The recent case of FCA v Arch and others  EWHC 2448 (Comm) considered whether policyholders of a number of business interruption insurance products were entitled to cover in respect of the recent Coronavirus pandemic.
One of the wordings considered was the the Marsh / Jelf Insurance Brokers Resilience Material Damage and Business Interruption Policy (RSA4). The policy (referred to as RSA4) was prepared by Marsh & McLennan group brokers and underwritten by RSA. It was held by a number of businesses including SMEs and wholesaler insured's
The relevant parts of the policy are cited in the judgment at paragraphs 126 -127, but the main aspect of the wording that fell to be considered was Clause 2.3:
The Insuring Clause
“In the event of interruption or interference to the Insured’s Business as a result of:
viii. Notifiable Diseases & Other Incidents:
- a. discovered at an Insured Location;
- b. attributable to food or beverages supplied at or from the Insured Locations;
- c. which are reasonably likely to result from an organism discovered at an Insured Location; and/or
- d. occurring within the Vicinity of an Insured Location,
- during the Period of Insurance ...
- within the Territorial Limits, the Insurer agrees to pay the Insured the resulting Business Interruption Loss.”
- Business Interruption Loss - "the Reduction in Turnover; Increased Cost of Working; and/or Research & Development Expenditure" [Clause 9]
- Indemnity Period - "the period of time during which interruption or interference to the Insured’s Business occurs as a consequence of the Covered Event beginning with the occurrence of the Covered Event and ending not later than the end of the Maximum Indemnity Period thereafter." [Clause 42]
- Notifiable Diseases & Other Incidents -
- "i. one of the following tabulated diseases and / or illnesses: [33 including anthrax, cholera, food poisoning, plague, and SARS];
- ii. any additional diseases notifiable under the Health Protection Regulations (2010), where a disease occurs and is subsequently classified under the Health Protection Regulations (2010) such disease will be deemed to be notifiable from its initial outbreak;
iii. any additional notifiable diseases in animals as determined by the Department for Environment, Food & Rural Affairs and Animal and Plant Health Agency or any successor agency;
iv. any accidental or malicious deposit of radioactive isotopes, biological or chemical materials reasonably believed by the Insured to be hazardous;
v. defective sanitation or any other enforced closure of an Insured Location by any governmental authority or agency or a competent local authority for health reasons or concerns. [Clause 69]
Vicinity - an area surrounding or adjacent to an Insured Location in which events that occur within such area would be reasonably expected to have an impact on an Insured or the Insured’s Business.” [Clause 120]
Covered Event - means the events as described in Insuring Clause 2.1, 2.2 2.3 or 2.4 or any applicable Extension. [Clause 17]
Standard Turnover means the Turnover during that equivalent period before the date of any Covered Event which corresponds with the Indemnity Period to which adjustments have been made to take into account the trend of the Insured’s Business and for variations in or other circumstances affecting the Insured’s Business either before or after the Covered Event or which would have affected the Insured’s Business had the Covered Event not occurred so that the figures thus adjusted will represent as nearly as may be reasonably practicable the results which but for the Covered Event would have been obtained during the Indemnity Period. [Clause 107]
The Court's judgment of coverage under Marsh / Jelf Insurance Brokers Resilience Material Damage and Business Interruption Policy (RSA4) is at paragraphs 136 - 148.
In brief the Court held that:
- In accordance with clause 69 (ii), COVID 19 became notifiable (for the purposes of clause 2.3) at the date of its "initial outbreak," "wherever it occurred" which was on 31st December 2019 in Wuhan.
- For the purposes of the present policy "vicinity" could encompass the whole country as the reference to "surrounding or adjacent" in clause 120 does not specify radius, whereas "within such areas as would be reasonably expected to have an impact" would dictate the size of the radius. Clause 69(i) clearly envisaged highly contagious diseases that might be expected to have a nationwide effect such as plague or SARS.
- As with the Eaton Gate (RSA3) wording [View the article on that policy here], cover was held not to be confined to the effects of a disease occurring only within the Vicinity, or expressly or implicitly confined to the effects only of the cases of the disease within the Vicinity.
