I suspect that it was inevitable that insurance claims for business losses arising out of the pandemic would have to be resolved by the courts. The losses suffered are significant and the insurance industry is being asked to meet some significant claims.
The Supreme Court’s decision in Financial Conduct Authority v Arch Insurance Ltd and others [2021] UKSC 1; [2021] EGLR 12 (www.egi.co.uk/legal/business-interruption-insurance-hats-off-to-the-supreme-court) cleared the way for policyholders whose cover was not limited to physical damage to property to make claims. The first reported decision – Rockliffe Hall Ltd v Travelers Insurance Company Ltd [2021] EWHC 412 (Comm) – followed a few months later (www.egi.co.uk/legal/caught-between-a-rock-and-a-cliffe) with the claimant hotel failing because the loss it suffered was not covered by the terms of its policy.
In Various Eateries Trading Ltd v Allianz Insurance plc [2024] EWCA Civ 10, the Court of Appeal had to consider the effect of an aggregation clause. These clauses group underlying losses together to form a single claim. The claimant, VE, operates 10 Italian restaurants in London and the South East and was claiming losses of more than £16m arising from the government’s decision to close restaurants in March 2020 as well as subsequent restrictions placed on re-opened restaurants in September 2020. Allianz argued that the clause, which aggregated losses “that arise from, are attributable to or are in connection with a single occurrence”, had the effect of reducing the amount VE was entitled to claim to £2.5m.
The issues
At first instance, Butcher J ([2022] EWHC 3549 (Comm)) had to decide whether VE’s losses arose from a single occurrence, which Allianz argued was the initial outbreak of Covid-19 in Wuhan, China. Although he was prepared to accept that the initial human infection(s) in Wuhan could be described as a single occurrence which satisfied the requirements of the aggregation clause, Butcher J held that, as a matter of causation, it was the wrong event. It was, in legal terms, too remote from the losses which VE suffered.
Rather, he held that the UK government’s decisions on 16 March (to instruct avoidance of social venues) and 20 March 2020 (closing restaurants), as well as the later restrictions imposed on 24 September, were a single occurrence for the purposes of the clause. He did not accept that any renewal, change or relaxation in the restrictions placed on restaurants was a separate event. Nor did he agree with VE’s argument that, if any aggregation was to take place, it should be applied separately at each of the 10 sites.
The appeal
Males LJ (with whom Sir Julian Flaux and Newey LJ agreed) stressed that the correct approach to interpreting the clause was as set out by the Supreme Court in Arch: “…how the words of the contract would be understood by… an ordinary policyholder who, on entering the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.”
The judge then analysed the Federal Court of Australia’s reasoning in LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCASC 17 (which stressed that the correct approach was to construe the clause in a way that “advances the purpose of the cover” rather than “one that hinders it”) as well as numerous authorities on both aggregation (especially Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] EWCA Civ 688) and remoteness of damage as applied to aggregation (including Caudle v Sharp [1995] 4 LRLR 433 and Scott) to establish a number of key findings:
- The extent that remoteness was relevant depended on the true construction of the aggregation clause, which in turn rested on the extent the clause required a causal link between the events which might be aggregated. In this instance, the words “in connection with” meant the link could be weak.
- Remoteness was relevant when analysing each possible occurrence to which the clause might relate. The test, particularly where the link between losses (as here) only needs to be a weak one is not the same as deciding that all losses flow from a dominate or proximate cause. That is a stricter test and not relevant when construing aggregation clauses.
- The approach suggested in Caudle was correct: “The three requirements of a relevant event are that there was a common factor which can properly be described as an event, which satisfied the test of causation and which was not too remote for the purposes of the clause.”
- The analysis required is intuitive and appellate courts should not interfere with the trial judge’s evaluation unless “the conclusion is plainly wrong in the sense that it was not reasonably open to the trial judge or… the judgment discloses some error of principle”.
Using that analysis, Males LJ held that Butcher J was correct. In particular, his conclusion that the outbreak in Wuhan was too remote from VE’s loss was one which he was entitled to reach. As Males LJ put it: “His decision involved both an intuitive exercise of judgment and the analysis and weighing of all the relevant circumstances, in which he, as the trial judge, after a trial lasting several days which included expert evidence, was thoroughly immersed. There was in my judgment no error of principle or other comparable error in his approach which would entitle this court to interfere.”
Key point
- The Court of Appeal has provided a helpful summary of remoteness of damage and aggregation clauses in insurance policies
Stuart Pemble is a partner at Mills & Reeve
