Determining if an insurance dispute is about liability or quantum

In DC Bars Limited and Tutton's Brasserie Limited v QIC Europe Ltd [2023] EWHC 245 (Comm), the High Court had to consider whether an insurance dispute was around quantum only (and should, therefore, be referred to arbitration) or if the insurer's liability was in issue such that the Court had jurisdiction to hear the case.

The arbitration clause in the policy provided for disputes to be referred to an arbitrator where there was a dispute "as to the amounts to be paid under this Policy (liability being otherwise admitted)". The Court found that the dispute, which centred around the Maximum Indemnity Period, was a dispute as to the insurer's liability rather than a dispute as to quantum. As such liability had not been "otherwise admitted" and the arbitration clause did not apply.

BACKGROUND

The Claimants were owners and operators of restaurants and bars and claimed under an extension to the Business Interruption (BI) cover of their Property Damage policy (the Policy) in respect of losses suffered as a result of the Covid-19 pandemic.

The Policy ran from 31 December 2019 to 30 December 2020, and contained an Infectious Diseases Extension which provided an indemnity in respect of interruption or interference with the Claimants' business following the occurrence of a notifiable disease within a radius of 25 miles of their premises. Of particular relevance to this decision, the Policy provided for a Maximum Indemnity Period of 3 months.

In March 2020, the Claimants notified a claim for BI losses suffered as a result of the pandemic and the first lockdown on 26 March 2020. The Claimants’ claim was initially submitted on the basis of the maximum 3-month indemnity period from the date of the first occurrence of Covid-19 within 25 miles of insured premises. Following the Supreme Court's judgment in the FCA Test Case, the insurer accepted that it was liable to pay the claim and the quantum was agreed applying the 3-month Maximum Indemnity Period.

The Claimants also claimed an additional circa £4 million in reliance on certain dicta of the Supreme Court, asserting that there was a fresh cause of action (i.e. claim) under the Policy for every separate occurrence of Covid-19 within 25 miles of each of their premises. The further losses related to three periods:

• a second claim for losses as a result of the Government’s decision that hospitality businesses must close from 10pm on 24 September 2020;
• a third claim for losses as a result of the national lockdown from 5 November 2020; and
• a fourth claim arising out of the Government’s decision that hospitality businesses must close from 16 December 2020.

The insurer disputed that the Claimants were entitled to any further indemnity, citing that the Maximum Indemnity Period of 3 months had expired and that that limit continued to apply for the remainder of the policy period.

The question for the Court was whether the proceedings should be stayed on the grounds that the Policy provided for certain disputes to be determined by arbitration. The arbitration clause in the Policy provided as follows:

“If any difference shall arise as to the amounts to be paid under this Policy (liability being otherwise admitted) such difference shall be referred to an arbitrator who will be jointly appointed in accordance with statutory provisions”.

The issue was therefore whether the dispute was “as to the amounts to be paid under this Policy (liability being otherwise admitted).”

The insurer argued, inter alia, that the dispute was not as to whether there is or would be liability under the Infectious Diseases Extension arising out of an occurrence of Covid-19 in, for example, September 2020, but whether such loss falls outside the 3 month Maximum Indemnity Period. This, the insurer argued, was not a dispute as to liability.

In contrast, the Claimants submitted that the arbitration clause concerns disputes where the only matter in dispute between the insurer and insured is quantum. They argued that, as the insurer denied liability under the policy for a new 3 month indemnity period on the happening of each occurrence of disease, then there was a dispute as to liability for the second, third and fourth periods in respect of which the Claimants were seeking an indemnity.

DECISION

Teare J considered the nature of a claim under an insurance policy and referred to the decision of Insurance Corporation of the Channel Islands Ltd v McHugh [1997] and the "hold harmless" principle; that is, the legal fiction whereby insurance contracts are treated in law as contracts to hold the insured harmless against the loss insured against. Insurers are therefore considered to be in breach of contract as soon as the insured loss occurs. As Mance J (as he then was) held in that case, "A claim under an insurance contract is thus commonly for damages for the failure to hold the insured harmless against the relevant liability or loss.”

In the context of this claim, Teare J noted that the Claimants were arguing that the insurer was in breach of its promise to hold the insured harmless on at least 4 occasions, whereas the insurer was arguing that it cannot be liable for longer than 3 months. The question for the Court was whether this difference is “as to the amounts to be paid under this Policy (liability being otherwise admitted).”

In a concise judgment, Teare J dismissed the application for a stay of the court proceedings, holding that the parties were not obliged by virtue of the Policy to refer the dispute to arbitration. He held that the correct analysis is that the insurer was disputing its liability to hold the Claimant harmless against its BI losses in respect of the second, third and fourth periods by reason of the terms of the Policy, in particular by arguing that there is only one 3 month Maximum Indemnity Period which had been exhausted. The difference between the parties, properly analysed, was therefore as to the liability of the insurer, not merely as to the amounts to be paid under the Policy with liability having been "otherwise admitted".

Teare J relied on the case of New Hampshire Insurance Company v Strabag Bau AG [1990] which he noted dealt with the construction of a clause in the same form as the arbitration clause before him. In New Hampshire, Potter J had held that:

“…the word “otherwise” is apt to emphasise the fact that it is “mere” disputes as to quantum which are to be arbitrated, thus excluding disputes as to amount which, despite prima facie acceptance of liability, depend upon the application of particular provisions or exemptions in the policy which place limitations on categories of loss, or otherwise apply to limit the amount recoverable. Such cases would raise a question of liability in the sense and to the extent that they involve a point of law or construction rather than a mere dispute on quantum.”

Noting that Potter J's decision on this point had stood for over 30 years and must have informed the practice of those in the insurance industry, Teare J therefore concluded that the aim of the clause:

"…is to refer to arbitration disputes as to quantum or assessment of loss but where there is, or is also, a dispute as to the liability of the insurer based upon the terms of the policy there is no agreement to arbitrate."

In Teare J's judgment, the present case did concern a dispute as to quantum or assessment, but there was also a dispute as to whether the insurer was liable for the BI losses caused by the second, third and fourth occurrences of Covid relied upon by the Claimants.

COMMENT

Arbitration clauses such as the one under consideration in this case are common in insurance policies and so this judgment will be of wide interest.

The case shows that while it is open to the parties to agree to resolve some disputes by referring them to arbitration, determining which disputes fall into that category can be difficult to ascertain in practice. Parties looking to apply clauses such as this should bear in mind Teare J's formulation of the aim of the clause and consider whether the dispute in question is "merely" as to quantum (which the parties have agreed to arbitrate) or whether in fact there is a dispute as to quantum or assessment of loss but also a dispute as to the liability of the insurer based on policy terms (such that there is no agreement to arbitrate).