Jonathan Seitler QC and Miriam Seitler debate the significance of the much anticipated decision in The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm)
Will the FCA test case help make Covid-19 an occasion for rent cesser?
Yes, says Jonathan Seitler QC, barrister at Wilberforce Chambers
The FCA test case provides much needed certainty on the interpretation of insurance policies that could save tenants from paying their rent during the Covid-19 pandemic.
1. When I say “I told you so”, Miriam, it is not just to be boastful. It is also so that next time when I say something, you will know to take it seriously because it is likely to be proven correct.
As I explained in EG, 27 June, a lease will usually contain a rent cesser clause which is triggered where the premises have been damaged or destroyed by an “insured risk”, as defined in the lease.
In order for a tenant to get anywhere with this argument, it will need to show that the landlord is covered under the insurance policy.
The FCA test case helpfully addresses and interprets various specimen wordings in respect of claims by policyholders to be indemnified for business interruption losses arising in the context of the pandemic and the consequential actions and advice of the UK government.
In respect of various policies, the FCA was arguing that the policyholders were covered. The insurers were resisting this.
The decision provides clarity on the meaning and application of a number of words and phrases commonly appearing in such policies. The decision significantly eases a tenant’s (and landlord’s) task of reviewing the landlord’s insurance policy and assessing whether the landlord is covered. In many of the 21 sample policy wordings, the court came down on the side of the policyholder.
2. The decision is good for certainty and also leaves the door open for the rent cesser defence by generously interpreting the clauses of some policies – particularly those relating expressly to notifiable diseases.
A typical extension will provide cover for “interruption or interference with the business following any occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”. “Notifiable disease” is defined differently in different policies, but a common definition is “any human infectious or human contagious disease an outbreak of which the competent local authority has stipulated shall be notified to them”.
It was common ground between the FCA and insurers that Covid-19 became a notifiable disease, within the statutory definition of the Health Protection (Notification) Regulations 2010, on 5 March 2020. Other disease clauses required the disease to occur in the “vicinity”, rather than within a certain mile radius of the premises. Vicinity is then defined as “an area surrounding or adjacent to the premises in which events that occur within such area would be reasonably expected to have an impact on the insured or the insured business”.
The court found for the FCA on most points relating to the disease clauses: there would be an “occurrence” of Covid-19 within an area when at least one person who was infected with it was in the relevant area, regardless of whether they had been diagnosed with it or not or whether they were symptomatic or not.
Similarly, “vicinity” (when defined in similar terms to the definition above) was capable of referring to an extensive area, possibly embracing the whole of England and Wales.
Further, the court rejected the insurers’ argument that the 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.
3. The court also addressed what is referred to as “prevention of access” clauses: for example, cover for loss and damage resulting from “prevention of access to the Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property”.
The insurers had conceded that “prevention” does not require physical or legal impossibility and that access for a limited purpose which was not a breach of regulations requiring closure, such as to switch off the electricity or to carry out urgent maintenance, would not preclude there being a prevention of access.
The court drew a distinction between “prevention” and “hindrance” or “impairment”. Prevention requires closure of the premises for the purposes of carrying on the business as defined in the policy schedule. So, for example, a pub that did not previously operate takeaway service but started to do so during the lockdown will constitute a prevention of access because this entails a fundamental change from the business as described in the policy schedule. However, where the pub or restaurant already had a takeaway service (more than a de minimis part of the business) prior to the government actions or advice, there is not a prevention of access, as the policyholder and his employees are not prevented from accessing the premises for the purposes of carrying on that part of the existing business which involves providing the takeaway service.
In contrast, even this latter situation could be described as involving a “hindrance of access”. The court went further and accepted that the social-distancing guidelines and the specific regulation requiring people not to leave their homes without reasonable excuse could be said, in a given case, to have hindered use of insured premises, in the sense that it either prohibited a potential customer from visiting non-essential retail premises at all or only permitted that customer to do so for the purposes of essential purchases.
4. The court also interpreted a number of other phrases, common to relevant clauses of insurance policies: this assists in interpreting insurance policies, but also leases, where those same terms sometimes appear.
“Inability to use” was interpreted more narrowly than hindrance or disruption, and although fact-dependent, was regarded as being unlikely to apply in the circumstances.
