(Read with . pdf version <here>) 17th April, updated 27th April 2020
There has been a lack of clarity for a long time now – for insurers, adjusters and customers – over certain aspects of BI policies. For example, there is often a big difference between the technical meanings for words in a policy and the way those words are used in everyday business.
This often means that insurers believe that the words mean one thing whilst the insured parties believe that the words mean another. Coupled with that the re-use of policy clauses, drafted in a hurrry at the behest of marketing department, the interpretation of the Ombudsman, statutory interpretation guidance in the High Court and the bias introduced by consumer law or common law, you have a recipe for material disputes.
The Financial Conduct Authority, that regulates the sector, announced on 1st May 2020 that it would “bring to court what it believes are the key relevant cases” in order to provide guidance (which became known to most people at the earliest on 2nd May) and giving until just 5th May for “comments on its proposal to help customers in temporary financial distress” and on how “to assess the value of insurance products” by 15 May, making it impossible for most people to effectively comment.
(The analysis of how to assess the value of insurance products is something that properly instructed, would take many days to properly research and comment upon).
This FCA move does not bode well for the insured parties as every case is different and it is unlikely that the FCA will present the case with the force that class-litigants would have done, whilst the insurers will have had weeks (not days) to marshall their arguments for non-payment).
The fact is that similar claims can end up with different outcomes, depending on the insurer’s interpretation of the policy and upon who you use as your lawyer.
In June 2009, the Chartered Institute of Loss Adjusters (CILA) convened a seminar to highlight recurring and significant BI issues encountered in practice; however this seminar has been criticised as being overly insurer biased, which is not unusual given that Loss Adjusters typically seek to reduce the insurer’s exposure.
The material damage proviso is an operative clause in some policies, and set out separately in others, but typically it is not readily identified in policy wordings and there is sometimes no heading entitled ‘Material Damage Proviso’. A typical material damage proviso might read:
[The Operative clause will trigger] provided that at the time of the happening of the damage there shall be in force an insurance covering
the interest of the insured in the property at the premises against such damage and that payment shall have been made or liability admitted therefore under such insurance.
The main purpose of the material damage therefore has been to ensure that sufficient funds are available to facilitate reinstatement, something necessary to mitigate the BI loss, coupled with subsidiary objectives of requiring actual physical damage to the property and so that there is no need to duplicate the work of investigating cause and considering the application of any clauses precedent to liability. There is, however, no requirement for the property insurance to be adequate, or for cover to be on a reinstatement basis and the proviso is an all or nothing event, being either satisfied (when trigger arises or not satisfied (when there is no trigger of the relevant cover) and this is irrespective of the underlying commercial sufficiency of the cover.
The material damage proviso was conceived when the various covers were purchased as separate policies and since inception of the clauses, not only has commercial “combined coverage” become the norm, but also the breadth and availability of BI extensions has increased. In many cases, the policy wordings have not been properly addressed, leaving material ambiguity in the wording in some cases and in other cases leaving a wide variation in extension wording.
In recent caselaw, judges drew a distinction between the type of interest covered by the business interruption policy and the insurable interest necessary to insure property under a material damage policy. It was held that business interruption was a broad cover and different to material damage and the business interruption cover clause only required the property to be used by the insured for the purposes of the business at the premises and that unlike material damage cover which required a proprietary or contractual interest in the property, BI cover simply required and insurable interest and illustrated the wider and more lateral judicial interpretation that is given to business interruption policy coverage. (see Glengate-KG Properties Ltd v Norwich Union).
Some policy forms relate the indemnity period to a notional reinstatement period, but this is also being found to be problematic for insurers as the notional reinstatement period may be, in relation to COVID19, not a nominal period for deep cleansing, but a period in which COVID19 is no longer considered to be a materially capable on premises contamination from air pollution, asymptomatic spread or clothing shedding and thus automatically covering the risk of second and third waves of COVID19.
It seems appropriate to observe that adequate insurance does not guarantee timely reinstatement, and inadequate insurance does not lead directly to delay, if alternative funds are drawn upon to drive mitigation.
Complicating all of this is also the creation of Declaration-linked policies. Declaration linked policies generally allow for a maximum recovery of 133.33% of the declared amount and in many cases there is no facility for any proportionate reduction should the declared amount be too low whilst in other cases, the declarations are not requested or offered. In many cases, Gross Profit may be (wittingly or otherwise) under-declared, such that insufficient premium is paid for the risk that is underwritten (a loss to the insurer) and insufficient cover established (a loss to the policyholders), but not identifiable easily in either case.
