Court of Appeal clarifies the causation test under ‘at the premises’ business interruption policies

It is some time since Covid-19 dominated the front pages — but it has not gone away, and neither have the disputes about cover for losses under business interruption (BI) policies.

The recent Court of Appeal decision in LEIC v Allianz establishes that policies based on occurrence of disease ‘at the premises’ provide cover — even if it cannot be shown that occurrence specifically at those premises was a specific trigger for restrictions imposed. 

An issue not resolved by the FCA Test Case

In the 2021 ‘FCA Test Case’, the Supreme Court considered BI policies featuring ‘radius’ wordings — i.e. covering loss arising from occurrence of disease within a certain radius of the policyholder’s premises (including restrictions imposed by government/local authority in response to such occurrence). 

The Supreme Court held that cover under such policies only required the restrictions to have been imposed at least in part due to at least one case of notifiable disease within the given radius. There was cover if the restriction was imposed in response to occurrences of disease both inside and outside the radius — and even if the restriction would have been imposed but for the occurrence inside the radius.

The FCA Test Case did not deal with policies that define cover by reference to occurrence of disease specifically at the policyholder’s premises. The Court of Appeal has now considered such ‘at the premises’ wordings. 

Court of Appeal decision — LEIC v Allianz & Ors [2024]

The lead claim was brought by London International Exhibition Centre plc, who sought c.£16 million from their BI insurers for business interruption  losses suffered at their ExCel conference centre.  Other similar claims were joined to the appeal. 

The policies provided cover for losses caused by a notifiable disease at the premises, including due to restrictions imposed as a result of such disease.

It was accepted by the insurers that a) the policyholders’ venues had been affected by restrictions and b) there had been at least one occurrence of Covid-19 at each venue. The crux of the dispute was:

• The policyholders argued that the Test Case decision on ‘radius’ cover applied equally to ‘at the premises’ cover. They argued that they only needed to show at least a single occurrence of the disease at their premises, and did not need show that to have been the only - or even main - trigger for the restrictions being imposed. Neither was it necessary that the public authority even knew that there had been an occurrence at the premises.
• The insurers disagreed. Whilst their arguments differed somewhat (in part due to variations in their respective wordings), in short, they argued that there was cover only if the restrictions were imposed specifically in response to a known occurrence of disease at the policyholder’s premises.

One insurer argued that this gave rise to a ‘but for’ test: would the restrictions have been imposed even but for the occurrence of disease at the policyholder's premises? If so, the loss was not covered (the restrictions would have been imposed anyway).

Another insurer put the threshold lower, but still argued that the decision to impose restrictions had to be at least in part due to a specific known occurrence of disease at the policyholder’s premises (if there was an occurrence at the premises but the authority did not know that when imposing the restrictions: no cover). 

In June 2023, the High Court found in favour of the policyholder claimants. The insurers appealed, and the Court of Appeal has now (September 2024) handed down its judgment.

The Court of Appeal has upheld the decision in favour of the policyholders.  Key features of the decision include:

• A proper assessment of causation must take into account the nature of the specific insured peril. Notifiable diseases do not behave like certain other insured perils (e.g. vermin infestation) — they spread quickly over a wide area.
• Restrictions were a reaction to widespread outbreak, with decisions necessarily taken quickly and based on incomplete information.
• In reality, an authority’s decision to impose restrictions was in response to all instances of the disease — both those of which it was specifically aware and those it was not.
• The FCA Test Case rationale regarding ‘radius’ clauses — that “each of the individual cases of illness resulting from Covid-19 which had occurred by the date of a restriction was a separate and equally effective cause of that action” – also applied to ‘at the premises’ wordings. Neither wording restricted cover to interruption caused only by disease within the radius/at the premise. As such, a ‘but for’ test is not applicable.
• A simplified example based on the appeal decision:
  • Disease is discovered at four out of ten venues on a street, each operated by different policyholders. The local authority does not know whether there is disease at the other six.
  • The authority orders all ten venues to close (if it closes only the four, or does nothing pending results at the other six, there is less hope of containing the outbreak).
  • It later transpires that the outbreak also affected the other six venues.
  • In this scenario, if, it would be illogical and unfair for the other venues’ losses not to be covered simply because the authority did not know for sure whether they had also been affected. In imposing restrictions, the authority was responding to the local outbreak as a whole, both confirmed cases and unknowns.

Commentary

Whilst the Court of Appeal approached the issue from the ‘ground up’, based on the respective wordings and facts, its rationale on ‘at the premises’ clauses mirrors the Supreme Court’s on ‘radius’ clauses in the FCA Test Case.

In considering the true basis for restrictions, the Court of Appeal recognised that notifiable diseases spread quickly, and that government and local authorities necessarily take swift, broad action. This led it to a wider causation test, which benefits policyholders.

Subject to any further appeal (TBC), this decision should pave the way for settlement of many outstanding claims under ‘at the premises’ BI policies.

Issues remaining at large

Aside from any potential reversal of this decision on appeal, other significant issues remain contentious, including:

• Untested wordings:
  • in some cases, insurers may argue that their policies feature material differences to those considered, leading to a stricter causation test;
  • following the pandemic, many insurers adjusted the terms of their BI policies. It remains to be seen how those will be interpreted against the facts of any future pandemic.
• Proving an occurrence at the premises: though policyholders need not show that an occurrence at their premises was the specific cause of the restrictions (or even that the public authority knew about it), they must still establish that there was at least one such occurrence. In some cases this may be challenging and contentious.
• Quantum: policyholders must still prove the loss they suffered, which may also have its challenges.
• Furlough payments: in a decision earlier this year (Gatwick Investment v Liberty Mutual Insurance), the High Court held that furlough payments received by policyholders reduced their net loss, and so the sum payable by their insurers (because such payments were not an arbitrary gift - they were made in response to the insured peril). The Court of Appeal is set to hear an appeal of that decision in January 2025, so in principle this could be reversed.