The Provincial Court of Girona has ruled on appeal on a case in which the insurer was sued for refusing business interruption cover to a restaurant that was forced to close its business during the pandemic (59/2021 Section Nº1 Civil Court of Girona). The court confirmed that the insurance policy should respond in this case, following a 30 day-closure which was imposed by Covid-related State legislation. In this respect, several insurance associations (Adecose, Aunna, Cojebro, Consejo General, Espabrok and Fecor) have shared their views with their members, advising them to be careful about the conclusions to be drawn from this judgment.
In Spain, BI cover derived from business closures due to decisions of public authorities and arising from state of alarm are generally not available on the market. When they do, they are not designed for “mass” policyholders, but for special risks, most of the time on Anglo-Saxons markets, and are associated with very high costs.
In this case, the insured owned a pizzeria, and was forced to stop its activities because of the pandemic during 30 days. The owner made a claim to his insurer, based on his BI cover. The insurance company denied cover, stating that the policy didn’t mention the fact that the costs arising from Business Interruption – resulting from a governmental decision in the event of a pandemic – would be covered. The insured brought the case in front of the Court of First Instance of Girona, which dismissed his request, in a ruling handed down on 20 November 2020.. That’s why he filled an appeal, and on February 2021, the Provincial Court overturned the first instance judgement. The court found in favour of the Insured, relying on a broad interpretation of a policy clause, which was considered by the magistrate as limiting the rights of the insured, and – according to him – should have been typographically distinct from the rest of the clauses, and expressly accepted by the insured. It is important to note that the judgement, from a chamber of the provincial court, won’t create a precedent, and takes the opposite side of a similar judgment, which was handed down in 2013.
This decision initiated a debate in the Spain insurance industry. Indeed, many stakeholders outlined the fact that, for a Business Interruption cover to respond, the occurrence of a material damage is necessary, as recalls Maciste Argente, CEO of Argente Gestión de Riesgos Correduría de Seguros, S.L.: “Not linking the activation of the guarantee to the existence of prior material damage could lead us, following the spirit of this judgment, to incomprehensible situations, such as […] the inability to open a business due to airport closures that prevent employees from accessing it after a trip (remember the problems caused in 2010 by the ash from an eruption of a volcano in Iceland, which cancelled more than 6 000 flights in Europe)”.From a more “legal” point of view, José Antonio Badillo Aria, Director de ‘R.C. Revista de Responsabilidad Civil, Circulación y Seguro’, outlines that this decision will give rise to some controversy in the coming months. Indeed, it seems clear to him that where insurance contracts link a BI to the existence of direct material damage covered by the policy, policyholders are dealing with a delimitation of risk clause. This type of clause is different from the clauses limiting the rights of the insured, which the magistrate identified in our case, as they do not need to be typographically distinct from the rest of the clauses in the contract, nor does it need to be expressly accepted by the insured by means of his signature. Therefore, the argument of the nature/typography of this type of clause will no doubt be raised in the future, and will be subject to debate. Antonio Badillo Aria also highlights the fact that, in order to resolve similar cases in the future, it will be necessary to analyse on a case-by-case basis how such clauses are drafted. Therefore, there will be no single rule, but the outcomes of future cases will depend on the drafting of the clauses.
This court decision is likely to initiate a wider movement in Spain, which seems to have been germinating in recent weeks. Indeed, 200 Spanish hotel and restaurant owners are now claiming to be indemnified for their BI losses arising from the pandemic, through a class action. They claim a total of 8 million euros from seven insurance companies.
What does it mean for insurance brokers?
In some instances, policyholders with policies that do not respond could be tempted to sue their insurance intermediary for not advising them to take out a policy that could have covered BI losses related to a pandemic. This movement is already beginning to take shape in the United-Kingdom, Ireland or France, whereas we are not seeing any such claims in Spain or Italy. Nevertheless, Insurance associations recall that the court’s interpretation of the clause does not correspond to the “spirit” of the cover when granted as, when the insurance contract was taken out in February 2020, “nobody in any sector, neither in the Insureds nor insurance companies, had the objective of covering a pandemic“. Indeed, most of insurance policies were not designed to target this type of risk, which wasn’t even considered by policyholders. Blaming insurance intermediaries for not having foreseen a risk that nobody thought of would therefore be a nonsense.
Furthermore, insurance associations emphasized the fact that: “pandemic cannot be covered by the insurance sector in its entirety. There are no enough reserves or premiums to cover it“. Indeed, Maciste Argente underlines the fact that – when insurance policies were incepted, before the onset of the pandemic – the premium charged by insurers for BI covers were not intended to be calculated in contemplation of the risk of a global pandemic “It is both unfair and dangerous to expect coverage to go further. This is the reason why Spanish insurance associations are currently proposing solutions in public statements, such as the creation of a public-private partnership at Spanish and European level, to provide a means of better managing a future pandemic. However, this solution was already studied in other countries, but seems quite difficult to implement. For instance, France was planning to set up a new compulsory insurance scheme called “CATEX” to cover business interruption arising from a future pandemic. That’s why a working group was set up and quickly proposed a scenario aimed at offering a lump sum “resilience capital” to VSEs and SMEs in the event of an administrative closure due to a pandemic (but also due to a natural disaster, an act of terrorism or popular riots). This idea was recently dropped by the French government, because it would have meant imposing new compulsory contributions on SMEs, which may not be able to afford them. Furthermore, reinsurers shared their views on the difficulty they would have in releasing capacity if a multi-peril scheme were adopted. Planète CSCA, the professional brokerage union, has also expressed some reservations, wishing to limit its coverage to pandemic risk. As no consensus was reached, the project was dropped.
In Europe, unprecedented growth in rulings in favor of policyholders
This decision is in line with other countries whose courts have ruled on pandemic-related BI losses, but is likely to have a more limited impact. Indeed, UK regulator, the Financial Conduct Authority (FCA), took the initiative to bring the case against a sample of over 60 insurers because it felt that a large number of commercial package policy wordings would cover claims arising from the pandemic, whether deliberately or not. After a first instance judgement in favour of policyholders, this test case was fast tracked to the Supreme Court for a final decision, which was handed down on 15th January 2021, and generally found in favour of the FCA. It is the ‘final resolution’ of the test case and there is no further recourse through the English courts.In Ireland, a similar decision was handed down by the High Court, a few weeks after the UK Supreme Court’s decision, in a test case opposing the insurance company, FBD, to four publicans. This decision provides clarity to policyholders seeking indemnity for business interruption as a result of the Covid-19 pandemic. FBD announced that it won’t be appealing the decision. This decision is quite different from the FCA’s Test Case though, as unlike the UK watchdog, the Central Bank of Ireland did not take the initiative to bring such a test case to Court, certainly due to statutory restrictions, and let the market litigate the case. Despite its absence in the test case proceedings, the Central Bank is apparently willing to supervise this issue, as it announced that it “welcomes the judgment of the High Court” and that it will be “closely examining the potential impact of this judgment for customers in the context of its sustained and ongoing engagement with insurers”.
Unlike the Spanish decision, these two decisions are likely to set precedents in the Irish and UK markets, and reflect a broader movement, due to the intervention of the watchdogs.Therefore, there is no single approach to this problem at European level, due to the specificities of each market.