Written by Mark Templeman KC of Essex Court Chambers
On 17 October 2022, the Commercial Court (Butcher J.) handed down judgments dealing with selected issues in the three Covid-19 business interruption insurance claims most recently to have come before the court: Stonegate Pub Company Ltd v MS Amlin Corporate Member Ltd and ors; Various Eateries Trading Ltd v Allianz Insurance plc; and Greggs plc v Zurich Insurance plc. All concerned claimants involved in the hospitality industry. The issues determined were either common to all three actions, or at least sufficiently closely related to make their determination at a single hearing convenient. Each concerned claims made for business interruption losses resulting from the Covid-19 epidemic and government action taken in response, under the “Marsh Resilience” form of wording (the wording dealt with in the FCA test case as “RSA 4”). This note deals with the judgment in Stonegate, the “lead” action, in which the court’s conclusions of principle are most fully set out. Differences between the judgments derive either from differences in formulation of the issues in each action, or from discrete arguments raised in separate actions.
The issues, which were determined on the basis of facts agreed or assumed in each case, concerned, broadly:
- identification of the trigger for cover under the relevant policies;
- determination whether the losses or some of them could be aggregated to one or more occurrences;
- determination whether the relevant losses were proximately caused by an insured event; and
- determination whether it was necessary for the assured to give credit, against any claim, for payments received under the furlough scheme and/or for business rate relief.
Additionally, the judgment in Stonegate dealt with the application of an additional increased cost of working (“AICW”) sub-limit in the policy in that case.
In Stonegate, Butcher J. concluded that:
- The “trigger” for cover was a covered event within the meaning of the insuring clause. In the case of “disease” cover, there were as many triggers as there were cases of Covid-19 discovered at an insured location or occurring within the vicinity of the same (as that term was defined by the policy). In the case of “enforced closure” cover, there were as many triggers as there were insured locations closed or partially closed under relevant compulsion or instruction; subject to the caveat that continuance, reiteration or renewal of any closure would not constitute a further trigger unless the location had reopened in the meantime. In the case of “prevention of access” cover, there were as many triggers as there were actions or advices of relevant authority in the vicinity of each insured location which prevented or hindered access to the same.
- In relation to aggregation, there was neither (as insurers contended) one single occurrence to which all business interruption losses could be aggregated as one “Single Business Interruption Loss” (“SBIL”) (a term defined in the policy), nor (as the assured contended) as many occurrences as there were individual cases of Covid-19 per insured premises (“disease” cover), individual closures per premises (“enforced closure” cover) or individual action or advice per premises (“prevention of access” cover). On the authorities, an occurrence was synonymous with an event: something which happens at a particular time, at a particular place and in a particular way. Whether there was an occurrence was to be determined from the perspective of an informed observer placed in the position of the assured. However, there was no previous authority dealing explicitly with the time at which the assessment was to be performed, and little concerning the state of knowledge to be attributed to the reasonable observer. On these questions, Butcher J, concluded that the assessment should be made at the earliest point at which a reasonable observer in the position of the assured would seek to decide whether there was one occurrence (on the facts, and given the nature of the losses, relatively shortly after business interruption loss started to be incurred, in March/April 2020) and that there should be imputed to the reasonable observer (at least in the absence of exceptional circumstances) only that knowledge which would have been reasonably available to an observer at that time – i.e. not knowledge of matters which were revealed only subsequently. Applying those principles, and as a matter of construction of the SBIL definition, Butcher J. concluded that there were two causative occurrences by reference to which losses may be aggregated: the decision taken at the COBR meeting on 16 March 2020 that the public should be advised to avoid pubs, restaurants and clubs; and the decision announced by the Prime Minister on 20 March 2020 to instruct all pubs, bars and restaurants to close and not reopen. The Judge recognised that there might be overlap between the losses attributable to these two occurrences, in which case all such losses would form part of the SBIL referrable to the decision of 16 March. He also thought it possible that the announcement of the lockdown on 23 March 2020 might be a further occurrence; but that was not a case advanced by assured or insurers.