In the absence of any specific provision for proportionate reduction, insurers may not be receiving an adequate premium to reflect the risk underwritten and except in egregious cases of very significant under-declaration that would constitute a failure to adequately disclose the nature of the risk presented, there is little that an insurer can do under the policy.
The term ‘Damage’ is usually, but not always,
a defined term in policy wordings. Common definitions include ‘Loss or Damage’; ‘material loss, destruction or damage’, ‘direct physical loss or destruction of or damage to the Property Insured’, ‘accidental loss, destruction or damage to the Property Insured’.
As in Glengate, where a wide interpretation of policy wording was applied, so too a wide interpretation of damage applied to the BI policy. There has been a suggestion that any failure to satisfy the “damage” proviso might invalidate all of the BI cover, but not only would this produce an unfair resolution in the mind of the policyholder, it would also have a wider effect, namely that for most BI cover the policy coverage offered is worthless and therefore the Courts will be reluctant to take this interpretive approach and are likely to take the same position in the UK as in the USA and to apply a wide interpretation resulting in the amount of physical damage that has to occur in order to trigger a policy BI coverage as very small. For example, in BI coverage wording limited to damage to the insured property or personal injury, it is possible to argue that COVID19 coverage applies simply because customers and staff may be infecting the area without knowledge due to the asymptomatic spread of the disease or that COVID19 coverage was present due to recent scientific findings that there are valid virus particles found on ordinary air pollutant as well as on viral shedding risk from clothing. Potentially valid claims via the physical damage proviso may be more likely now than in the past, as recent wordings have required the physical damage proviso to be applied to property (used by the policyholder) and as the microscopic property damage can be therefore applied. (In the USA, there are already cases that have ruled that “microscopic property damage” falls within property damage wording and is adequate to trigger coverage.
In the case of certain professions such as dentists and surgeons, there is an additional argument that in addition to “microscopic property damage” triggering coverage, there is also an obligation inherent within the writing of the policy for that profession, that because the profession, unlike nail salons and tattoo and beauty parlours, deals with open wounds, the professional obligation to avoid contamination of open wounds is also relevant within the claims coverage circumstances and that once it is accepted that microscopic property damage has arisen, then there is a professional duty and responsibility to close the premises to avoid inevitable contamination of the open wound from that microscopic property damage and microscopic contamination.
This approach has been previously applied by the Courts, for example where aircraft at the same airport were insured under the same policy wording but the circumstances of the insured were different. Kuwait Airways aircraft, which were captured during Iraq’s invasion of Kuwait constituted a ‘loss’ because there was evidence that the assets of Kuwait Airways were a specific target of the Iraqi invasion and that Iraq intended both to capture them and treat them as acquired from the moment the airport was captured and therefore once the airport had been captured these assets were effectively permanently lost to Kuwait Airways with no real prospect of recovery. By contrast, an aircraft belonging to British Airways that was also captured during the same operation, was held only to be a temporary loss because there was a realistic prospect of recovery by UK forces and the permanent loss damage as defined had not occurred in
that case. (Scott v Copenhagen Reinsurance).
In terms of COVID19, The Oxford English Dictionary defines ‘damage’ as ‘Harm or injury impairing the value and usefulness of something or the health or normal function of a person’, but there has been significant judicial consideration of the meaning of ‘damage’ in many different contexts, and just as with the interpretation of the word ‘loss,’ whether ‘damage’ within the meaning of the policy has occurred will be a question of fact and degree depending on the circumstances and on the nature and effect of what has been done and this question will need to be considered in the context of each individual claim. In general terms, however, ‘Damage’ must be damage to tangible property, albeit microscopic damage, as opposed to pure economic loss (which is generally not insurable on its own). In other words, physical alteration or change in the characteristics of the property rendering it less useful or valuable and/or which requires some remedial work or expenditure of money to restore the property to its former usable condition (and in the case of surgeries and surgeons, the low criteria for damage (physical alteration or change in the characteristics of the property rendering it less useful) means that the criteria for restoring the property to its formerly usable condition could be interpreted as requiring a deep anti-COVID19 cleanse after each patient, a commercially impractical step making mitigation impossible and thus triggering B.I. Coverage within the damage clause.
The damage need not be permanent as long as there is a physical alteration. For example, surface contamination or defacement, which can be cleaned, can still constitute damage. (See Promet Engineering (Singapore) Pte Ltd v Sturge & Others (The Nukila) , Tioxide Europe Ltd v CGU International plc and others 2005, Pilkington (UK) Limited v CGU Insurance plc ; Losinjska Plovidba v Transco Overseas Ltd (The Orjula)  ; Patricia Hunter and others v CanaryWharf Ltd (1997)