Covid Business Interruption Disputes: The Salon Gold Arbitration Award

Covid Business Interruption Disputes: The Salon Gold Arbitration Award in Various Insureds v Canopius

Summary

Here, by an arbitration award (made public with the agreement of the parties) Sir Richard Aikens decided a number of issues in relation to the application of the “Public Emergency Extension clause” of the Henry Seymour Salon Gold 2019 (or similar) wording to Covid BI losses.

In particular, the arbitrator decided that for a ‘Public Emergency’ prevention of access BI clause there is no requirement for the emergency to have occurred within the vicinity of the Premises as long as it endangered life within the vicinity. Although redundant given the other conclusions reached in the award, the arbitrator indicated that he agreed with insurers that “the vicinity” means the area around the Premises.

Background

The material parts of the Public Emergency Extension clause in the Salon Gold 2019 wording state that it will cover:

“…loss as insured under this Section resulting from… the actions or advice of a government or local authority due to an emergency likely to endanger life or property in the vicinity of the Premises which prevents or hinders the use of or access to the Premises…”

The award

The decision can be distilled down into four principal questions. We take each of these questions in turn below:

(i) What is the correct interpretation of “an emergency likely to endanger life… in the vicinity of the Premises”?

The competing constructions of the sentence were: (a) the emergency can be anywhere but must endanger life in the vicinity of the Premises; versus (b) the emergency itself having to be located in the vicinity as well as having to cause danger to life within the vicinity.

The arbitrator concluded that the first construction was correct. It was not necessary to show that the emergency was located in the vicinity of the Premises. Rather, the emergency must have been one which endangered life in the vicinity of the Premises. This, according to the arbitrator, was the only reasonable meaning of the clause. It followed the syntax. It did not involve artificially inserting commas where the draftsperson had chosen not to. The fact that the response to the emergency could come from a local authority or regional or national government added some context to how “emergency” should be defined.

The arbitrator also concluded that he was not bound to follow the Divisional Court in the FCA Test Case (this point was not appealed to the Supreme Court) since the point had not been “squarely decided” in that judgment, which had considered the RSA 1 and RSA 2 wordings. These contained very similar Prevention of Access – Public Emergency extensions of cover in the following terms:

“What is covered

The actions or advice of a competent Public Authority due to an emergency likely to endanger life or property in the vicinity of the Premises, which prevents or hinders the use or access to the Premise…”

On the face of it, this clause is at least very similar (if not materially identical) to the clause in this case.

In the FCA Test Case, the Divisional Court concluded that the clause required there to be an emergency in the vicinity of the Premises. This “connotes neighbourhood, the area surrounding the Premises” which cannot mean the entire country. The “paradigm example” of the “emergency in the vicinity” is, according to the Divisional Court, the police cordoning off an area including the insured Premises because of intelligence about bomb making materials located in that area.

The arbitrator circumvented this analysis by concluding that the question as to whether “the emergency” or just “the danger to life” needed to be in the vicinity had not been argued before the Divisional Court. This involved quite a detailed analysis of the arguments made to the court rather than the just the judgment itself.

(ii) What does “likely” mean in the context of this clause?

The arbitrator decided that “likely” in this context meant “a real possibility” of there being a danger to life (or property). It did not mean “more likely than not”.

One of the factors the arbitrator took into account was the fact that it is “unrealistic to think” that the government will have undertaken a forensic assessment of the likelihood of the emergency endangering life or property. Rather, they will have acted based on there being a real possibility of such danger.

Timing issue

In addition, there can only be cover if the government or local authority action or advice was “due to an emergency…”. If, therefore, the government action or advice in relation to Covid-19 was given before the emergency had started, there could be no cover. This was so even if the government advice or action had resulted in a prevention of access.

It was accepted that by 16 March 2020, there was an emergency. The arbitrator concluded that in fact there was an emergency as at 12 March 2020. At that point: (a) Covid-19 had been designated a notifiable disease in the UK; (b) the WHO had declared Covid-19 was a pandemic; (c) the Prime Minister had reported that the number of cases of Covid-19 was rising sharply and the country was faced by the “worst public health crisis for a generation”; (d) the first death from Covid-19 in the UK had been reported; and (e) the risk level in the UK because of Covid-19 was raised from “moderate” to “high”.

(iii) What is an “Emergency”?

