The BatesCarey COVID-19 coverage team has tracked over 200 cases in which courts dismissed COVID-19 business interruption claims brought by policyholders against insurers, including establishing our own precedent in Kentucky, Missouri, North Carolina, Ohio and Pennsylvania. While courts in the United States have been largely dismissing the policyholders’ efforts to create coverage for loss of use of property during a pandemic, slightly different issues presented to the United Kingdom Supreme Court and Irish High Court have garnered a different result discussed below. 

With respect to those coverage cases in the United States, the majority view clearly dictates that loss of use of property due to pandemic restrictions on public gatherings is neither a direct nor physical loss of property. See, Terry Black’s Barbecue, LLC v. State Automobile Mut. Ins. Co., Case No. 1:20-CV-665-RP, 2020 WL 7351246 (W.D. TX., Dec. 14, 2020); Bluegrass, LLC v. State Automobile Mut. Ins. Co., Case No. 20-cv-00414, 2021 WL 42050 (S.D.W. Va., Jan. 5, 2021). These courts recognized that commercial property policies are not intended to insure economic losses resulting from a suspension of operations that are entirely unrelated to the physical conditions at the insured premises. The courts’ reasoning in these cases exemplify the reasoning and direction of decisions in similar cases across the United States.

By contrast, the United Kingdom Supreme Court recently took a different approach in a “test case” filed by The Financial Conduct Authority against eight different insurers. In The Financial Conduct Authority v. Arch, et al., the Supreme Court issued an advisory opinion last month addressing three different coverage clauses from several sample policies:

• Disease Clauses, which afford coverage for business interruption losses resulting from the occurrence of an infectious or contagious disease, that is required to be notified to a local authority, at or within a specified distance of the insured premises;

• Prevention of Access Clauses, which provide coverage for business interruption losses resulting from the intervention of a public authority that prevents or hinders access to or use of the insured premises; and

• Hybrid Clauses, which combine the Disease and Prevention of Access Clauses.

With respect to the Disease Clauses, the Court rejected the insurers’ argument that the Disease Clauses are only intended to provide coverage for losses arising out of a local disease outbreak, not a nationwide (or worldwide) outbreak like COVID-19. The Court held that a single “occurrence” (diagnoses) of COVID-19 within the specified vicinity, and consequent business interruption, was sufficient to trigger coverage under the Disease Clauses. The Court also went so far as to hold that if a COVID-19 case occurs within the requisite vicinity and during the policy period, then the policy covers all effects of the virus on the policyholder’s business, including measures taken by the government in response to COVID-19.  Of course, in the U.S., government measures were taken to prevent public gatherings in general, and not in respect to any diagnosed virus within the property of any specific premises.

The United Kingdom Supreme Court held that the Prevention of Access Clauses in the policies before it required total inability to use or total loss of access to the insured premises. However, unlike the language and reasoning in over 100 U.S. decisions, the English court determined that total loss of access or prevention of access could apply to a discrete part of the insured’s business or its premises. For example, a retail shop that must close to in-store customers, but could still take orders via telephone, would satisfy the inability to use requirement under English law.

The Supreme Court also went to great lengths to address the issue of causation. The insurers argued that an insured risk did not cause the policyholders’ losses because the policyholders would have suffered losses regardless of the existence of an insured risk (i.e. the occurrence of disease within the specified vicinity or prevention of access or use of the premises) due to the widespread nature of the COVID-19 pandemic. The Court soundly rejected this “but for” causation theory, and in doing so, explicitly overruled prior Supreme Court precedent on the issue. The Court instead applied a more relaxed standard, holding that the coverage provisions could be triggered even if an insured’s losses were concurrently caused by an insured risk and uninsured risk(s). 

Following on the heels of the Supreme Court’s decision, the High Court of Ireland issued a ruling on February 5, 2021 that largely follows the reasoning of the U.K. Supreme Court. The Irish Court held that a Hybrid Clause similar to that addressed by the U.K. Supreme Court provides coverage for the business interruption losses incurred by several Irish pubs.  Relying heavily upon the U.K. Supreme Court’s decision, the Irish Court rejected the insurer’s argument that the Hybrid Clause responds to local, not nationwide or worldwide, outbreaks of a contagious or infectious disease. The Court held that the outbreak of COVID-19 within 25 miles of each of the insured premises (which was admitted by the insurer) proximately caused the closure of the pubs by the government, which, in turn, caused the insureds’ losses.  

As noted above, the U.K. Supreme Court’s opinion is, at its core, a legally binding advisory opinion, which likely opens the door for many U.K. policyholders (and now, Irish policyholders) to obtain coverage under the unique clauses addressed by the Court. However, notably absent from the provisions addressed by the Supreme Court, and the Irish High Court, is the “physical loss of or damage to property” requirement found in those commercial property policies addressed by United States Courts. The “physical loss of or damage to” property component has been central to nearly all of the 100 plus decisions to date dismissing COVID coverage lawsuits in favor of insurers, which have held that the virus, and resulting government orders, did not cause a physical change or alteration to the physical condition at the insured premises or property close to the insured premises. 

In the United States, deaths continue to mount, and the coronavirus pandemic and broad government orders intended to slow its spread have taken a toll on the global economy as a whole. U.S. courts have recognized, however, that commercial property policies are not the solution to the economic losses sustained as a result of the pandemic and related government orders. Instead, commercial property policies stand ready to respond to a different type of loss that emanates from physically changed conditions within the four walls of an insured location. While some policyholders have touted the United Kingdom Supreme Court’s ruling as providing certainty for COVID-19 business interruption claims, based upon the significant differences in the policy language at issue, the United Kingdom High Court’s decision will not alter the reasoning of the over 100 decisions in the United States premised up very different wording and legal precedent.