Half Year Review: Insurance Coverage Litigation (H2 2022)

This half-yearly update summarises significant insurance coverage cases in the English courts in the second half of 2022 concerning Covid-19 business interruption insurance, jurisdiction and rights against insurers of insolvent companies.   

Covid-19 BI Cases:

• Stonegate Pub Company v MS Amlin Corporate Member Limited and others [2022] EWHC 2548 (Comm)
• Various Eateries Trading Limited v Allianz Insurance Plc [2022] EWHC 2549 (Comm)
• Greggs Plc v Zurich Insurance Plc [2022] EWHC 2545 (Comm)

These judgments dealt with some common Covid-19 Business Interruption (“BI”) insurance issues around how to deal with multiple lockdowns and closures, multiple sites, expenses to keep the business afloat and government support.

Background

The policy wording at issue in these judgments concerned three insuring clauses, for Notifiable Disease, Enforced Closure, and Prevention of Access (non-damage), under the Marsh Resilience wording[1].

Notifiable Disease coverage insured against disease identified under the Health Protection (Notification) Regulations 2010 which is discovered within the Vicinity of an Insured Location during the Period of Insurance (Covid-19 fell within this category).

Enforced Closure coverage insured against the enforced closure of an Insured Location by any governmental authority or a competent local authority for health reasons.

Prevention of Access (non damage) coverage insured against business interruption loss resulting from the actions or advice of a governmental authority in the Vicinity of the Insured Locations.

While not an insuring clause, it is helpful to set out, for what follows below, the nature of Additional Increased Cost of Working (“AICW”) coverage. This coverage insures against the costs of getting the business back on track. While aimed at additional expenses that mitigate business losses, it is different to Increased Cost of Working (“ICW”) coverage. For example, a pub may rent outdoor space and buy takeaway packaging for the purpose of setting up a pub garden and takeaway service aimed directly and solely at reducing or avoiding the loss of turnover caused by the damaging event (Covid-19 and the associated restrictions and closures). That would be ICW and could be recoverable as long as the saving achieved exceeded the cost of the additional expense (i.e. it must be profitable, or ‘economic’ expenditure). AICW by contrast is intended to cover uneconomic expenditure for the purpose of reducing the loss in turnover and assisting in resuming or maintaining normal business operations.

This wording was materially the same as one of the policy wordings[2] considered to provide coverage for Covid-19 BI insurance losses in the Financial Conduct Authority (“FCA”) test case[3] and so insurers had already accepted liability in these cases. However, the FCA test case only considered whether there was coverage in principle for losses arising out of the Covid-19 pandemic. The issues in this case concerned the amount that was covered.

Stonegate was the owner of 760 pubs across England, Scotland and Wales. Stonegate claimed over £1 billion in damages on the basis that:

1. Each of the three insuring clauses was triggered separately and for each Insured Location with each occurrence or discovery of Covid-19, each enforced closure, or each action which prevented access; and
2. Each constituted a covered event which was not capable of being aggregated into a single occurrence (for the purposes of the £2.5 million limit) or, at most, the losses could only be aggregated either by Insured Location (so that the £2.5 million limit applied to each Insured Location) or by government action (so that the £2.5 million limit applied to each government action per Insured Location).

In other words, on its primary case, if Stonegate had four pubs in the same town, it was seeking for each pub to be treated separately, and each Covid event, be it closure or restricted opening, to be treated as a separate event, and the £2.5 million limit applied separately to each location and event.

Stonegate did not give credit for furlough payments or other Government support in its claim.  Stonegate’s policy ended in April 2020 but, because the maximum indemnity period was 36 months, Stonegate claimed the interruption and interference from the Covered Events continued and would continue into the future so that losses were recoverable up to April 2023.

Various Eateries (which operated 10 relevant insured venues (trading as Coppa Club and Tavolino) in England) and Greggs (which operated takeaway and dine in services across 1,778 stores in England as well as further stores across the UK, but was only claiming in respect of its dine in business) made similar claims to Stonegate, claiming in excess of £16 million and £150 million respectively. However, their policy periods covered a greater portion of the Covid-19 pandemic: from 29 September 2019 to 28 September 2020 for Various Eateries; and from 1 January 2020 to 31 December 2020 for Greggs. Each had a 12 or 24 month indemnity period in their policies.

In addition, Stonegate claimed under AICW coverage. As stated above, AICW coverage is for money spent to maintain the business and to minimise loss long term but which does not result in a profit for the business in the relevant indemnity period. A sub-limit (meaning a specific limit for the specific type of loss) of £15 million applied to AICW coverage “in addition to the Limit of Liability” and Stonegate claimed that this applied for each Single Business Interruption Loss rather than in the aggregate.

