Partner Gurpreet Sanghera examines the consequences of a recent High Court judgment on business interruption claims arising from the Covid-19 pandemic
Gurpreet’s article was published in FTAdviser on 17 March 2022, and can be found here. A similar version of Gurpreet's article was published in The Law Society Gazette on 6 May 2022, and can be found here.
The hospitality sector was one the most badly affected by the Covid-19 pandemic. Restrictions on trading have significantly impacted the turnover of businesses as fixed costs and accumulated debt further combined to drive their bottom lines into the red.
A healthy hospitality sector is vital to the UK economy. Despite some temporary respite from the Eat Out to Help Out scheme in summer 2020, a series of protracted lockdowns and continued restrictions that lasted for almost two years inevitably led to widespread disruption. This resulted in cumulative levels of financial loss that forced some businesses to close for good. It is estimated that almost 10,000 licensed premised including pubs, clubs and restaurants, closed permanently in 2020, a devastating impact on a sector that exists to bring people together.
For many of those that survived, business interruption (BI) insurance was seen as an essential lifeline. But a significant number of hospitality companies that sought to rely on their BI policies in order to recover their losses have instead been faced with fierce resistance from insurers, many of whom have refused to pay out under their policies.
To address this problem action is being taken in the courts by many of the affected businesses. Most notable among them has been the recent BI claim by Corbin & King which owns restaurants, cafés & brasseries, including The Delaunay, The Bellanger, The Colbert, and The Wolseley.
In the High Court, the restaurateurs won their case last month against the UK arm of the French insurer, AXA. In delivering her judgment, Mrs Justice Cockerill found that AXA should pay out under a BI policy for losses that Corbin & King had incurred during the pandemic lockdowns of 2020 (March to July and November/December). It is expected that, following a loss adjustment exercise, the decision will eventually cost AXA up to £4.4m.
The judge noted that the case affected “not just these litigants but a considerable range of other businesses”, adding that “a number of disputes may well be short circuited” by her ruling.
The ground for bringing this case was initially paved by a Supreme Court judgment in January 2021 which related to a BI test case brought by the Financial Conduct Authority (FCA) on behalf of several thousand policyholders. In doing so, the FCA recognised that the issues surrounding BI policies are complex and had the potential to create ongoing uncertainty for both policy holders and insurers. Accordingly, they brought a test case against several leading insurance companies.
In its landmark ruling, the Supreme Court substantially allowed the FCA’s appeal. Although this judgment was good news for most policy holders and insurers, resolving much of the ongoing uncertainty for them, it came with limitations. The test case could not cover every eventuality since it was never intended to resolve all possible disputes or determine the outcome of each potential individual claim.
Fresh litigation was therefore anticipated. So, it came as no surprise when the High Court was asked to consider a range of issues in the case brought by Corbin & King against AXA. Of particular note was the scope of cover provided by the policy’s Denial of Access (Non-Damage) clause , which compensates businesses if their venues are shut by a statutory body because of a local danger or hazard. Whilst clauses vary from policy to policy, they generally relate to ‘incidents in the vicinity of’ the affected premises. It was held by the Supreme Court that such clauses are designed to cover narrow, localised incidents such as brawls, bomb scares, gas leaks and traffic accidents as opposed to general restrictions placed on businesses across the country.
The court had to consider whether the policy wording in this case provided effective cover for loss resulting from restrictions on access. The relevant clause in the AXA policy stated: ”We will cover you for any loss insured by this section resulting from interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period shown in your schedule arising directly from: The actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a one mile radius of your premises.”
In examining the scope of Corbin & King’s insurance cover, the High Court held that it was not a requirement in the policy that the “danger” should exclusively be present within a one mile radius and that “COVID-19 is capable of being a danger within one mile of the insured premises, which coupled with other uninsured but not excluded dangers outside, led to regulations which caused the closure of the businesses and caused the business interruption loss”.
The High Court also rejected AXA’s argument on coverage, i.e. that the claims were limited to just £250,000 in respect of all premises and instead supported Corbin’s contention that it was £250,000 per Covid claim and per premise.
In her judgment, Mrs Justice Cockerill deals at length with the ambiguity of certain words in the denial of access clause. But in her decision about the effect of the £250,000 figure is unambiguous: “Overall the picture which emerges from a consideration of the wording and a consideration of the nature of the Policy persuades me without difficulty that the correct answer is that this is a composite policy in respect of which each insured is entitled to claim £250,000 in respect of each claim.”
It will be interesting to see whether, in light of this judgment, insurers will reconsider their decisions or whether they will simply wait for the Courts to determine each matter on a case-by-case basis.
The FT concluded in a headline report about the case that ‘Insurers brace for pay-outs after Wolseley owner wins Covid case.’ The article that followed suggested that after the Corbin’s victory, insurers will face ‘significant increases in Covid-related pay-outs’.
Undoubtedly, in similar cases, companies with certain policies can reasonably expect to be paid out per Covid claim and per premise by their insurers. But while that may well be true for some, every case can be different. Equally, the terms of each policy and its denial of access clause can also vary.
At a more practical level, many businesses that are potentially affected by similar claims will simply not have sufficient resources to run them. Accordingly, while some insurers will need to have a radical rethink about the wording of their policies and the potential claims facing them, the easier response for others may simply be to wait and see what happens next.