“Incident” was given a narrow meaning, as was “event”, requiring something happening at a particular time, at a particular place and in a particular way: it was regarded as a misuse of language to describe the pandemic as “an incident”.
“Competent local authority” means whichever authority is competent to impose the relevant restrictions in the locality on the use of the premises, including central government.
”Restrictions imposed” requires something mandatory and with the force of law.
Vicinity, when undefined, has a local connotation and could not encompass the entire country.
5. A property litigator will also note the court’s willingness to fudge the distinction sometimes drawn in insurance policies between physical and non-physical damage. Many of the policies on their express terms referred to “the incident”, “incident” being defined as loss, destruction or damage to physical property.
Despite this express reference to physical property, in respect of a number of policies, the court, by its own admission, said that this needed to be “manipulated” so that it is applicable to non-damage perils: the opposite result would be “commercially surprising”. Tenants defending rent claims will be asking a court to perform a similar manoeuvre with a rent cesser provision that is only triggered if the premises are “damaged or destroyed”.
The court’s willingness to ignore the requirement for physical damage on the express terms of the policy will be a welcome approach for tenants.
So Miriam, I am not saying that the rent cesser argument is fully made out yet. But an important hurdle has been cleared. Much like Oldham Athletic were in 1981 – lying in fifth place in the old Division 2 just a few points off automatic promotion, with only three games to go – we’re nicely placed.
So too is the rent cesser argument.
No, says Miriam Seitler, barrister at Landmark Chambers
The FCA test case does not provide as much certainty as you suggest but leaves much to depend on the facts of the individual business.
1. Any property litigator reading the FCA judgment will appreciate how detailed and repetitive it is, and that it strays far beyond the comfort zone of any property litigator, into the unfamiliar world of insurance law. The bottom line is that it will always turn on the specific wording of the particular insurance policy, and the circumstances of each business.
2. I wouldn’t get so excited about the court’s interpretation of the disease clauses. Many insurance policies define “notifiable diseases” by a closed list, and without reference to the statutory definition. The policyholder’s claim won’t get off the ground where Covid-19 does not appear on that closed list, which it rarely does.
3. Many issues were left by the court to depend on the factual circumstances. In particular, the court was reluctant to reach any firm decision on whether the social-distancing guidance itself and the regulation requiring people not to leave their homes without reasonable excuse will be sufficient to amount to “hindrance of access” or “hindrance of use”.
This leaves a major question open for businesses, perhaps primarily in city centres, that were not required by regulations to close down but in practice, owing to the social-distancing rules and the fact that the entire country was being strongly discouraged from leaving their homes, could not feasibly and commercially continue to operate during the lockdown. These tenants will be no closer to establishing whether the insurance policy covers their landlord.
The court left the parties in the dark too on the interpretation of the phrase “inability to use” which although not requiring total closure would not encompass any and every departure from normal use.
Similarly, the court declined to form any definite conclusions on the question of what type of proof could be sufficient to discharge the burden of proof on the insured as to the prevalence of the disease in order to establish cover.
For example, what nature and extent of evidence would be needed to prove, on the balance of probabilities, that there had been a case of Covid-19 in a certain mile radius of the premises. Despite this being perhaps the most important practical issue for policyholders wanting to make a claim, the court rather dodged the issue by stating that the relevant evidence as to prevalence will vary according to the particular timing and location of the claim and different inferences might be drawn from a combination of underlying data in different contexts.
4. The decision, unsurprisingly, does not address the real obstacle for tenants relying on the rent cesser provisions of the lease – the need for physical damage to premises. It must be remembered that the insurance policy is only the first hurdle for the tenant – the second, and often more significant, hurdle is the terms of the lease itself.
The court’s efforts to stretch the interpretation of physical damage in an entirely different context (the trends clause) of an entirely different contract (an insurance policy rather than a lease) is irrelevant and goes nowhere in helping the tenant’s arguments on the lease. The fact that the court was prepared to elide the distinction between physical damage and non-physical damage in an insurance policy is no guarantee that a different court would take the same approach to a lease.
5. It could all change on appeal. Given that the case is estimated to affect some 700 types of policies across over 60 different insurers and 370,000 policyholders, and the obvious impact of the result for insurers, an appeal is expected. Any appeal is anticipated to leapfrog the Court of Appeal and go directly to the Supreme Court, again on an expedited basis.
The rent cesser argument is no more “nicely placed” than Oldham Athletic are today.
