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Recent Legal Developments in Business Interruption Insurance – Coverage Issues and Wider Implications perhaps for the Middle East

The English High Court has recently handed down a judgement in a test case related to “Business Interruption” insurance in the context of the COVID19 pandemic, which provides an interesting angle in respect of coverage issues and general English law [insurance] contract interpretation. The Financial Conduct Authority v Arch and Others[1] essentially addressed the legal construction of business interruption policy provisions including the Extensions of coverage provisions related “Disease” clauses and the Exclusions, which the insureds had made claims against in light of the current COVID19 pandemic for losses arising from the Government actions to curb spread of the virus. Twenty-one sample insurance coverage wordings were reviewed from eight UK insurance companies by the High Court as part of their technical legal analysis and contract construction to ascertain, whether and to what extent those coverage wordings would respond to claims made relating to the business interruption arising from the COVID19 pandemic. The Financial Conduct Authority (FCA) issued proceedings for and on behalf of the policyholders under the financial Market Test Case Scheme pursuant to Practice Direction 51M given the importance of the matter.

In summary, the proceedings dealt with coverage issues under the policies of insurance and whether those provisions of coverage should respond to the insureds’ claims. The FCA presented arguments, namely, there was cover under the insurance Extensions, specifically Extension vii (a) (iii) –“interruption of or interference with Business during the Indemnity Period following……..any occurrence of a Notifiable Disease within the radius of 25 miles of the premises” based on there being a Notifiable Disease in all parts of the UK from 6 March 2020, the occurrence of that Notifiable Disease was within 25 miles of the insured’s premises, when a person or persons with COVID19 was within 25 miles of the premises, there was interruption and/or interference with the business as result of UK Government intervention (i.e. lockdown, social distancing, travel restrictions and closure of businesses), and that there was sufficient causation as to the losses incurred based on the link between the business interruption/interference and the occurrence of COVID19. Insurers presented three counter arguments insofar as they contended (i) that there was not sufficient causation between the business interruption and the occurrence of COVID19 – i.e. “Had there been no COVID19 within the 25 miles radius of the insured premises, the insured’s business would still have suffered losses in any case with the proposed measures that the UK Government had implemented” – the well know “but for” test, (ii) there was no cover for “epidemics” pursuant to General Exclusion L, and (iii) reliance on the “trends clause” in the Business Interruption section of the coverage terms. The High Court found in favour of the FCA in respect of the key issues while at the same time providing further guidance on the construction of coverage provisions for the insurance contracts and those related to coverage triggers for add on insurance extensions related to Business interruption Insurance. It is important to note that different findings were made in respect of each insurance policy, where Mr Justice Butcher and Lord Justice Flaux found in favour of some of the insurer’s wordings.

The current coronavirus outbreak (since 31 December 2019 from Wuhan, China[2]) have wide implications for the (re)insurance industry globally both in terms of financial impacts and future risk management. The Middle East, including the United Arab Emirates insurance markets have also been impacted by recent exposure to the COVID19 pandemic, especially those insurance coverages with added business interruption coverage, yet many of these coverages have not triggered or indeed not responded to claims either based on the absence of “notifiable diseases” extension and/or “disease clause” in the policy terms and conditions or simply based are arguments that key coverage of risk, such as damage to property in a “Properties All Risk” or “Contractors All Risk” only responds to physical damage and not non-physical damage such as COVID19 even to the extent the policy may include a disease clause. Business Interruption insurance indemnifies the insured for loss arsing out of or connected to trading loss and expenses, normally suffered as a result of physical damage to the insured property and normally forms part of a wider composite insurance such as a property all risks insurance. In many cases, these insurance coverages provide extensions and add-on to the cover such as losses arising from notifiable diseases, which for all intents and purposes may not constitute physical damage to the property[3]

The case of Financial Conduct Authority v Arch and Others[4] may have wider reaching implications for the entire global insurance/reinsurance markets and more specifically the Middle East, where many of those coverage provisions in respect of insurance wordings are used. By way of illustration, it is common practice for insurers in the United Arab Emirates to use London Market Wordings (LMW) through, for example the Lloyd's Wording Repository. Often coverage provisions and their wordings are not given the due consideration they need when they are placed in different legal systems with a foreign language requirement. This is the case in the United Arab Emirates, where often the policy wordings are not translated in Arabic language, despite a regulatory requirement for this condition to be met for most lines insurance coverages.[5] It is only when local litigation arises in the courts that many of these insurance coverages and their wordings are then translated into Arabic and often this puts the insurers on the backfoot insofar as many of the English law centric coverage provisions will be unknown and foreign to the local courts and the appointed experts given the operation of a civil law system in the United Arab Emirates.

The High Court’s judgement in Financial Conduct Authority v Arch and Others presents a very interesting illustration of the legal analysis used in respect of the contractual construction of insurance policies and the how the Court addressed the issue of causation under English common law and statute. The Court facilitated the cannons of legal contract construction, such “ejusdem generis” (of the same kind), “noscitur a sociis” (known by its association) and “Contra Proferentem” (where there is doubt in the meaning it will be construed against the party putting it forward) in terms of general principles of construction[6] Indeed the High Court went on to suggest that they could apply the principle of Contra Proferentem as to the wordings found at General Exclusion L “epidemic” but thought it not necessary[7]

The High Court raised the provision of section 55(1) the Marine Insurance Act 1906, which codified the common law concept of “proximate causation” – “the loss claimed by the insured and such interruption or interference with the Business.” That is, “the requirement that the business interruption or interference should follow one of the (a) to (d) (insurance perils) is, as we see it, a requirement within the composite peril insured.”[8]

