policyholders v China Taiping Insurance (UK) Co Ltd.

Whilst the arbitration award will not be binding on the courts, it will no doubt prove persuasive and represents a victory for insurers, with Lord Mance finding no coverage under the denial of access cause in question.

Unusually, the award was made pursuant to an arbitration agreement entered into after the dispute arose and it was agreed that insurers would pays the costs of the arbitration, the award would be un-appealable, and the award would be published (given its potential significance to other policy holders and insurers).

The award comes in the aftermath of the High Court and Supreme Court decisions in FCA v Arch Insurance (UK) Ltd and Others. Our summary of the High Court decision can be found here, and the Supreme Court decision here.

The Policy

The dispute centred around the construction of a denial of access clause (DOA Clause), which extended cover to include:

…interruption of or interference with the Business in consequence of:

…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…

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;

Lord Mance was asked to consider three key issues:

1. Does the DOA Clause apply to notifiable diseases or is it excluded by the existence of a separate extension dealing with notifiable diseases?

2. Does the DOA Clause apply where the notified disease is national rather than local in scope?

3. Does “Police or other competent local authority” extend to measures taken or advice given by central government?

Issue 1 - Does the DOA Clause apply to notifiable diseases or is it excluded by the existence of a separate extension dealing with notifiable diseases?

In addition to the DOA Clause, the policy contained a disease clause extending cover to interruption or interference caused by the occurrence at the premises of a notifiable diseases. It was common ground that this clause would not provide cover as the definition of notifiable disease in the policy did not include COVID-19.

Insurers argued that the parties cannot reasonably have intended the DOA Clause to provide cover in circumstances where the instructions, actions or advice leading to the business interference or interruption were given because of a disease notifiable under the legislation identified in the disease clause. Otherwise, the limited scope of the disease clause would be undermined by the wider scope of the DOA Clause.

Lord Mance disagreed with insurers. Had the parties intended to limit the scope of the DOA Clause so that it did not apply to notifiable diseases, they could easily have done so with express wording; exclusions for other matters were already included in DOA Clause b but did not reference notifiable diseases.

At [27] Lord Mance explained: “The existence of a potential overlap of some of the elements relevant to cover under the provisions of these two specific and differently worded Extensions factors does not to my mind mean that any particular provisions in one such Extension must apply to the exclusion of any other”.

Issue 2 - Does the DOA Clause apply where the notified disease is national rather than local in scope?

In light of his decision on issue 3, Lord Mance declined to come to a firm view on this issue. The key reason for this was a tension between the decision reached by the High Court in FCA v Arch in relation to a number of policy wordings that were not appealed, and the reasoning employed by the Supreme Court on other policy wordings, which differed significantly from the High Court’s approach.

The key question involved the construction of the words “in the vicinity of the Premises”. The High Court decision in FCA v Arch considered a number of policy wordings containing similar phrasing and, in most instances, declined cover on the basis that the ‘vicinity’ wording connoted a narrow and localised cover not applicable to a national pandemic effecting the country as a whole.

Whilst many of these wordings were distinguishable from the DOA Clause, Lord Mance viewed the phrasing in RSA 2.1 and 2.2 (as described in FCV v Arch) to be effectively the same except for a reference to “a competent Public Authority”. Lord Mance considered that the High Court’s decision in relation to this must therefore be highly persuasive and potentially even binding.

The High Court held at [467] in relation to RSA 2.1 and 2.2 that “There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in the sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government”

On this approach, the key reason that cover was not available was that it was highly unlikely that it could be shown for any particular case that the emergency in the vicinity had caused the interruption or interference, rather than the national pandemic.

However, Lord Mance doubted that the High Court would have approached the RSA 2.1 and 2.2 wording in the same way had it had the benefit of the Supreme Court’s ruling, which held that the High Court had erred in significant respects in its understanding of causation on other policy wordings.

On the Supreme Court’s analysis, the ‘but for’ test for causation was inapplicable as a matter of construction and instead occurrences of Covid-19 should be considered as concurrent causes of the disruption. Lord Mance found this approach to causation hard to reconcile with the High Court’s analysis of RSA 2.1 and 2.2 (which would otherwise appear to also apply to the DOA Clause).

Given this, and because it was not necessary for Lord Mance to decide this issue in light of his analysis of issue 3, this question was not resolved in the award.

Issue 3 – Does “Police or other competent local authority” extend to measures taken or advice given by central government?

Insurers were successful in arguing that the cover was not available because the closures brought about by the various lockdowns in response to COVID-19 were not actions of the “Police or other competent local authority”. In determining this Lord Mance explained that:

• the more natural reading is for “the Police or other competent local authority” to refer to bodies with local rather than country wide or central governmental authority;
• the policyholder’s interpretation would mean that the word “local” does not add anything to “competent and so the insurer’s interpretation should be preferred;
• elsewhere in the policy and relevant legislation there is a recognition of a distinction between local authority and central government authorities;
• there was a coherent and understandable basis for drawing this distinction; and
• the fact that, with the benefit of hindsight, there would be no coverage for an unforeseen international pandemic is not a reason to interpret the DOA Clause in a sense which would distort its natural and objectively intended meaning.

Interestingly, in reaching this conclusion, Lord Mance distinguished the wording in this policy from the High Court’s construction of the phrase “competent local authority” in relation to Ecclesiastical Insurance Office’s policy wording considered in FCA v Arch (the “EIO Policy”). The context of that policy and the clauses in which the phrase “competent local authority” was used, were distinguishable from its use in the DOA Clause and justified a different construction despite almost identical words being used.

The policies were distinguishable for a number of reasons, in particular, in the EIO Policy the phrase “competent local authority” was used in a disease clause extending to occurrences of a specified disease within a 25 mile radius and an exclusion within a prevention of access clause. The use in the disease clause suggested that the EIO Policy envisaged central government action, in contrast to the DOA Clause. Lord Mance also explained that whilst in the EIO Policy construing “competent local authority” as restricted to local authority action would have led to a counter-intuitive result where cover was available under the disease clause (for specified diseases only) if there was local government (but not central government action), but cover under the prevention of access clause for any infectious disease as a result of central (but not local) government action. In contrast, for the DOA clause, it did not seem at all unlikely that the parties would have limited the cover available to local as opposed to central government action.

Comment

The award is a reminder that context is key when determining the meaning of contractual provisions. The words need to be understood in their context, including the other terms of the policy and how they are used in the clause in question. As seen here, the same words can bear radically different meanings when used in different ways and in different contexts.

Whilst the award has not resolved certain tensions between the approach of the High Court to the denial of access clauses which were not appealed and the Supreme Court’s approach to causation in FCA v Arch, it serves a useful analysis of the issues involved and suggests that caution should be exercised when applying the decision of the High Court to other similar policy wordings.