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The FBD Decision on Business Interruption Insurance – Key Points

By: Eoin Casey | Posted on: 25 Feb 2021

The judgment delivered earlier this month in the High Court by Mr. Justice McDonald in Hyper Trust Limited t/as The Leopardstown Inn & Others v FBD Insurance plc has been hailed as a landmark decision for hospitality businesses impacted by the covid-19 pandemic. The decision is expected to have a significant impact on business interruption claims for FBD Insurance policyholders in particular and is of importance in clarifying some of the legal principles applicable in disputes relating to insurance contracts.

Background

The test cases were taken against FBD by four pubs seeking business interruption cover as a result of the Government imposed closures on the 15th March 2020 due to the covid-19 pandemic. The key clause at issue in the relevant FBD Insurance policy provides that it will indemnify the pubs for losses incurred “as a result of the business being affected by:… imposed closure of the premises by order of the Local or Government Authority following:...Outbreaks of contagious or infectious diseases on the premises or within 25 miles of same”

FBD declined cover on the reasoning that the forced closure wasn’t as a result of an outbreak on the premises or within 25 miles, but nationwide. As such, its argument was that a localised outbreak wasn’t the cause of the closure in each instance, and so on the wording of its policy, there was no cover.

In deciding against the insurer, the following are some of the key elements of Mr. Justice McDonald’s Judgment:

The Insured Peril

One major strand of the dispute was the Court’s interpretation as to what risk the policy was covering (the insured peril). FBD argued it was simply an “imposed closure” per se and that the words following “imposed closure” were just restrictions on the cover available. The publicans on the other hand argued that the insured peril had three composite parts; (a) an imposed closure, (b) by order of a local or government authority, following (c) an outbreak of an infectious disease on the premises or within a 25 mile radius. The Court agreed with the argument put forward by the publicans and held all three elements together comprised of the peril. This was important because if the Court had sided with FBD on this point, the potential recovery by the publicans might have been hugely reduced because they would have had to have shown that their losses resulted from the closure per se, as opposed to the outbreaks of covid-19 giving rise to the closure.

Extent of Cover

FBD argued that the cover available to the insured pubs should be limited solely to closures following localised outbreaks (i.e. outbreaks within the 25 mile radius of the pub as referenced in the relevant clause). However, Justice McDonald disagreed and held that, while there must be at least an outbreak within 25 miles, there was no suggestion in the language used in the clause that other outbreaks outside this radius would deprive the pub owners of cover. Explaining this finding, the Court pointed out that FBD could have worded the relevant clause to clearly limit cover in that manner by including in the clause words such as “on the premises (or wholly) within 25 miles of same” but didn’t do so. At the same time, the Court noted that simultaneous further outbreaks outside of the 25 mile radius would make it more difficult to demonstrate a causative connection between the imposed closure and the localised outbreaks. 

Causation and Proximate Cause

In determining cover under insurance contracts, a key legal rule ordinarily applied is that the insured can only recover those losses which would not have been incurred ‘but for’ the occurrence of the insured peril (the “but for” test). FBD’s contention was that the pubs would have suffered huge losses even if not forced to close because of public reaction to the pandemic and the change in societal behaviour that resulted. On this point, the Court took a consistent approach to that taken recently by the UK Supreme Court in a similar case taken by the Financial Conduct Authority and held for a fair and reasonable modification of the “but for” test. It held that where loss was caused by the insured peril together with another event/cause, and it was not possible to determine that, but for any one of them, the loss would not have occurred, then the insured peril should be regarded as a sufficient cause for the purposes of the “but for” test.

The Appropriate Counterfactual

In order to assess the base point for each pub’s losses, the Court saw it necessary to determine the position each of the pubs would have been in but for the occurrence of the insured peril (the appropriate counterfactual). FBD’s argument was that the appropriate counterfactual was a situation where the pubs remained open but the covid-19 pandemic remained and resulting restrictions were in place. The pub owners argued that it should be a scenario where there was no closure and no covid-19 restrictions. In the case of one of the four pubs, the Lemon & Duke, there had been a specific representation made by FBD that cover would be available if there was an imposed closure due to covid-19 (i.e. without any 25 mile radius limitation). Ultimately, the Court sided with the publicans on this point and held that the appropriate counterfactual was a situation of no imposed closure and no outbreaks of covid-19, for the three other pubs, within 25 miles, and for the Lemon and Duke, worldwide. As long as the other three pubs can show that the closure due to outbreaks within the 25 mile radius was a proximate cause of their loss, their recovery under the policy will not be reduced just because changes in societal behaviour (whether within or outside the 25 mile radius) was also a proximate cause. Notably, Justice McDonald did express the view that further submissions would be needed at a later date in considering the geographical scope of the pandemic to be applied as part of the appropriate counterfactual.

The Indemnity Period

The one major point in which the publicans were unsuccessful in the case was in the Court’s decision as to how long they should be covered for (the indemnity period). The Court rejected the publican’s argument that they should be entitled to recover for ongoing losses resulting from the pandemic even after any period of imposed closure comes to an end. 

Calculation of Loss yet to be Determined

The Court indicated that it will hold a further hearing at a later date to determine how the publicans’ losses are to be quantified. In the meantime, it has been reported that the parties will seek to agree on those losses and so a further hearing to deal with quantum might not be needed.

Impact

FBD has confirmed it will not be appealing the decision. Aside from the important legal principles clarified and set out by the Court, as touched on above, the hospitality industry and insurers alike will have been considering the practical ramifications of the ruling in these extraordinary and difficult times. It has been reported that approximately 1,300 publicans throughout the country are insured by FBD under the same policy terms, some of whom already have proceedings on foot.  FBD has stated that it will “endeavour to process claims as quickly as possible” including making interim payments to policyholders.

The Central Bank of Ireland, which issued a Covid-19 and Business Interruption Insurance Supervisory Framework last year, has welcomed the judgment and will continue to have an important supervisory role including engaging with insurers in respect of policies and claims impacted by the decision and reducing the potential for further disputes.

Of course, the decision will not determine disputes over business interruption cover for similarly worded policies issued by other insurers but is likely to have a significant impact. Further similar litigation may follow, and it is notable that the Restaurants Association of Ireland has stated that 12 other insurers are facing 423 potential High Court claims relating to business interruption cover. However, it can be expected that the judgment will benefit the sector generally and may lead to the resolution of many similar business interruption claims.

Key contact:

Eoin Casey

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