In all three cases, the insurers’ primary case was that all losses were attributable to or in connection with a single occurrence and the losses should therefore be aggregated as a Single Business Interruption Loss, which was subject to a Limit of Liability of £2.5 million that insurers had already paid. In other words, in Stonegate’s case, the insurers argued that Stonegate could only claim recovery of £2.5 million with regard to the effects of the entirety of Covid-19 rules on the entirety of its 760 pubs. The insurers’ alternative case was that there were a limited number of Single Business Interruption Losses applicable. The insurers also argued that furlough payments should be taken into account.

The issues to be considered in the three cases were, briefly, therefore:

1. The Trigger Issue: what was the trigger for each of the three insuring clauses of the policy? In other words, how many Covered Events were there?
2. The Aggregation Issue: could the losses be aggregated into one or a small number of single occurrences, were they limited to a single Limit of Indemnity of £2.5 million and, if so, how many and what were the aggregating factors?
3. The Causation Issue: were the losses proximately caused by the relevant events within the policy period?
4. The AICW Issue comprising two sub-issues:
   a. Was the £15 million limit for AICW in the aggregate or for each Single Business Interruption Loss (e.g. per location and per event).
   b. Based on the specific wording of the AICW coverage, did AICW apply to both ICW coverage and to AICW, or was AICW simply a form of top up coverage separate to ICW coverage? If AICW and ICW were mutually exclusive, Stonegate’s AICW coverage would be effectively useless because ICW was where the bulk of Stonegate’s expenditure fell.
5. The Government Support Issue: was Government support to be taken into account in calculating sums recoverable under the policy?

Judgment

The Trigger Issue. The Court held that: (i) for the Notifiable Disease Coverage, there would have been as many Covered Events as there were cases of Covid-19, which occurred at or within the vicinity of an Insured Location; (ii) there could only be one trigger for the Enforced Closure coverage, that is the enforced closure itself unless the Insured Location is opened and then closed again (i.e. the number of triggers is the number of Enforced Closures multiplied by the number of Insured Locations); and (iii) in respect of the Prevention of Access coverage, it is the number of actions or advices (which are materially different and do not merely repeat or renew an existing prevention or hindrance of access) that prevents or hinders the use of or access to an Insured Location, whatever the number of Insured Locations affected.

The Aggregation Issue. The Court held that there were several single occurrences: (i) on 16 March 2020 when the public were advised to avoid pubs, restaurants and clubs; (ii) on 20 March 2020 when instructions were given to all pubs, bars and restaurants to close; and (iii) other “occurrences” including in September 2020 (when regulations were implemented for early closing and other restrictions on restaurants), in October 2020 (when regulations for a three-tiered system of access to areas were implemented); and in November 2020 (when the second lockdown came into force). 

In so doing, the Court rejected the insurer’s primary case on aggregation, that all losses for each policyholder aggregated to a single occurrence or, in the alternative, a small number of occurrences with a limit of £2.5 million. The Court decided that the aggregating factors put forward by the insurers (e.g. that everything went back to an initial case in Wuhan) were too remote from the occurrences giving rise to the loss being claimed.

But it also rejected the policyholders, argument that claims could be on a per Insured Location basis; Butcher J held that the Limit of Indemnity of £2.5 million applied to each policyholder business as a whole (i.e. £2.5 million per business and not per location). As the policyholders were the sole named insureds (e.g. no subsidiaries were named), the Court held the policy was not a composite one (where each Insured Location owned or operated by separate insured entities each had its own insurance).[4] There was nothing in the policy wording to conclude otherwise. However, as the losses aggregated to multiple occurrences, the policyholders were entitled to £2.5 million multiplied by the number of occurrences less any furlough payments and business rate reduction benefits (see the Government Support Issue below).

The Causation Issue: Butcher J rejected Stonegate’s claim for losses for the entirety of the 36 month indemnity period (to April 2023) under the Notifiable Disease coverage. However, he accepted that there could be coverage for cases of the disease due to the continuation of the first lockdown to 4 July 2020 in England, which was beyond the end of Stonegate’s policy period (April 2020), but when hospitality venues reopened, the Government response was to subsequent developments of the disease and were not caused by cases of the disease within the policy period. In Various Eateries, Butcher J also considered the extent to which there was coverage beyond the end of the policy period in the context of Enforced Closure and Prevention of Access coverage. Butcher J held that there would be coverage beyond the end of the policy period (28 September 2020) to the extent that the loss resulted from interruption from the closure or prevention of access which took place during the policy period.

