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In a highly anticipated decision delivered on 5 February 2021, Justice McDonald ruled that four pubs are entitled to cover under FBD’s business interruption policies for losses suffered as a result of pub closures due to the COVID-19 pandemic.
The judgment in this test case is of huge significance for both the plaintiffs and pubs throughout Ireland, including in particular approximately 1300 publicans, who purchased similarly worded polices from FBD. This judgment follows on from the recent UK Supreme Court decision that policyholders in the UK are entitled to recover for business interruption losses caused by the Covid-19 pandemic.
The plaintiff pubs are the Leopardstown Inn; Sinnotts; Lemon & Duke; and Sean’s Bar.
In a statement issued on 5 February 2021, the Central Bank welcomed the judgement of the High Court commenting that it will closely examine the potential impact of this judgement for customers in the context of its ongoing engagement with insurers. The Central Bank also reiterated that its expectations for insurers’ handling of COVID-19 related business interruption insurance claims is set out in its COVID-19 and Business Interruption Insurance Supervisory Framework.
Policy Wording
The policies in question provided business interruption cover, including cover for a:
“[i]mposed closure of the premises by order of the Local or Government Authority following:
……..
(d) Outbreaks of contagious or infectious diseases on the premises or within 25 miles of same.”
This dispute arose after FBD refused to cover policyholders after the pandemic resulted in the first temporary closure of businesses, on 15 March 2020. FBD argued that the premises’ closures could not be said to have been caused by an outbreak of Covid-19 which occurred within 25 miles of the premises, but rather that the imposed closure arose because of the nationwide presence of Covid-19.
The Insured Risk
Justice McDonald determined that the insured peril, i.e. the risk covered by FBD, was a “composite” one consisting of all 3 of the following elements:
- an imposed closure
- by order of a local or government authority, following
- an outbreak of infectious disease on the premises or within a 25 mile radius
Justice McDonald dismissed FBD's arguments, finding that cover will still apply following nationwide outbreaks of disease Covid-19, as long as there is an outbreak within 25 mile of the premises and that outbreak is one of the causes of the imposed closure. Justice McDonald also dismissed FBD’s contention that the plaintiffs’ losses were not covered because there was a several instances of the disease, meaning that the pandemic was not an “event” in the sense of a single occurrence.
Other Issues of Note
Indemnity Period: Justice McDonald held in FBD’s favour finding that the plaintiff pubs are only entitled to business interruption cover for the duration of the enforced closure of their premises, and cannot claim for the continuing effects of the Covid-19 pandemic on their business after any period of imposed closure comes to an end.
Causation: Justice McDonald found that it was not necessary to establish “proximate causation”, i.e. it was not necessary for the plaintiff pubs to establish that the imposed closure of their premises occurred as a result of an outbreaks of Covid-19 within 25 miles of the premises. It was sufficient that an outbreak of Covid-19 within 25 miles, was a cause (but not necessarily the dominant cause) of the government enforced closure. In reaching this conclusion, Justice McDonald considered the policy wording, which states that cover applies for an imposed closure of a premises “following” an outbreak of disease. Justice McDonald found the word “following” should be interpreted as requiring a looser causal connection than proximate cause.
However, it was necessary for the plaintiff pubs to establish “proximate causation”, in so far as they must show that their losses resulted from the government imposed closure. FBD argued that the proximate causes of much of the plaintiff pubs’ losses was uninsured issues such as the public reaction to Covid-19, social distancing, travel restrictions etc., which the plaintiff pubs could not recover for under the policy. Justice McDonald found that there can be more than one proximate or effective cause of the plaintiff pubs’ losses. However, the plaintiff pubs could still recover as long as one of those proximate causes was insured. Justice McDonald concluded that the government imposed closure of the pubs (i.e. the insured peril) was a proximate cause of the plaintiff pubs' losses, and consequently the plaintiff pubs were entitled to recover under their polices. In reaching this conclusion Justice McDonald found that the “but for” test should be modified to avoid an overly technical result that could give rise to manifest injustice.
Counterfactual: Justice McDonald also considered the correct counterfactual that should be used to identify the loss to the plaintiff pubs (i.e. the hypothetical scenario which must be compared against to understand what loss has been caused by the insured peril).
Justice McDonald held that the correct counterfactual in the case of each of the plaintiffs (other than the Lemon & Duke plaintiff) is “a world in which there is no imposed closure and no outbreaks within 25 miles of the plaintiffs’ premises”.
However, Justice McDonald held that the as well as excluding the insured peril, the counterfactual also excludes any overlapping proximate causes of the plaintiffs’ losses. This means that to the extent that the effects of the existence of the Covid-19 outside the relevant 25 mile radius can be established to be a concurrent proximate cause of the plaintiffs’ losses, then it must be stripped out of the counterfactual, so that the plaintiff pub’s recovery under the policy is not reduced.
Trends and Circumstances Provisions: Justice McDonald also considered the “trends and circumstances” provisions of the policy. Trends clauses typically allow insurers to reduce the amounts payable under the policy where other wider factors or trends have affected the insured party’s ability to trade.
In this instance, the policy provided an indemnity for loss of gross profit during the indemnity period. The loss of gross profit covered by the business interruption clause, is calculated by comparing the gross profit earned during the indemnity period to the previous year’s gross profits “adjusted for the trend and other circumstances affecting the business”.