- Business interruption or interference is caused by a notifiable disease for the purposes of the policy, if that notifiable disease occurs within “the Vicinity”.
- Coverage was for an "occurrence" rather than "an event" and thus could extend to interference caused by the disease generally (providing it manifested within the vicinity), providing there is the "occurrence of at least a case of the disease within the Vicinity"
- A susbequent definition of Covered events referring to "events" described in the insuring clause did not alter this.
- The words "as a result of" contained within the insurance clause is a link within the definition of the insured peril (business interruption caused by coronavirus) and not a requirement of proximate causation - that there should be a link between the loss and insured peril. The causal connection which the phrase imports must give effect to the intention of the parties and not defeat it.
- The de facto trends clause contained within the Standard Turnover definition does not allow the insurer to contend that loss would have arisen irrespective of the occurence within the Vicinity, given that the Vicinity would include the UK as a whole. Even if Vicinity covered a more limited area, it was either part of an indivisible cause or one of many equally effective causes that caused the government and pubic reaction and thus the interuption as a result of COVID 19.
When COVID 19 became a notifiable disease?
What is in issue is the relevant date of its “initial outbreak”, and thus the deemed date of its being a notifiable disease in accordance with that Definition. The FCA contends that the “initial outbreak” was on 31 December 2019, when the first cases in Wuhan were confirmed. RSA contends that the date of the “initial outbreak” is 31 January 2020, when the first positive test for COVID-19 occurred in England. We consider that the FCA is correct.... The Definition does not refer to an initial outbreak “within the Territorial Limits” or within England and Wales....what is being dealt with is a newly notifiable disease, the phrase “initial outbreak”, without more, would most readily be understood as being the initial outbreak wherever it had occurred.
It was, however, cautioned that this might not be the case where there was an initial outbreak abroad with only "isolated and sporadic" cases following in the UK. The Court confirmed that the finding as to when the disease became notifiable for the purposes of the policy was not "of great significance" given the Vicinity requirement "which on any party's case, could not be met by an occurrence of the disease in China."
the ordinary meaning of “vicinity” is a near area...it would not be normal parlance to refer to the whole of England and Wales as within the “vicinity” of any part of England and Wales...Nevertheless, given the particular terms of the definition of Vicinity in RSA 4, the perils insured under the policy, and the role that the defined term has in relation to those perils...in relation to a disease such as COVID- 19, an extensive area, possibly embracing the whole country, can be regarded as the relevant Vicinity for the purposes of this wording [Para 137]
the extent of the Vicinity depends in part on the nature of the event which may occur within it. “Events” in this context must include the occurrence of any of the notifiable diseases within Definition 69 (i), (ii) and (iii). The occurrence of some of those diseases, anywhere in the country, might very well, possibly depending on the nature of the insured’s business, reasonably be expected to have an impact on it. One example given by the FCA is an outbreak of foot and mouth disease in sheep and cattle which, depending on the insured’s business, might reasonably be expected to have an impact on it, even though the outbreak was geographically very distant.