It is of note that case of Financial Conduct Authority v Arch and Others was determined in the absence of live factual evidence and without expert evidence, the latter of which is commonly used in the local courts of United Arab Emirates for all type of disputes including insurance disputes. Insurance/reinsurance dispute in the United Arab Emirates either follow a path of local court litigation, arbitration (both institutionalised and ad hoc) or submission to the Insurance Authority’s (the current regulator of insurance in the United Arab Emirates), Insurance Disputes Committee, which is a recently established body to deal and mediate insurance disputes in a less informal and cost effective manner.[9] In terms of applying principles of English and common law related to insurance/reinsurance in respect of any of these dispute forums based on local insurance coverage with LMW, there is some limitation with local courts but perhaps more flexibility with other forms of dispute forums including arbitration and the Dispute Committee. It may of course be possible to adduce expert evidence in respect of the policies wordings to ascertain their true intent and meaning and this is permitted in other Middle East insurance dispute forums, such as the Kingdom of Saudi Arabia, where an independent insurance dispute committee presides over insurance related disputes.[10]

Tools of interpretation in respect of coverage and causations issues are codified under United Arab Emirates law and found both in the UAE Civil Code and UAE insurance laws. [11] Those aids to construction and interpretation, while not the same as the English law common principles of construction do provide a degree of assistance when a contract disputes arises in the courts of the United Arab Emirates and there are also similarities to some of the English common law principles. By way of illustration, Article 266 of the UAE Civil Code provides that “doubt is construed in favour of the debtor”. While the wordings may not be appropriate (“debtor”) is does however have a close parallel to the maxim principle of Contra Proferentem. The UAE insurance laws as well as the UAE Civil code also provides for the condition that any exclusion clauses or clauses that result in arbitrary outcomes to the insureds must be conspicuous and highlighted in a different text or colour to warn the policyholder of the potential limitations. In the backdrop of the Financial Conduct Authority v Arch and Others it is clear that “General Exclusion L” excluding “epidemics” would need to be made conspicuous within the policy terms and conditions, thereby altering the potential policyholder of the exclusion/limitation and perhaps in an ideal world challenging the exclusion before the policy and coverage is incepted. Indeed, Article 266 of the UAE Civil Code might be of some assistance here but that cannot be guaranteed.

What then should insurers/reinsurers in the Middle East be considering in terms of limiting exposure and mitigating potential losses and what should actual and potential policyholders consider as coverage fit for purpose considering the COVID19 pandemic? Insurers/reinsurers should take stock and review their existing coverage provisions to avoid any exposure in terms of triggering claims, especially if they are using LMW, where English common law construction might be applied based on the chosen dispute forum used in the policy wordings. Actual and potential policyholders will need to consider whether the insurance coverage meets their needs and responds to any losses for business interruption related to future epidemics or pandemics, which should always include a disease provision/clause at the very least.

It is anticipated that (re)insurers will have some part to play in terms of a shift of risk. This will give immediate need for policy coverage reviews including insuring clauses, type of insurance coverage and exclusions.

Insured businesses will need to carry out risk assessments of their current supply chains and look for alternative measures, review contractual provisions to explore whether any of those provisions provide protection. In addition, all insurance coverage should be reviewed and analysed to explore whether and to what extent the policy would respond to future pandemic outbreaks.

Certain coverage terms that addresses several areas of coverage (composite insurance), tend to be broad in scope, where insureds have relied on these as comfort for an event such as the coronavirus outbreak. These could be, for example, “Properties All Risk”. However, these coverages may not be appropriate and may not respond to an event like the coronavirus outbreak as opposed to a more tailored insurance coverage, such as a business interruption insurance coverage with a “notifiable diseases” extension in the policy terms or additional endorsement. This is then normally triggered by Government/Ministerial Orders. Note, that many business interruption insurance policies do not include this provisions and specialist insurance/legal advice should always be sought.

Finally, it is certain that the Coronavirus will, without a doubt, trigger litigation, insurance claims and coverage disputes in 2020 and beyond and this will have implications for the global insurance market and capacity in genal.

The High Court’s judgement in Financial Conduct Authority v Arch and Others will no doubt change the way insurers/reinsurers approach risk to pandemics.

[1] Case No: FL-2020-000018 – The Financial Conduct Authority -v- Arch Insurance (UK) Limited & Others – Lord Justice Flaux and Mr Justice Butcher – In the High Court of Justice Business & Property Courts, Queen’s Bench Division Financial List – Royal Courts of Justice Strand, London - https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-ruling-case-management-conference-26-june.pdf

[2] Named COVID-19 by the World Health Organisation

[3] Several District courts in the United States have settled that actual contamination of property may constitute property damage and if the contamination results in business closures and losses insurance claims are triggered.

[4] https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-ruling-case-management-conference-26-june.pdf

[5] While the UAE Civil Code provides that insurance policies must be translated into Arabic, Some UAE lines of insurance coverage are not required to be translated into Arabic such as marine based on a UAE Insurance Circular issued by the Insurance Authority.

[6] See paragraph 67. and 71. of the Approved Judgment

[7] See paragraph 118 of the Approved Judgment – “Finally, under this heading we should say, while we do not consider it necessary to resort to it, this would be one of the few cases in which it would be appropriate to apply a principle of Contra Proferentem

[8] See paragraph 94. of the Approved Judgment

[9] See Decision No.33 of 2019 – of the UAE Insurance Authority

[10] Rules and Regulations for the Operation of the Committees for the Resolution of Insurance Disputes and Violations in the Kingdom of Saudi Arabia

[11] See Articles 265 and 266 of the UAE Civil Transactions Law and Federal Law No.6 of 2007 (As amended)
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