The AICW Issue: The Court held in favour of Stonegate that the AICW limit of £15 million applied for each and every Single Business Interruption Loss and not in the aggregate. However, it held against Stonegate that AICW included ICW, instead that they were mutually exclusive. Only expenditure in relation to essential administrative functions were recoverable because they were expressly set out in the policy as AICW.

The Government Support Issue: There were two forms of Government support considered by the Court, furlough payments and business rate reductions. On furlough payments, Butcher J held that the policy wording meant that the insurer had the benefit of savings that would otherwise be paid from turnover, and furlough payments were such savings. On business rate reductions, the same logic applied — if such payments were made out of turnover, they would be treated in the same way as furlough (i.e. as a saving for the insurers' benefit). In other words, as wages and business rates would normally be paid from turnover, if they ceased or were reduced as a result of furlough or business rates reductions, they were to be treated as savings of the business. Therefore, a policyholder’s BI coverage, once established, could be reduced by the whole amount of furlough and business interruption reductions received in the relevant indemnity period.

Comment

While the insurers won on the Government Support Issue, there were ‘wins’ on both sides on all other issues. Importantly, the Court agreed with the policyholders that their losses aggregated to multiple occurrences and not only one with a £2.5 million limit. These decisions were based on the Marsh Resilience wording and other wording might be interpreted differently. Policyholders with alternative policy wording should carefully consider with their coverage counsel how these cases might apply or indeed be distinguished.

These decisions are subject to appeal. Policyholders should therefore consider whether to reserve their position with insurers by avoiding any settlements with insurers on a full and final basis and reserving rights to revisit a settlement in the event of further judicial determination on these issues, particularly on the treatment of Government support.

Relatedly, there are further cases dealing with similar issues working their way through the Commercial Court. We expect further decisions on these issues, which are subject to different BI policy wording, in the second half of 2023 and beyond.

Interpretation of Jurisdiction clauses:

Al Mana Lifestyle Trading L.L.C. & others v United Fidelity Insurance Company PSC and others [2022] EWHC 2049; [2023] EWCA Civ 61

This judgment is a reminder of the difficulties that complex and layered jurisdiction clauses can give rise to. The Court of Appeal (reversing the High Court decision) held that a clause providing for the local law and jurisdiction of the country where the policies were issued “[o]therwise England and Wales UK Jurisdiction” was an exclusive jurisdiction clause in favour of local law with England only being a fall back in the event the local court did not accept jurisdiction.

Background

The Claimants were part of the Al Mana Group, whose business is in the Middle East food and beverage industry. The Defendant insurers, headquartered in the UAE, Kuwait and Qatar, issued BI insurance policies to the Al Mana Group in those jurisdictions. The applicable law and jurisdiction clause in the policies provided: “In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued. Otherwise England and Wales UK Jurisdiction shall be applied…".

The Al Mana Group filed claims in England against the insurers for Covid-related BI losses. They argued that claims could be brought in either the country where the policies were issued, or in the English courts and, as such, the English courts had jurisdiction to hear the claims.

The insurers argued that the clause provided for the exclusive jurisdiction of the courts of the country where the policies were issued and it was only in circumstances where those courts declined jurisdiction that the English courts could then have jurisdiction. The insurers argued that, in the event that the Court concluded this was a non-exclusive jurisdiction clause, England was not the appropriate forum based on a number of factors, including that: the Al Mana Group and the insurers were not located or connected with England; none of the alleged losses were sustained in England; the governing law remained the relevant local law where the policies were issued and those courts were best placed to apply their own law; and none of the reinsurers were based in England.

Judgment - High Court

The High Court held that the clause conferred non-exclusive jurisdiction as it permitted proceedings in either the country where the policies were issued or the English courts. The High Court considered this to be the most commercially reasonable interpretation to a non-legal reader.

There was then a determination as to which was the most appropriate forum. The High Court decided on England on the basis that, among other things: (i) England would provide a single neutral forum to solve the disputes, as opposed to litigating claims separately in a variety of countries; and (ii) England had particular expertise in dealing with Covid-19 related BI losses and foreign law issues where they arose. Given that a contractual choice of English jurisdiction (even non-exclusive) creates a starting point that England is the correct forum, the Court held that it could not exercise its discretion to decline English jurisdiction without “strong reasons”, and found that no such “strong reasons” existed. The decision on construction of the jurisdiction clause was appealed to the Court of Appeal.

