Arbitrator dismisses Covid-19 business interruption claim on basis UK Government is not a "competent local authority" in the context of denial of access extension

In Certain Policyholders v China Taiping Insurance (UK) Co Ltd, Lord Mance, sitting as sole arbitrator in a public arbitration award, found in favour of an insurer, China Taiping Insurance (UK) Co Ltd (China Taiping), that a denial of access extension contained in business interruption insurance policies did not provide cover for business interruption losses caused by the UK Government's Covid-19 lockdown measures on the basis that the UK central government was not a "competent local authority".

The award is not binding on UK courts, but may still be regarded as persuasive given Lord Mance's standing as a former Deputy President of the UK Supreme Court. It gives the phrase "competent local authority" a narrower meaning than the Divisional Court did at first instance in the FCA Business Interruption Test Case (FCA Test Case) when it considered similar wording used in an Ecclesiastical policy wording.

However, aspects of Lord Mance's analysis may also be regarded as favourable to policyholders, particularly those with similar denial of access wordings if they are not confined to action by a local authority but may extend to central government action.

A copy of the award is available here.

Background

Arbitration proceedings were brought pursuant to an ad hoc arbitration agreement entered into between China Taiping and a group of its policyholders following a coverage dispute concerning the meaning of a denial of access extension in a Package Insurance Policy (the Policy). Given the wider importance of the award to other China Taiping policyholders and the market generally, the parties agreed that China Taiping would pay all costs of the arbitration; that the award would not be appealable; and that the award would be made available publically.

The arbitration was conducted before former Deputy President of the UK Supreme Court Lord Mance sitting as sole arbitrator in London. Based on a set of agreed facts drawn from the FCA Test Case, the arbitrator did not consider the individual positions of policyholders and rather the findings of the award are declaratory in nature as to the scope of cover under the Policy.

Policy wording

The Policy contained a clause called Extension 1 which extended cover under its primary business interruption insuring clause to include the following circumstances:

"...interruption of or interference with the Business in consequence of: …

1. the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority…
2. the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises;" [emphasis added]

A further extension, namely Extension 2, also provided cover for business interruption loss caused by a defined list of specified notifiable diseases. Covid-19 was not included on that list of diseases.

Issues in dispute

The policyholders claimed to have suffered loss covered by Extension 1 due to interruption of or interference with their businesses arising from the UK Government’s orders or advice, issued at various times in 2020 and in response to the Covid-19 pandemic regarding the closure or use of their premises (which variously included restaurants, cafes, bars and public houses).

Lord Mance identified three issues for determination:

1. Does Extension 1 apply to notifiable diseases?
2. If Extension 1 can apply in situations of notifiable disease, does it apply where the notified disease is national rather than localised?
3. Does the phrase “competent local authority” used in Extension 1 extend to the measures taken or advice given by the UK central government?

Decision

Issue 1 – Does Extension 1 apply to notifiable diseases?

China Taiping argued that it would be contrary to the parties' intentions if Extension 1 was held to afford wider cover than Extension 2 by providing policyholders with cover for business interruption losses arising from a wider range of notifiable diseases than those listed in Extension 2.

Lord Mance did not accept this argument. While acknowledging that there could be potential for overlapping situations engaging both extensions, he held that both Extension 1 and Extension 2 stood side by side and that both must be allowed to operate according to their respective terms, whether they contain elements which potentially overlap or not.^[1] The existence of a potential overlap of some of the elements relevant to cover under the provisions of these two specific and differently worded extensions' factors did not, to Lord Mance's mind, mean that any particular provision in one such extension must apply to the exclusion of any other.

Issue 2 – If Extension 1 can apply in situations of notifiable disease, does it apply where the notified disease is national rather than localised?

China Taiping argued that the language of Extensions 1 demonstrated an intention to provide only “localised” cover, including through the use of the words "in the vicinity". Consistent with the findings of the Divisional Court at first instance in the FCA Test Case, the policyholders accepted the word “vicinity" connotes "the neighbourhood”, but denied it implied an immediacy of location. Lord Mance noted the distinction was a very fine one and would not in any event dictate the outcome of this case.^[2]

In light of Lord Mance's findings in relation to Issue 3 below, he considered it unnecessary to reach a conclusion on this issue for the purpose of his award. However, he did in any event set out his analysis on the Divisional Court's decision in relation to the other policy wordings containing similar "vicinity" language and made the following observations on Extensions 1b and 1c:

1. Extension 1b: Lord Mance was unable to see any basis for reading Extension 1b down generally so that it only operates in respect of a localised danger, disturbance or other peril leading to the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority. While he had no doubt such a closure or sealing off will often be because of a localised peril, to his mind there was nothing in the language of Extension 1b requiring or implying this to be so, or to exclude cover when the Police or other competent local authority take action in response to a countrywide pandemic. Lord Mance noted that if the cover afforded by Extension 1b was in any sense “localised”, this would not be because the danger, disturbance or other like peril involved inherently has to be local, but because it was a likely, though not inevitable, consequence of the requirement that the instructions given to address the period were “issued by the Police or other competent local authority", which is a separate question addressed at Issue 3.^[3]
2. Extension 1c: in contrast, Lord Mance observed that the language used in Extension 1c was "effectively indistinguishable" from the RSA 2.1 and 2.2 wordings considered at first instance by the Divisional Court in the FCA Test Case. Accordingly, he considered that the Division Court's finding that this type of wording connoted a narrow and localised cover that was inapplicable to a national pandemic was likely to be persuasive and potentially even binding on him.^[4]

