Application of policy definition of "damage" results in no cover for pandemic losses

Bellini (N/E) Ltd v Brit UW Limited [2023] EWHC 1545 (Comm) was one of a series of judgments about insurance cover for Covid-19 business interruption losses. Unlike previous cases, this case considered an extension in the policy which was not, on the insurer's case, a non-damage business interruption clause because it expressly required the business interruption to be caused by damage. The court rejected the insured's argument that such a clause should be interpreted purposively to provide cover where no damage has occurred.

This case is a reminder that a court may be reluctant to depart from the express terms of coverage where it considers that they are clear on their face, even if other factors point the other way. This stands in contrast to the approach taken by the Financial Ombudsman Service (FOS) in relation to the same wording.

BACKGROUND

Bellini brought a claim against its insurers for business interruption losses arising out of the closure of its restaurant during the Covid-19 pandemic. Bellini sought to bring its claim under the "Murder, suicide or disease" extension in its policy. The court was asked to consider the construction of that clause as a preliminary issue.

The extension provided:

"8.2 Business interruption - Cover extensions

… 8.2.6 Murder, suicide or disease

We shall indemnify you in respect of interruption of or interference with the business caused by damage, as defined in clause 8.1, arising from:

1. 1. any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS related condition) an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it;…"

Unlike the disease clauses considered by the Supreme Court in the FCA Test Case (FCA v Arch [2021] UKSC 1) which did not require the policyholders' premises to be damaged, this clause expressly states that the interruption must be "caused by damage, as defined in clause 8.1".

Damage was defined – although not in clause 8.1 – as follows:

"18.16.1 Damage

Damage means

18.16.1 physical loss, physical damage, physical destruction

18.6.2 in respect of sections I and J loss of use of tangible property that has been lost destroyed or damaged.”

It was common ground between the parties that there had been no physical damage to Bellini's premises or property. In the circumstances, the court was asked to consider whether clause 8.2.6 provided any cover.

Bellini argued that clause 8.2.6 should not be construed to require physical damage to have occurred to its premises. It argued that if clause 8.2.6(a) only responded to physical damage then this would render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away.

In support of this argument, Bellini raised various arguments about the construction of the clause:

1. The basic business interruption cover provided by the policy at clause 8.1 required physical damage. The purpose of clause 8.2.6 was to extend cover for matters that would not ordinarily be expected to give rise to physical damage, which in this case was notifiable disease manifesting within a 25 mile radius.
2. The reasonable intention of the parties when using the language “caused by damage, as defined in clause 8.1” in the extension under clause 8.6.2, was to make reference to the contractual machinery in clause 8.1 for the standard cover as a whole, and not specifically limiting the extension to physical damage. Bellini argued that it was significant that clause 8.1 did not define 'damage' – the definition was at clause 18.16.1 of the policy – and instead clause 8.1 set out the machinery for the standard type of business interruption cover, including the method of calculating the amount of cover.
3. When using the emboldened word “damage” the parties were not seeking to negate the cover which was being specifically provided within clause 8.6.2 but to extend the meaning of that term in the cases specifically provided by the clause.
4. The proper meaning of the word "damage" in clause 8.6.2 would be the “effects of the perils” defined in 8.2.6 and would not be limited to physical property damage. This gives effect to the parties’ reasonable intentions taking account of what a small and medium-sized enterprise (SME) would have understood by the wording.
5. Any inconsistency in the contractual language should be resolved to reflect the reasonable intentions of an SME contracting for insurance.

The insurer denied liability on the basis that coverage under clause 8.2.6 is dependent upon physical damage to the premises or property, which had not occurred.

DECISION

The court (Ms Clare Ambrose sitting as a deputy high court judge) referred to the principles of contractual construction as set out by the Supreme Court in the FCA Test Case, namely that:

"the core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean".

Applying this, the court held that Clause 8.2.6 expressly provided that the insurer would only indemnify for business interruption caused by damage. The word "damage" was in bold text indicating it was a defined term and under the express terms of the policy it was given a defined meaning, namely physical loss, damage or destruction. On the ordinary meaning of clause 8.2.6, it provided no cover in the absence of such physical loss, damage or destruction.

The court considered that a reasonable SME would have read and understood the policy wording in this way and dismissed the proposition that there was any ambiguity on the policy wording. The court distinguished clause 8.2.6 from the clauses considered by the Supreme Court in the FCA Test Case, which were 'non-damage' clauses and did not contain any express requirement for damage to have occurred.

The court also gave only limited weight to the fact that the FOS had determined coverage to apply on the same wording, as the FOS determines matters based on what is fair and reasonable rather than legal entitlement.

Ultimately, the court had regard to the fact that, in its view, the extension would provide some cover beyond the basic business interruption cover under the policy, since the manifestation of a notifiable infectious disease or a murder on the premises would be capable of causing physical damage on the premises that would interfere with the business; albeit that the manifestation of a notifiable disease off the premises was less likely to cause such physical damage, but that limited application did not justify giving damage a different meaning.

COMMENT

This case is a useful reminder that in the context of Covid-19 business interruption losses – as with all losses – the courts will construe each policy on its own terms in accordance with the usual principles of contractual construction. In circumstances where the court considered that the terms were clear on the face of the policy, the judge adopted a somewhat literalist interpretation of the policy and was unwilling to read the policy purposively in order to provide the insured with what it considered would have been significantly wider and better cover against the closures caused by Covid-19. It also notable that the court departed from decisions of the FOS on the same wording. The court was unmoved by the insured's argument that the clause’s plain meaning would render it illusory or pointless; that was the clear deal that was agreed by the parties at the time. What was not explained was on what basis the court considered that the manifestation of disease at the premises (or elsewhere) was capable of causing physical damage, which is the point it relied on as giving the disease cover under the clause some scope – such that it was not illusory. This is a material unaddressed point, since it was the basis on which the court considered that some cover would be available on a literal construction of the clause.

It is worth noting that in FCA v Arch [2020] EWHC 2448 (Comm), the High Court was willing to interpret 'damage' as meaning 'damage or insured peril' in the context of clauses governing the quantification mechanism for business interruption losses. The effect of that interpretation was that the damage-related quantification machinery was also determined to apply to the quantification of non-damage business interruption losses. Whilst that contractual context is different, it nevertheless serves to highlight the range of approaches taken by the courts in different contexts.

Of course, each policy will be construed on its own terms and care must be taken when drafting Business Interruption coverage by reference to terms and architecture applying, on their face, to physical damage if, in fact, the parties intend the clause to be a non-damage extension. It is unsafe to assume that a court will depart from a literal construction of a wording if it considers that the terms are sufficiently clear.