Several project developers and other businesses around the world have filed claims under business interruption insurance policies due to interruptions in work during lock-downs resulting from COVID-19.

More than 1,000 COVID-19-related insurance lawsuits are estimated to have been filed in the US alone.

The British High Court decided a test case in September.

UK Test Case

Business interruption insurance usually requires the insured party to show damage to assets from a cause not excluded under the policy.

In some cases insured parties may take the view that they have recourse under business interruption insurance where there is denial of access to a project or business site or interruption to operations as a consequence of an infectious disease contracted by any person while at the site or due to a lock-down, even though no damage to the business assets may have occurred.

To address the policy coverage uncertainty, the Financial Conduct Authority in the United Kingdom (FCA) commenced a test case in June 2020 in the High Court of England and Wales. The High Court rendered a decision in mid-September in a case called [2020] EWHC 2448 (Comm).

The objective of the test case was to obtain a declaratory judgment about the meaning and effect of a representative sample of 19 business-interruption insurance policy wordings (clauses, definitions, exclusions, trends clauses, indemnity limits, etc.) selected from more than 500 relevant policies obtained from 40 insurers.

The relevant provisions of the lead policies essentially fell into three categories.

The first category is disease clauses that provide coverage in cases of business interruption on account of a disease within a specified radius of the insured premises that is notified to a public authority. The key issue was whether the policies provided coverage for the COVID-19 pandemic if the events that led to the business interruption (particularly governmental measures) would have happened even without the discovery of COVID-19 cases within a specified vicinity of the business or project site because COVID-19 had occurred or was feared to have occurred elsewhere.

The second category is hybrid clauses that provide coverage in cases where restrictions have been imposed on a business or project premises because of a disease that has been notified to a public authority, but that may not have struck the particular location yet. These types of clauses blend the prevention of access with a general manifestation of the disease.

The third category is clauses that cover business interruptions due to prevention or hindrance of access to or use of the premises as a consequence of government or local authority action or restriction.

Submissions to the High Court were made by the FCA, two intervenors (Hospitality Insurance Group Action and Hiscox Action Group) and the eight insurance company defendants who had agreed to be part of the test case: Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office Plc, MS Amlin Underwriting Ltd, Hiscox Insurance Company Ltd, QBE UK Ltd, Royal & Sun Alliance Insurance Plc and Zurich Insurance Plc.

The High Court dealt with each insurance policy wording individually, as the court said it was “impossible to determine questions of policy coverage in the abstract.”

The court held that most, although not all, of the disease clauses provide cover.

It held that certain prevention-of-access clauses in the samples provide cover, but this depends on the detailed wording of the relevant clause and how the business was affected by the government response to the pandemic, including, for example, whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case outcome should help both the insurers and insured parties get more clarity on what wording in policies would provide coverage for loss resulting from denial of access resulting from COVID-19 (without any property damage having occurred) and the necessary causation that the insured parties would need to establish in order to succeed in such claims.

The judgment also clarified that the COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even when the policy provides coverage.

The judgment in the test case is legally binding on the insurers that are parties to the case for how the business interruption insurance policy wordings considered by the High Court are to be interpreted.

The decision may still be appealed by the FCA or the insurers directly to the Supreme Court by “leapfrogging” the Court of Appeal in the United Kingdom.

An application for filing such an appeal to the Supreme Court was made by the FCA on September 28, 2020, as a precaution, in case the FCA and the insurers are unable to reach an agreement on how to process the pending insurance claims based on the High Court judgment.

The appeals process would not prevent insured parties and insurers from settling individual insurance claims in the interim.

The judgment also provides persuasive guidance for the interpretation of similar business interruption insurance policy wordings, which may be relevant to the US insurance market.

Consolidating US Claims

In the US, an attempt was made earlier this year to consolidate the COVID-19-related business interruption and civil authority insurance litigation.

Two petitions were made to the Joint Panel on Multidistrict Litigation (JPML) in April 2020.

One petition sought consolidation of COVID-19 business interruption litigation in a federal district court in Philadelphia and the other in a federal district court in Chicago.

The advocates for consolidation identified three core common questions. First, do the various government closure orders trigger coverage under the policies? Second, what constitutes “physical loss or damage” to the property? Third, do any exclusions (particularly those related to viruses) apply?

The JPML declined in August to consolidate lawsuits on grounds that these questions shared only a superficial commonality and that there was no common defendant in the lawsuits.

The JPML saw little potential for common discovery across the litigation and noted that the cases involve different insurance policies with different coverages, conditions, exclusions and policy language, purchased by different businesses in different industries located in different states. The JPML said these differences would overwhelm any common factual questions.

However, it said centralization may be warranted to eliminate duplicative discovery and pre-trial practice with respect to four sets of insurers — The Hartford, Cincinnati Insurance Company, various underwriters at Lloyd’s of London and Society Insurance Company. These parties were directed to show cause why actions against them should not be centralized.

Insurers’ Response to COVID-19

Several insurers are explicitly excluding COVID-19 from policies that are due for renewal.

Some insurers are reluctant to include an extension under existing insurance policies to cover infectious diseases as many have had legal proceedings commenced against them because of the COVID-19-related claims.

The Lloyd’s Market Association (LMA) published a model endorsement or clause in March 2020 — the LMA 5393 communicable disease endorsement — for use to amend the coverage under property insurance policies.

The model endorsement has the effect of carving out losses or damage resulting from “communicable diseases.”

The term “communicable diseases” in the model endorsement is broadly defined to include diseases that can be transmitted by a virus through airborne, bodily fluid or surface transmission and can cause or threaten damage to human health or insured property.

Insurers may also take the view that all insurance coverage should exclude any claim that is caused in any way from COVID-19 or any fear or threat of COVID-19.