- As to causation, it was common ground that only those losses proximately caused by insured events occurring during the period of insurance were recoverable. However, issues arose as to the period during which losses could be said to have been proximately caused by the relevant insured events. Stonegate claimed all business interruption losses it suffered as a result of the occurrence of disease within the vicinity of its insured premises up to the end of the 36 month indemnity period provided by the policy (30 April 2023), on the basis that all such losses were proximately caused by covered events occurring within the policy period (1 May 2019 to 30 April 2020). Stonegate advanced five arguments in support of its claim: (i) the FCA test case had concluded that all cases of Covid-19 were of equal causative effect, which conclusion precluded any argument that occurrences of the disease within the policy period were not causative of government action or consumer behaviour after the end of he policy period (but during the period of indemnity); (ii) government action with the indemnity period was caused by occurrences of the disease within the policy period; (iii) consumer behaviour during the indemnity period was caused by occurrences of disease within the policy period; (iv) insofar as government action or consumer behaviour outside the policy period but within the indemnity period was caused by occurrences of the disease after the policy period, those cases were themselves caused by cases occurring within the policy period; and (v) given the number of cases of Covid-19 at the end of the policy period, Stonegate was in the grip of the peril and/or the subject-matter insured had received its “death blow”, so that further loss suffered thereafter was recoverable. Butcher J. rejected each of these arguments. The first represented a fundamental misunderstanding of the FCA test case, which involved only a finding of fact that all cases occurring up to the time of the government measures there under consideration (up to 4 July 2020) were equally caused by all cases which had then occurred. The second was wrong because government action was dictated by the incidence of disease from time to time, and was not therefore caused by occurrences within the policy period. The third was wrong because initial occurrences of disease did not have a continuing impact on consumer behaviour. The fourth was wrong because occurrences of the disease after the policy period were not proximately caused by occurrences within the policy period: at most, it might be said that the former would not have occurred but for the latter. The fifth was wrong because the “death blow” principle was inapplicable on the facts: loss caused by occurrences of disease after the end of the policy period was not the mere playing out of the effect of earlier occurrences, but depended on new government actions in new economic and political circumstances which did not follow in the ordinary course from earlier occurrences.
- It was necessary for Stonegate to give credit against its claims for payments received under the furlough scheme and (depending on the accounting treatment accorded to it) for business rate relief, as a matter of construction of the “reduction in turnover” clause in the policy. Butcher J. indicated that he would, in any event, have concluded that credit should be given for those benefits on the basis of normal principles of subrogation.
In terms of general principle, the judgment in Stonegate provides new guidance on the application of the “reasonable person in the position of the assured” test to determine whether a plurality of related losses may be said to have been caused by one event or occurrence for the purpose of aggregation (see KAC v KIC  1 Lloyd’s Rep. 664, and the Dawson’s Field award there quoted). It is now clear that the time at which the assessment must be made depends upon the nature of the losses: there is a distinction between immediate physical destruction (the context, for example, of the Dawson’s Field award) and business interruption loss of the type which gave rise to the claim in Stonegate; in the latter case, the test should be applied at the time when the assessment is first likely to be made, rather than when loss is first suffered. Further, the knowledge to be attributed to the reasonable person is that which a reasonable person would have had at the time when the assessment must be made, rather than knowledge of the true facts as they may come to be known months or even years later (c.f. the suggestion of Rix J. in KAC v KIC to the effect that the assessment must be based on the true facts and not simply the facts as they may have appeared at the time). Finally, Stonegate serves to emphasize the importance of the requirement (often overlooked) that the causal connection between an occurrence and the losses which may be aggregated to it, while it may fall short of proximity, must not be too remote (see Caudle v Sharp  4 Re LR 389): thus, the initial case of human infection with the SARS-CoV-2 virus in Wuhan, China was identified as an occurrence which satisfied the (relatively weak) causal test required by the SBIL definition in the policy in Stonegate, but was nonetheless too remote from the losses to provide a basis for aggregation.
The practical effect of Stonegate will depend, of course, on whether the judgment is appealed, and the outcome of any such appeal. Stonegate has indicated an intention to appeal, but no application for permission to appeal has yet been determined. As it stands, the judgment is likely to be of practical significance not only in relation to those actions currently proceeding in the Commercial Court which concern business interruption insurance claims (of which there are a number), but also in relation to reinsurance disputes arising from such claims. The “Marsh Resilience” wording has generated very significant business interruption claims to the property catastrophe reinsurance market, and a number of issues are currently in dispute, notably in relation to aggregation. There are similar Covid-19-related reinsurance disputes in the travel and contingency markets (the latter concerned largely with cancellation losses). All are likely to be affected by the outcome of the Stonegate litigation.
This note is provided free of charge as a matter of information only. It is not intended to constitute, nor should it be relied upon as constituting, legal advice, and no responsibility is assumed in relation to the accuracy of the contents of the same as regards anyone choosing to rely upon it.