QC calls on court to treat insurers fairly

Gavin Kealey QC, who represents Ecclesiastical and MS Amlin, has accused the Financial Conduct Authority of rewriting the insured peril, as the Covid-19 business interruption test case continued in the High Court.

Kealey outlined the argument around causation and the ‘but for’ test on behalf of all of the eight insurers involved in the court case.

Earlier this week, Colin Edelman QC, representing the FCA, argued that the geographical scope of the disease should have no restrictions.

In response, Kealey stated that this was a “most objectionable” approach by the regulator.

He added: “What Mr Edelman submitted was that BI losses caused to the insured by pandemic anywhere would be covered as long as the pandemic extended into the radius of the disease clause.

“The FCA says the insured does not have to show that the BI losses were actually caused by any disease within the radius. But there is no insured peril clause in any of these contracts that come anywhere near this.”

He added that this approach would provide cover to policyholders even when their losses were not incurred as a result of a Covid-19 case in the nearby area or because of restrictions imposed by a local authority.

“This would provide cover for a peril not insured against and it would be enough to harvest in all of the consequences of Covid-19 no matter where they are to be found,” he continued.

He further dismissed Edelman’s accusation that the insurers were “cherry-picking” the insured perils.

Kealey said: “The guilt lies elsewhere. Mr Edelman also argued that with our approach the more widespread the disease the less cover the insured has. That’s just wrong.

“It all depends on what the disease is and what the government’s approach is. If there had only been restrictions in certain areas where the disease was present they would have been covered, but if there are restrictions to every area regardless of whether the disease is local, then the insured does not have cover.”

He also argued that the FCA could not prove that any disease or incident within a particular area was causative of the government’s response to Covid-19 and the decision to go into a UK-wide lockdown.

Kealey further argued that when signing the contract policyholders and insurers had agreed that only BI losses caused by an illness within the specified area – in many of these policies within 25 miles of the insured premises – would be covered.

“There is a geographical limit that applies,” he continued.

Adding: “If you have one instance of illness within that area – did that cause the BI loss? But for that illness within that 25 mile area, would the loss have been covered?

“You can’t harvest into the 25 mile area every single other illness in the country and the government action and say it was caused by that one illness. The FCA knows it can’t say that.”

He added that the insurers “are not bad people” and admitted that there may be cases where they are wrong about not paying claims, as well as instances when they are right not to pay.

“They have to be treated in the same way as the insureds – fairly,” he continued.

According to Kealey, there is “nothing wrong with the policy language” and he also pointed out that the relevant clauses are policy extensions.

In the second day of the trial, lawyers representing the FCA questioned the insurers’ reliance on the Hurricane Katrina Orient Express case, stating that the judgment in the case had been driven by “an incorrect analysis of what the insured peril actually was”.

The Orient Express case involved a hotel that closed down for two months in 2005 after taking damage from Hurricane Katrina. The insurer involved in the case, Generali, argued that applying a ‘but for’ test the hotel would have suffered from BI losses whether it was damaged or not, because the surrounding area was also devastated from the hurricane.

In that case, the judge found that ‘but for’ reasoning meant the hotel was entitled to much less of a pay out under its BI policy due to a trends clause in the policy.

Kealey argued that the judgment was correct, adding that the insured peril in the Orient Express case is property damage rather than the hurricane itself.

He said: “It’s blatantly fallacious that the peril was a hurricane. The relevant insured peril is the damage, not the cause of that damage.”

According to Kealey, in this case it is relevant to assess business interruption losses on the basis that the hotel was undamaged but nothing else was different.

“In other words ‘but for’ the insured peril,” he continued.

“Anything other than that ‘but for’ test results in something that is wholly inconsistent with the contract.”

He added that the ‘but for’ test in the current BI test case had to be applied in the right way.

Kealey stated: “The FCA wants to measure gross operating profit that would have been earned by insureds had Covid-19 not happened. That would provide cover for a peril not insured against.”

He argued that a case of the illness within 25 miles of the premises had to be “factually causative” to the business interruption loss.

Kealey concluded: “What you find is if you have national outbreak but it is only the case of illness within a 25 mile radius that provokes government action within that area, there is covereage.

“But you don’t reverse the illness beyond the 25 mile area.”

The trial in the BI test case began on 20 July and is planned to go on for four more days. It is overseen by two judges: Commercial Court judge Mr Justice Butcher and Court of Appeal judge Lord Justice Flaux.