Justice McDonald rejected FBD’s arguments that the fall off in sales suffered by the plaintiffs in the days preceding the government imposed closure on 15 March 2020, constitute a trend or circumstance that continued throughout the period of closure. Justice McDonald stated that the effects of the insured peril must be excluded from the trends calculation.
However, for the purposes of the comparing gross profits in the indemnity period versus the previous year, losses suffered by the plaintiffs in the days preceding the government imposed closure on 15 March 2020 (i.e. before the commencement of the indemnity period), must be taken into account when calculating the previous year’s gross profits.
Quantification of Loss: Justice McDonald did not make any findings on the issue of quantification of losses, and directed that this would be considered in a separate hearing.
What’s Next
In a public statement, FBD has said that it will not appeal the decision and that the company will endeavour to process claims as quickly as possible.
This decision will be welcomed by policyholders with business interruption cover. Indeed it has been reported that following the ruling, solicitors acting for the Restaurants Association of Ireland wrote to insurance companies on behalf of 423 businesses seeking confirmation of indemnity and interim business interruption payments.
However, given that the wording used in business interruption insurance clauses will vary from policy to policy, it is likely that further disputes will arise, and the High Court may be called on again to interpret the meaning of other insurers’ business interruption clauses.
Written by Aising McMorrow,
Other Issues of Note
Indemnity Period: Justice McDonald held in FBD’s favour finding that the plaintiff pubs are only entitled to business interruption cover for the duration of the enforced closure of their premises, and cannot claim for the continuing effects of the Covid-19 pandemic on their business after any period of imposed closure comes to an end.
Causation: Justice McDonald found that it was not necessary to establish “proximate causation”, i.e. it was not necessary for the plaintiff pubs to establish that the imposed closure of their premises occurred as a result of an outbreaks of Covid-19 within 25 miles of the premises. It was sufficient that an outbreak of Covid-19 within 25 miles, was a cause (but not necessarily the dominant cause) of the government enforced closure. In reaching this conclusion, Justice McDonald considered the policy wording, which states that cover applies for an imposed closure of a premises “following” an outbreak of disease. Justice McDonald found the word “following” should be interpreted as requiring a looser causal connection than proximate cause.
However, it was necessary for the plaintiff pubs to establish “proximate causation”, in so far as they must show that their losses resulted from the government imposed closure. FBD argued that the proximate causes of much of the plaintiff pubs’ losses was uninsured issues such as the public reaction to Covid-19, social distancing, travel restrictions etc., which the plaintiff pubs could not recover for under the policy. Justice McDonald found that there can be more than one proximate or effective cause of the plaintiff pubs’ losses. However, the plaintiff pubs could still recover as long as one of those proximate causes was insured. Justice McDonald concluded that the government imposed closure of the pubs (i.e. the insured peril) was a proximate cause of the plaintiff pubs' losses, and consequently the plaintiff pubs were entitled to recover under their polices. In reaching this conclusion Justice McDonald found that the “but for” test should be modified to avoid an overly technical result that could give rise to manifest injustice.
Counterfactual: Justice McDonald also considered the correct counterfactual that should be used to identify the loss to the plaintiff pubs (i.e. the hypothetical scenario which must be compared against to understand what loss has been caused by the insured peril).
Justice McDonald held that the correct counterfactual in the case of each of the plaintiffs (other than the Lemon & Duke plaintiff) is “a world in which there is no imposed closure and no outbreaks within 25 miles of the plaintiffs’ premises”.
However, Justice McDonald held that the as well as excluding the insured peril, the counterfactual also excludes any overlapping proximate causes of the plaintiffs’ losses. This means that to the extent that the effects of the existence of the Covid-19 outside the relevant 25 mile radius can be established to be a concurrent proximate cause of the plaintiffs’ losses, then it must be stripped out of the counterfactual, so that the plaintiff pub’s recovery under the policy is not reduced.
Trends and Circumstances Provisions: Justice McDonald also considered the “trends and circumstances” provisions of the policy. Trends clauses typically allow insurers to reduce the amounts payable under the policy where other wider factors or trends have affected the insured party’s ability to trade.
In this instance, the policy provided an indemnity for loss of gross profit during the indemnity period. The loss of gross profit covered by the business interruption clause, is calculated by comparing the gross profit earned during the indemnity period to the previous year’s gross profits “adjusted for the trend and other circumstances affecting the business”.
Justice McDonald rejected FBD’s arguments that the fall off in sales suffered by the plaintiffs in the days preceding the government imposed closure on 15 March 2020, constitute a trend or circumstance that continued throughout the period of closure. Justice McDonald stated that the effects of the insured peril must be excluded from the trends calculation.
However, for the purposes of the comparing gross profits in the indemnity period versus the previous year, losses suffered by the plaintiffs in the days preceding the government imposed closure on 15 March 2020 (i.e. before the commencement of the indemnity period), must be taken into account when calculating the previous year’s gross profits.
Quantification of Loss: Justice McDonald did not make any findings on the issue of quantification of losses, and directed that this would be considered in a separate hearing.
What’s Next
In a public statement, FBD has said that it will not appeal the decision and that the company will endeavour to process claims as quickly as possible.
This decision will be welcomed by policyholders with business interruption cover. Indeed it has been reported that following the ruling, solicitors acting for the Restaurants Association of Ireland wrote to insurance companies on behalf of 423 businesses seeking confirmation of indemnity and interim business interruption payments.
However, given that the wording used in business interruption insurance clauses will vary from policy to policy, it is likely that further disputes will arise, and the High Court may be called on again to interpret the meaning of other insurers’ business interruption clauses.