The arbitrator rejected insurers’ argument that “emergency” required that at or before the announcement of the relevant action or advice, it was necessary for a claimant to prove that (a) there existed a person who had been diagnosed as suffering from Covid-19; (b) who was in the vicinity of the Premises; and (c) that diagnosis had been reported to or was known by the relevant body or authority that had taken the action or issued the advice.

This conclusion was inevitable given the decision reached on the first issue that there was no need for the emergency to have been in the vicinity of the Premises. However, the arbitrator proceeded to raise three further points.

First, he concluded that even if the emergency was required to have been located in the vicinity (as the Divisional Court considered was required) there was no requirement to prove that a case of Covid-19 had been diagnosed or reported before the action/advice of the relevant authority. Nor was that argument, in his view, raised before the Supreme Court.

Secondly he stated that “no Court has yet found” that, in order to prove that Covid 19 was the “occurrence” or “danger”, both the diagnosis and report of that case of Covid 19 to a relevant authority must be proven.

Thirdly, he considered it unrealistic to conclude that a policyholder would have to show there was a case of Covid-19 diagnosed and reported which was in the vicinity of the Premises which lead to the government or local authority action or advice. Furthermore, he was “sure that a reasonable insurer and a reasonable policyholder of the type concluding a contact with this Sub-Section for business interruption cover would not have thought that the wording required such proof”.

(iv) What does “vicinity” mean in the context of this clause?

This point too was rendered redundant given the other conclusions reached. The arbitrator was nonetheless prepared to decide this issue too. He agreed with insurers that “the vicinity” means the area around the Premises. That is, broadly speaking, within the neighbourhood of the Premises.

He also concluded that this is a flexible concept. What, precisely, that area comprises will depend on two factors. First, the location of the particular Premises. There is no pre-determined radius that applies in all cases to define the vicinity. This will depend on things like whether the Premises are in a city, a town, a village, the countryside etc, with the vicinity likely to be larger in a village or the country and smaller if in a more urban area. It may also depend on local features, such as whether there is a river or canal near the Premises, the road network, whether there is a railway track that does not have a road crossing etc. Secondly, it also depends on the nature of the emergency that is likely to endanger life or property in the vicinity of the Premises. This is because it is the nature of the emergency that gives rise to the action or advice which, in turn, leads to the prevention of access.

Therefore, the argument that vicinity meant the whole country was rejected. So was the argument that vicinity must mean the entire city, town or village in which the Premises is located. The arbitrator then proceeded to interpret the vicinity specifically in relation to each of the 13 test cases. With one exception (Premises in Sutton Coldfield), the vicinity was defined by reference to boundaries (motorways, A-roads, a park, a racecourse etc) rather than a particular radius.

Comment

It is worth noting first of all that the decision of an arbitrator, even one as eminent an arbitrator as Sir Richard Aikens, is not binding on a court. That said, as has been seen with Lord Mance’s arbitration decision in the China Taiping case, at the very least these reported arbitration decisions are seen as persuasive.

The decision itself represents another case where a first instance tribunal has refused to follow the Divisional Court judgment in the FCA Test Case. This is not universally the case, however, as was seen in Mr Justice Jacobs judgment on the Allianz wording in the Gatwick Investments case.

Some elements of the decision may come as a surprise. For example, the interpretation of “likely” as meaning “a real possibility” may not have been predicted by insurers (and insurance lawyers). The term likely has been construed in a straightforward way to mean more likely than not in relation to things like “circumstances likely to give rise to a claim” in deeming provisions in claims made liability policies and in pre-contractual proposal form questions. Here, however, it was given an interpretation (“a real possibility”) that is more generous to the insured.

Furthermore, whilst the arbitrator concluded that “emergency” would not require a case of Covid-19 to have been located in the vicinity, that will not be the same with other, different wordings. In the FCA Test Case itself, the Supreme Court interpreted “event” and “occurrence” to mean that there had been someone who had the virus (whether manifest or not) within the relevant area. And in Gatwick Investments, the court construed: (a) “incident” to require not only someone having the disease, but that this was apparent at the time they were in the relevant area; and (b) “incident likely to endanger human life… within 1 mile radius of the premises” meant that the incident that was likely to endanger life had to occur within the relevant radius and not just the endangerment to human life. This highlights the fact that it remains crucial to interpret each clause according to the words actually used.

Finally, how the “vicinity” will be defined in each case will be specific to the particular location of the insured premises and the nature of the insured peril. The application of the general principles to each specific case at the end of the decision demonstrate how arbitrary, albeit necessarily so, this assessment is likely to be.