Lord Mance noted, however, that the Divisional Court's findings in respect of RSA 2.1 and 2.2 were not appealed to the Supreme Court. In light of the Supreme Court's subsequent findings on causation that all cases of Covid-19 countrywide were concurrent causes of business interruption losses, he expressed doubt as to whether the Divisional Court would have approached the matter as it did had it had the benefit of the Supreme Court’s analysis.^[5] Lord Mance noted that once it was accepted that the "emergency" in Extension 1c may at the same time be elsewhere and threaten life or property elsewhere, the Supreme Court’s analysis of the relevant elements of cover and its conclusion that a “but for” test of causation was inappropriate would seem "readily transposable" to a coverage clause in the same terms as Extension 1c. That said, he noted that this was a complex area that was not fully argued before him and the issue was in any event unnecessary to decide given his conclusion on Issue 3 below.^[6]

Issue 3 – Does the phrase “competent local authority” used in Extension 1 extend to measures taken or advice given by the UK central government?

Lord Mance accepted China Taiping's construction that the words "instructions / actions / advice issued by the Police or other competent local authority" covered only instructions, actions or advice of the Police and other competent local authorities in the sense of a local as opposed to central or countrywide authority. It therefore followed that the closure of the policyholders' premises as a result of the national lockdowns imposed by the UK Government was not covered under Extension 1.

Lord Mance reached this conclusion based on the following considerations:

• The natural meaning of the phrase

The natural meaning of the phrase "the Police or other competent local authority" connoted a local (rather than central) body taking action or issuing instructions or advice in relation to the locality within its jurisdiction or property within such locality.^[7]

• Other policy language

This natural meaning was supported by other provisions in the Policy recognising the distinction between a local authority in a day-to-day sense and a central governmental or public authority.^[8]

• The legislative background to the policy

Notwithstanding that there appeared to be a wide range of duties and powers imposed or conferred on both local and central government authorities to deal with the types of situations contemplated by the Policy, the language of Extension 1 was heavily focused on localised incidents, likely to attract a response from the Police or a local authority or body with local competence, even though there is nothing in it as such to exclude the responses of such an authority or body to a national or countrywide event or emergency.^[9]

• Distinguishing the Ecclesiastical wording

Lord Mance notably distinguished the Divisional Court's construction of the phrase "competent local authority" which, in the context of Ecclesiastical's policy wording considered in the FCA Test Case, was construed broadly to mean whichever authority was competent to impose the relevant restrictions in the locality on the use of the premises, including central government.^[10]

He noted in respect of the Ecclesiastical wording that it appeared in the context of a clause covering specified diseases occurring within a 25-mile radius of the premises which thus made it more likely that a central governmental response was contemplated in that specific policy context. By contrast, China Taiping's wording did not share any of these features and Lord Mance found that in the context of the Policy read as a whole it was not unlikely that the parties agreed that the cover afforded under Extensions 1 was to be limited by reference to intervention by a body with local, as opposed to central governmental authority.^[11]

• Not an uncommercial outcome

Lord Mance noted that the policyholders' submissions stressed the uncertain, inadequate and uncommercial consequences that would follow if policy cover was limited only to the intervention of a local, as opposed to central governmental authority. Lord Mance warned that such considerations must be treated with caution and one must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest.^[12] Construing the Policy as a whole, he found that the Policy appeared to have drawn a line which made sense and could not fairly be stigmatised as absurd or uncommercial.^[13]

Weighing all of the above factors on balance, Lord Mance concluded that the Policy covered only directions, actions or advice of the Police and other competent local authorities in the sense of a local as opposed to central or countrywide authority.^[14]

Comment

Despite not being binding on UK courts, Lord Mance's decision is likely to be regarded as persuasive and thus welcomed by insurers with policies containing similar denial of access clauses that contemplate local authority rather than central government action.

However, notwithstanding the final outcome, the reasoning adopted by Lord Mance contained a number of favourable aspects for policyholders. For example:

• the existence of a separate notifiable disease extension in a policy does not necessarily preclude cover being available under a denial of access extension where the facts giving rise to cover under both clauses are the same or overlapping (Issue 1);
• absent any "competent local authority" language, wordings such as Extension 1b ought not be read down generally so as to be construed as provide purely local cover in circumstances where the wording otherwise provides broad "all risks" cover that does not specify the peril from which the authority action must arise (Issue 2); and
• in light of the Supreme Court's reasoning with respect to causation, there may be scope to revisit the Divisional Court's earlier conclusions in relation the scope of cover under RSA 2.1 and 2.2 (and hence similar wordings) in this right case in due course, albeit full and proper argument would be required.

Different aspects of the award are therefore likely to be relied upon by policyholders and insurers depending upon which aspects of Lord Mance's reasoning are applicable to the clause at issue. It is unlikely, therefore, that we have heard the last word on many of the issues discussed.

[1] Certain Policyholders, [27].

[2] Certain Policyholders, [33].

[3] Certain Policyholders, [48].

[4] Certain Policyholders, [53].

[5] Certain Policyholders, [65].

[6] Certain Policyholders, [66].

[7] Certain Policyholders, [70]-[73].

[8] Certain Policyholders, [74]-[77].

[9] Certain Policyholders, [78]-[88].

[10] Certain Policyholders, [93] citing the Divisional Court at [375].

[11] Certain Policyholders, [89]-[101].

[12] Certain Policyholders, [103].

[13] Certain Policyholders, [106].

[14] Certain Policyholders, [107].