FBD Test Case a Significant Victory for Business Interruption Insurance Policyholders

Today, the Commercial Court has found in favour of the policyholders who challenged FBD Insurance’s decision to deny cover in respect of business interruption losses sustained as a result of the Covid-19 pandemic.The outcome of this case was highly anticipated by all FBD Insurance policyholders who had purchased business interruption cover, as well as policyholders with other insurers who also had an element of non-material damage business interruption cover within their policy of insurance. The decision may also have wider implications for those who have been denied insurance coverage for losses caused by the Covid-19 pandemic.Claims for business interruption coverage are highly topical at present following the recent finding of the Supreme Court of the United Kingdom in a highly publicised test case in favour of commercial policyholders under a number of diverse policies of insurance.A lengthy and detailed judgment was handed down today by McDonald J of the High Court. This briefing note will cover some of the central issues of that judgment.

The Nature of the Insured Peril

There was a significant divergence of views in relation to the nature of the insured peril that provided for business interruption insurance coverage. FBD had argued that the insured peril is limited solely to the government imposed closure. This approach would have allowed FBD to contend that the losses would have arisen even if the pubs were open during the period in question given the existence of Covid-19 in the community and all of the attendant restrictions (other than closure) which would continue to exist. Such a line of argument akin to the argument of the “wider area of damage” principle. An argument which developed somewhat in the aftermath of Hurricane Catarina which hit Southern USA in 2004.The policyholders had argued that a “composite peril” existed that comprised a number of components as follows:

an imposed closure;
That had been implemented by order of a local or government authority; and
following an outbreak of infectious disease on the premises or within a 25 mile radius.

The Court agreed with the argument put forward by the policyholders. This is a significant finding as it removes FBD’s ability to adopt a narrow interpretation of the insured peril which would have rendered a number of the components of loss due to the pandemic as unrecoverable. It will allow a trigger of the some of the extension covers for material damage not associated with an insured peril, thus allowing a claim for coverage of business interruption to be made.

The Denial of Coverage by FBD

The plaintiffs claimed that their policy of insurance with FBD provided cover for losses sustained as a result of the government mandated shutdown. The plaintiff’s argued specifically that section 3 of the business interruption policy provided this coverage. Such a clause is contained in a number of other policies sold within the Jurisdiction. This section would provide cover in respect of losses arising from the imposed closure of the premises by order of a government or local authority following the occurrence of a number of specified circumstances including “outbreaks of contagious or infectious diseases on the premises or within 25 miles of same”.FBD denied coverage on the basis that the imposed closure arose not as a consequence of a local outbreak of the disease but as a consequence of the countrywide presence of the disease. In short, FBD had argued that while the imposed lockdown caused significant damage to the insured businesses, a sufficient causal link could not be established between the damage and the specific outbreak of Covid-19 that had manifested within the 25 mile radius of the insured business.

“Proximate cause” and Causation

The concept of proximate cause was established as a crucially important issue in this case. Proximate cause refers to an event that is so specifically related to a loss sustained, that it is the dominant, effective or operative cause of that loss.It was argued by the legal team of FBD that in order for cover to arise, the policyholders would have to demonstrate that the damage they had sustained was proximately caused by the specific outbreak of Covid-19 that had occurred within 25 miles of the insured business.The Court rejected this approach and instead found that cover should be provided in circumstances where the business interruption is shown to have been proximately caused by a government imposed closure, which in turn has as one of its causes, an outbreak of infectious disease within a 25 mile radius of the insured premises. In essence, the outbreaks within the defined radius limits of the policy are composite in nature.The Court further accepted the arguments put forward by the plaintiffs that the aggregated effect of instances of Covid-19 within the State had led to the national closure of all pubs in March 2020. It found that while it was necessary to establish that cases of Covid-19 had occurred within the 25 mile radius prior to the closure order, it was not necessary to prove that these individual cases had proximately caused the business interruption. McDonald J Stated:“I am also of the view that cover is not lost where the closure is not prompted by nationwide outbreaks of disease provided that there is an outbreak within the 25 mile radius and that outbreak is one of the closure…”In effect this finding by the Court centred on the contention that the government decision on closure could not be said to have been caused by any particular localised outbreak of the disease. It seems that for the purposes of causation, the localised constituent outbreaks of Covid-19 that together caused the national lockdown will be sufficient to trigger cover (provided that it can be shown that an outbreak occurred within the relevant 25 mile radius).This particular aspect of the decision could have further reaching implications for alternative insurers who have put forward similar arguments to deny coverage.

Conclusion

While this decision will bring certainty to FBD policyholders, it by no means offers an all-encompassing solution to the live issue of business interruption claims arising from Covid-19. Each policyholder must proceed on the basis of what is covered by the wording of their individual contracts of insurance. Inner limits of cover and aggregation clauses need to be examined to see if the lockdown only allows for one claim under the policy of insurance or several, given that at the time of writing, we are in the midst of a third national lockdown.Going forward, there are likely to see localised rolling lockdowns. Again policy wording should be considered for such cover of any claim made. In this regard it is important to understand the indemnity period as afforded by any specific policy of insurance as well as the claims notification period attached to the outlined coverage period.The Court has now provided a certain amount guidance in relation to the issue of causation and in particular to the contention that only a localised outbreak of Covid-19 could trigger coverage for losses sustained as a result of mandated lockdowns. This has been the basis for declinature in respect of claims for business interruption for a number of insurers prior to this decision.The Court has not yet made any decision in relation to the quantum of this case. The matter is to be brought forward for a quantum hearing in which a number of crucial issues relating to the nature of losses sustained by the policyholders will be addressed. The outcome of this hearing will be very important for policyholders to establish what specific losses will be indemnified. For many of these businesses that have been devastated by the effects of the pandemic, the details of this will be crucial.It is vital to understand that even if the policy provides a cover for business interruption, there will have to be shown a direct causal link between the losses and the cover being provided. Anyone who has a policy of commercial insurance which may have a cover for business interruption insurance should speak to their insurance broker or seek specialist insurance legal advice on the matter.This note is forgeneral information purposes and does not constitute legal advice. Legal advicemust be obtained for all individual circumstances. Each case must be assessedon its own merits