A tale of two countries: concurrent causes, insurance coverage and the COVID-19 pandemic

The COVID-19 pandemic has been unique in so many ways, but its scale and immense financial impact are certainly two defining characteristics.

In the world of insurance, unique events tend to produce coverage litigation, because they reveal shortcomings in the wording of insurance policies. Those shortcomings might arise from the reality that it is simply not possible (or at least very difficult) for underwriters to draft policies which contemplate an event which is, by its very nature, unique. But shortcomings might also result from the fact that underwriters are humans, who are prone to error, and the drafting of policy wordings is (and always has been) susceptible to the making of mistakes.

For some considerable time, the insurance market has been perfecting the art of cutting and pasting. Clauses and, in some cases, entire wordings, developed by the few who are brave enough to innovate, are copied and repackaged by competitors within days of launch. Not only does this practice stunt innovation, but it results in underwriters failing to properly understand the coverage provided by the products they offer, near identical coverage being replicated, and errors embedded within the copied clause or wording going largely unnoticed. Until that is, a policyholder makes a claim under the policy.

In Australia, 250,000 policyholders have made claims for interruption to their business caused by the COVID-19 pandemic. The Insurance Council of Australia estimates the claims are worth approximately AUD 10 billion (USD 7.74 billion). The UK has experienced similar levels of claims, under 700 types of policies across more than 60 insurers, affecting 370,000 policyholders. These claims have given rise to test cases, in which the courts have been called upon to determine issues which are common to all of them.

HDI Gerling Specialty SE v Wonkana No. 3 Pty Ltd is one such test case, selected by the Insurance Council of Australia (ICA) and the Australian Financial Complaints Authority (AFCA) to determine whether references to the Quarantine Act 1908 in some business interruption policies excluded claims made as a result of the COVID-19 pandemic. Another test case, The Financial Conduct Authority v Arch Insurance (UK) Limited, has been brought in the UK under the Financial Markets Test Case Scheme, to determine coverage issues of general importance which also arise from the COVID-19 pandemic.

It is now painfully clear that many insurers in Australia have, for some years, excluded losses caused by viruses and diseases listed in the Quarantine Act 1908, in ignorance of the repeal of that Act in 2016 and its replacement by the Biosecurity Act 2015. As a result, the insurers have handed themselves the task of having to persuade the Australian courts that the reference to the Quarantine Act 1908 in the exclusion they have used, ought to be construed as a reference to the Biosecurity Act 2015. That construction is, of course, self-serving: construing the exclusion in that way would help get the insurers off the hook for business interruption losses caused by the COVID-19 pandemic, by virtue of COVID-19 having become a “listed human disease” under the Biosecurity Act 2015 on 21 January 2020.

Exactly why the courts should indulge the insurers in this fashion is not clear, particularly when it was open to them to avoid the commercial and financial consequences of their collective oversight by periodically tracking the legislation referred to in their policy wordings, and correcting obsolete references. After all, not every insurance policy in Australia is affected by the problem: this commentator was able to find, without much difficulty, an example of an insurance policy wording pre-dating the COVID-19 pandemic which excludes loss:

…directly or indirectly caused by or arising out of or in connection with … a disease declared to be a 'quarantinable disease' under the Quarantine Act 1908 (Cth) and subsequent amendments or any ‘listed human disease’ under the Biosecurity Act 2015 (Cth) including any subsequent amendments or replacement thereof or any equivalent legislation.

In its 18 November 2020 decision in Wonkana, the Supreme Court of New South Wales held that the exclusions in issue could not be construed as referring to the Biosecurity Act 2015. A victory for the policyholders, yes, but the reality is that they have won only the first lap, in what is a two lap race. The second lap involves having another test case, to determine factual issues such as whether there has been interruption to policyholders’ businesses, and the meaning and effect of provisions which restrict coverage to within a radius of policyholders’ premises.

It is possible, however, that the length of this second lap has been considerably shortened by the UK Supreme Court's 15 January 2021 decision in FCA v Arch Insurance, because Arch has addressed at least some of the key issues that were to be considered by the second test case in Wonkana.

In essence, Arch resolves the thorny issue of whether the ‘but for’ test has any place in the analysis of coverage for COVID-19 business interruption losses. The Supreme Court took the view that whilst the ‘but for’ test is a minimum threshold test of causation, it isn't a requirement in every case, and declined to apply it. In its place the Supreme Court applied the concept of concurrent causes (i.e., two (or more) proximate (or efficient) causes, which combined to produce a loss). Long-established principles dictate that, if one concurrent cause falls within the scope of an insuring clause and the other concurrent cause(s) do not (but are not expressly excluded by the policy), the insuring clause will respond. Conversely, if one concurrent cause falls within the scope of an insuring clause and the other concurrent causes are expressly excluded, the exclusion will generally prevail.

These principles provided the Supreme Court with an infinitely scalable solution to a problem created by the fact that no individual case of COVID-19 could be said to have caused the government to impose a lockdown on the UK (which, in turn produced the business interruption losses suffered by the policyholders), but it was manifestly clear that each individual case of COVID-19, in combination with all other cases of COVID-19, had resulted in that lockdown:

[69] … The interpretation which makes best sense of the [insuring] clause, in our view, is to regard each case of illness sustained by an individual as a separate occurrence.

[191] … there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause - indeed as a proximate cause - of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself …

[196] … to apply a “but for” test in a situation where cases of disease inside and outside the radius are concurrent causes of business interruption loss would give the insurer similar protection to that which it would have had if loss caused by any occurrence of a notifiable disease outside the specified radius had been expressly excluded from cover. If the insurers had wished to impose such an exclusion, it was incumbent on them to include it in the terms of the policy.

Significantly (perhaps, fortuitously, at least for the policyholders) none of the policies examined by the Supreme Court excluded a peril which described a pandemic (perhaps insurers in the UK never experienced the effects of Sudden Acute Respiratory Syndrome, or SARS, and were therefore unaware of the pandemic exclusions often found in insurance policies in Asia). The concept of concurrent causes therefore provided the Supreme Court with an elegant, and robust, answer to the insurers’ contention that the ‘but for’ test ought to be applied.

The application of the concept of concurrent causes by the Supreme Court in Arch has since been replicated by the Irish Commercial Court, in its 5 February 2021 decision in Hyper Trust Limited Trading as The Leopardstown Inn v FBD Insurance plc. As the Commercial Court said in that case:

… there are situations where the “but for” test is inappropriate and where fairness and reasonableness require that there should be a relaxation in the standard of factual causation required.

Now that we have the decision in Arch, it will be interesting to see whether the ICA and AFCA can agree on whether the second test case in Wonkana is now even necessary.