Judgment - Court of Appeal

A majority of the Court of Appeal allowed the appeal on the basis that the clause was in fact an exclusive jurisdiction clause. It considered that the first sentence contained the primary law and jurisdiction selection by the parties of local law and that “[o]therwise”, at the start of the second sentence, was more consistent with introducing English jurisdiction as a fall back in the event the local court did not accept jurisdiction. And that, even if English jurisdiction was invoked, the English court would have to apply the local law and practices. Here, the local courts had been willing to accept jurisdiction and therefore the jurisdiction clause did not give the English court jurisdiction.

Scope of Third Party Rights under the Third Party (Rights Against Insurers) Act 2010:

Keegan v Independent Insurance Company Limited and Zurich Insurance Plc [2022] EWHC 1992

This High Court decision considers the scope of third party rights against insurers of an insolvent company under the Third Party (Rights Against Insurers) Act 2010 (the “2010 Act”). In a mesothelioma case, the High Court decided that liability would have been incurred when the claimant suffered actionable damage. That took place after commencement of the 2010 Act and the claimant could therefore proceed under the 2010 Act, enabling it to bring proceedings against the insurer of an insolvent company directly (rather than having to first establish the liability of the insolvent insured company).

Background

Prior to the 2010 Act, claimants needed to go through a two-stage process requiring them to establish liability against the insolvent insured first, before they could bring proceedings against the insolvent company’s insurer. Stage one required the third party claimant to reinstate the insolvent company to the UK Companies House register so that liability could be established against it by way of default judgment. Stage two required the claimant to then bring a direct claim against the insurer of the insolvent insured. This was a costly and lengthy process.

The 2010 Act removed stage one of this two-stage process, enabling a claimant to bring proceedings against the insurer of an insolvent company directly, without having first established the liability of the insolvent insured company.

The Claimant, Mr Keegan, had been employed for over four decades, during which he was exposed to asbestos. The two Defendant insurers provided employer’s liability insurance to Mr Keegan’s former employer. His former employer had gone into insolvency and had been dissolved.

Judgment

The issue before the Court was whether liability in a mesothelioma case was incurred before or after the 2010 Act’s commencement date (1 August 2016). If liability was incurred after 1 August 2016, Mr Keegan could bring the claim under the 2010 Act directly against the insurer but, if incurred before, he would have to follow the two-stage procedure. The Court held that liability would have been incurred when Mr Keegan suffered actionable damage which was one of two dates, both of which were after August 2016 and Mr Keegan could therefore proceed under the 2010 Act.

Limitation under the Third Party (Rights Against Insurers) Act 2010:

Mr Mohammed Rashid and others v Direct Savings Limited and others [2022] 8 WLUK 108

This is the first reported decision on how limitation applies to the 2010 Act. Claims under the Act were held to be made outside the insolvency of the insured company because the right to bring a third party claim existed as a statutory right under the Act. Therefore, the usual limitation rules in insolvency, in particular, the pause on limitation, were not applicable to a claimant under the 2010 Act.

Background

The claims alleged negligent cavity wall installation by the Defendants, Direct Savings and Direct Savings (Scotland) (a company in liquidation). Both companies were insured by Aviva.

There is a long-standing principle, going back to the 1872 case of Re General Rolling Stock Co Ltd, that time ceases to run for limitation purposes at the onset of insolvency, so long as a claim against the insolvent defendant at that time would not have been time-barred and this was applied in the context of the pre-2010 Act two-stage process. As described above, that prior process required an initial stage of establishing liability against the insolvent insured and a second stage of bringing a claim against the insurer of the insolvent insured. The limitation position was that limitation for the purposes of the two-stage procedure ceased at the point of insolvency. It followed that limitation for the second stage also ceased at the point of insolvency, so that insurers were unable to rely on the limitation defence in such cases.

As the 2010 Act removed stage one of the process, the main issue was whether that affected limitation and whether the insurer could now put forward a limitation defence.

Judgment

The Court considered that the crucial question was whether the claim against Aviva under the 2010 Act was made within or outside the liquidation. The Court was satisfied that the claim was made outside the insolvency on the basis that the right to bring a claim against the insurer was a statutory right that arose automatically under the 2010 Act at the moment of the insolvency event; it was not dependent on first establishing liability against the insolvent insured. As such, a third party claim made against an insolvent entity’s insurer, for the purposes of enforcing rights against an asset not available to the general creditors, fell outside the insolvency. Therefore, the usual limitation rules in insolvency were not applicable under the 2010 Act, with a potentially unintended effect of the 2010 Act being that the pause on limitation that was previously available is now no longer available to a claimant.

This decision is a County Court decision. While not binding, and currently being appealed, it is based on five other unreported County Court decisions which reach the same conclusion. It also serves as a good reminder to claimants to ensure that claims are brought well within any potential limitation periods.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Insurance Recovery practice.