Given the severity of the SARS outbreak in 2002-2003 in various countries, it would in our view have been reasonably expected, at the time of conclusion of the contracts of insurance, that a significant outbreak of a SARS-like disease anywhere in the UK would have “an impact” on an insured [Para 138]
RSA’s response is that to concentrate on the potential width of the area which might be impacted by a particular event is to give no or insufficient weight to the first part of the definition of Vicinity, namely “an area surrounding or adjacent to an Insured Location”....That the area must be surrounding or adjacent to the Insured Location does not of itself say much about the size of the area. The part of the definition which does dictate the size of the area is the second part of the definition. [Para 139]
We therefore consider that the reasonable person would have understood the parties, in using the defined term Vicinity to mean an area whose extent would depend in part on the nature of the relevant “event”, but which could be very extensive, and indeed nationwide. [Para 140]
If we are wrong...then the Vicinity will be an area which is fact sensitive, and depends, at least in part, on the nature of the insured's business, but there is an overriding criterion of close spatial proximity." [Para 141]
Disease outside vicinity
In our judgment, it is not the correct construction of the coverage provision in Clause2.3 (viii)(d) that cover is confined to what can be shown to be the business interruption or interference resulting from the occurrence of the disease within the Vicinity and does not extend to the business interruption or interference resulting from the disease being both inside and outside the Vicinity. We do not consider that that construction is dictated by the words used. The cover is not confined to the effects of a disease occurring only within the Vicinity, nor in our view is it expressly or implicitly confined to the effects only of the cases of the disease within the Vicinity. Instead the words used in Clause 2.3 are consistent with there being cover for the effects of a Notifiable Disease which has come within the Vicinity. [Para 142]
the nature of the insurance provided...is for business interruption resulting from the occurrence within the Vicinity of... diseases...notifiable under the 2010 Regulations..those Regulations [were] introduced to control epidemic and infectious diseases.. that may..spread over a significant and difficult to predict area...SARS...would be an example...the nature of such diseases..may..produce a response from the authorities or the public which is to the outbreak as a whole, not to the parts of it which fall within "the Vicinity"... if [it] is to be treated as a geogrprahically proximate area which is smaller than that in which the impact of a notifiable disease may reasonably be expected to be felt...we do not consider..the parties would be reasonably understood to be restricting the cover to interference or interruption of the business which was caused only by the fact that the relevant disease was within "the Vicinity", as distinct from its also being outside "the Vicinity" [Para 143]
we do not consider that it is the proper construction of the policy that cases of the notifiable disease within the relevant area are independent of, and can be regarded as a separate cause from, cases outside the area. The nature of highly infectious or contagious notifiable diseases is that cases in different areas will be related to each other, having spread from one source to multiple individuals in different places. As people move, the disease moves with them.
we consider that the correct construction of the cover provided by Clause 2.3 and in particular by (viii)(d), is for the business interruption or interference caused by a notifiable disease, if that notifiable disease occurs within “the Vicinity”. The occurrence of at least a case of the disease within the Vicinity is required for there to be cover" [Para 144]
RSA’s argument that cover was provided only for the occurrence of a relevant insured event, here a disease, specific to the Vicinity, and not in respect of one which occurs in a wide area encompassing the Vicinity...that the RSA 4 cover was for “events” and not for “states of affairs”, which pandemics would be...We did not consider that this point had force in relation to RSA 4.
we do not regard Definition 17 as importing any additional requirement or re-definition of what constitutes an insured peril beyond what is set out in Clause 2.3 itself. It is true that Definition 17 is of “Covered Event”, and that it refers to the matters in the Insuring Clauses as “events”. That appears simply as a shorthand for what is in the various insuring clauses. [Para 145]
we consider that the issues of causation are largely answered by the construction to be placed on the cover provided. If we are correct in what we have said above, it clearly makes no sense to say that there is no cover because it cannot be shown that the cause of the business interruption was the disease insofar as it was outside and not within the Vicinity.
the insured peril is “interruption or interference to the Insured’s Business as a result of [one or more of (i) to (xiii)]”.... the phrase “as a result of” is accordingly a link within the definition of the insured peril; and accordingly not between the loss and the insured peril, which is the link which is ordinarily characterised by a requirement of proximate causation....the causal connection which the phrase imports must be one which gives effect to and does not defeat the intentions of the parties in agreeing the cover....the phrase “as a result of” requires that the matter within one of (i) – (xiii) of Clause 2.3 should be an effective cause of the interruption or interference...that requirement is to be regarded as fulfilled on the basis either that the occurrence of the disease within the Vicinity was part of an indivisible cause, namely COVID-19 and the governmental and public reaction thereto, or was one of many equally effective causes. [Para 147]
If we are right in relation to Vicinity, or if we are right in rejecting RSA’s case that, if Vicinity is given a narrower meaning, the occurrence of the disease outside the Vicinity constitutes a separate cause which can be relied upon as showing that the business interruption would have occurred even without the occurrence of the disease within the Vicinity, then there is no further point which arises in relation to the definition of Standard Turnover. On these bases the “Covered Event” will include the effects of COVID-19 on the business, and that is what will need to be removed for the purposes of the Standard Turnover definition. [Para 148]
KEVIN HOLDER © 2020
33 BEDFORD ROW
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