COVID-19 BI Losses: English High Court confirms loss of use is not equivalent to physical loss of property
The recent judgment in the FCA business interruption test case ruled on the interpretation of notifiable disease and non-damage prevention of access extensions under BI policies. However, one issue that the test case did not consider was coverage of COVID-19 BI losses under the principal BI insuring clause (which typically provides cover for BI arising out of "damage" to insured property).
Accordingly, although the FCA had not sought to argue that COVID-19 constitutes or creates physical property "damage" under English law, it remained open to other insureds to do so. However, the decision in TKC London Limited v Allianz Insurance Plc( EWHC 2710 (Comm)), handed down on 15 October, appears to confirm the difficulties for insureds seeking to conflate COVID-19 with physical damage.
The claimant, TKC London Limited ("TKC") runs a café restaurant in South Kensington (the Café"). The Café was closed from 12 March until 4 July 2020 as a consequence of nationwide lockdown restrictions. During the period of closure, TKC's property damage and business interruption cover (the "Policy") was provided by Allianz Insurance Plc ("Allianz").
TKC issued a claim against Allianz, arguing that the Policy's business interruption section (the "BI Section") responds to TKC's BI losses arising out of the lockdown. Allianz denied liability, and applied for strike out of the claim.
The BI section
The BI Section's insuring clause provides cover for "…Business Interruption by any Event…". "Business Interruption" is defined as:
"Loss resulting from interruption of or interference with the Business carried on by the Insured at the Premises in consequence of an event to property used by the Insured at the Premises for the purpose of the Business."
Event is defined as:
"Accidental loss or destruction of or damage to property used by the Insured at the Premises for the purpose of the Business…"
Neither the BI Section nor any other section of the Policy contains any non-damage extensions of cover of the type recently considered by the Court in the FCA test case.
TKC had sought to argue that its losses were covered on the basis that:
- Its inability to use the premises amounted to a "loss of property" for Policy purposes.
In support of this proposition, TKC noted that the definition of "Event" did not require that the loss of property must be physical. In advancing this line of argument, TKC relied heavily upon the recent Canadian decision of MDS Inc. v. Factory Mutual Insurance Company (2020 ONSC 1924) ("MDS Inc"). That decision rejected a narrow interpretation of "physical damage" limited to "corporeal, tangible damage", instead favouring a broad definition, "to include impairment of function or use of tangible property".
- Alternatively, during lockdown TKC had suffered damage to property in the form of deterioration of stock, which resulted in (i) business interruption caused by the inability to sell or use the stock when the premises reopened and / or (ii) an Increased Cost of Working. TKC denied that this damage to stock was "gradual deterioration", excluded under both the BI Section and the Policy's Property Damage section (the "PD Section"), on the basis that the cause of the deterioration was the lockdown, which was not gradual.
These arguments were rejected by the Court, who favoured Allianz's position. In respect of TKC's principal argument, the Court concluded that the phrase "loss of property" in the BI Section could not be interpreted as including mere temporary loss of use of property. The judge agreed with Allianz that the term "loss" must take colour from the context in which the word is used. The BI Section's definition of "Event" included the word “loss” alongside the phrase “accidental loss or destruction of or damage to property”. The Court therefore held that these words strongly suggested that "loss" was intended to have a physical aspect.
Turning to TKC's alternative argument, the Court noted that the definition of Business Interruption itself required the interruption or interference to be "in consequence of an event to property used by the Insured at the Premises”, a phrase which (per Allianz's arguments) commonly denotes proximate causation. The Court rejected the idea that the deterioration in TKC's stock during lockdown in any way caused interruption or interference to the business: the deterioration (and consequent Increase in Cost of Working) was a consequence of the interference, not its cause. The cause of damage to stock was "gradual deterioration", and therefore such damage was excluded from cover under both the Policy's PD and BI Sections.
In light of the above, it was held that the TKC claim was bound to fail, and summary judgment in favour of Allianz was granted.
Since the outbreak of COVID-19, there have been significant doubts over the merits of arguing that the presence of COVID-19 at an insured property amounts to physical damage. In English law, the definition of physical damage is a change to the physical subject matter of property, whereas COVID sits on property and can be easily removed. However, following the above-referenced Canadian decision of MDS Inc, as relied upon by TKC, there had been a question mark over whether a broader definition of "Damage" than had hitherto been adopted in English law might be applied to BI losses arising out of COVID-19. We have commented in some detail in our COVID-19 Briefing on Business Interruption issues (accessible via this link) that the physical damage threshold will be difficult to overcome in most jurisdictions, including England, although under English law the case law is arguably somewhat unclear in the context of decontamination which requires specialist contractors.
Although the decision in TKC v Allianz did not specifically consider the meaning of "Damage" per se, it does confirm that where "loss of property" refers to physical loss, this trigger will not be satisfied by a mere inability to use the premises. This reinforces the view that insureds will struggle to argue that COVID-19 is or causes physical damage to property, at least as a matter of English law.
Nevertheless, it is also worth noting that the contractual context was key to the Court's decision: had the definition of "Event" not included the phrase "accidental loss or destruction of or damage to property” it is possible that a different view would have been reached by the Court. This makes clear that a detailed consideration of all relevant policy terms and definitions is required in order to understand the precise scope of cover available in any particular case.
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