Business Interruption cover and insurable interest

Summary

In The Members of the Probitas Syndicate 1492 At Lloyd's for the 2022 Underwriting Year of Account v Pro 2 Care Ltd the court construed a liability policy following a claim that damage from a burst water pipe had delayed the opening of a business. The court found that the policy did not cover business interruption losses (BI), or in the alternative that there was no insurable interest to which BI cover could attach.

Background

The defendant's sole director bought and insured a property in order to develop a care home business.

Before the care home could become operational the property needed to be refurbished, and planning and other consents were required from the local authority. Damage was caused by water pipes bursting before the care home opened, allegedly delaying its opening. The defendant claimed for property damage and BI under the policy. Insurers denied that the policy included BI cover, and applied for declarations to resolve the coverage issues.

Scope of cover

The court applied well-established principles of policy construction, asking what a reasonable person, with all the background knowledge which would have been reasonably available to the parties when they entered into the contract, would have understood the language of the contract to mean. The court concluded that the insured had no real prospects of successfully arguing that the policy included BI cover. It therefore granted summary judgment in favour of insurers.

The Policy consisted of (1) a policy schedule (the "Schedule") and (2) the policy wording (the "Wording"). The "principal relevant provision" was identified as being the statement in the Wording that "The Schedule attached to this Policy provides details of the Sections that are operative and the cover that has been agreed". Each of the headings used in the Schedule mirrored the associated heading of a Section of the Wording. Section A of the Wording was entitled "Property Damage and Business Insurance", with reference to a "Schedule of Values and Deductibles". That Schedule included sums insured for "Buildings", "Contents" and "Computers", but made no reference to any sum insured for BI.

It was held that the ordinary policyholder (taken to have read through the Policy conscientiously in order to understand what cover they were getting) would have concluded that Section A of the Policy was limited to Property Damage insurance cover only. There was nothing in its plain and ordinary language to support the submission that the parties intended the sums insured for Buildings, Contents and Computers at the property to include BI cover. The separation of the property and BI covers in Section A would be "readily comprehensible", and it would be "readily apparent" to the reader that the Schedule contains none of the requisite details required to calculate any BI insurance payment.

This textual reading accorded with common sense. The insured was defined as a “Property owner of soon to be children's care home". This made the lack of BI cover unsurprising. It makes "no objective commercial sense" to conclude that BI insurance cover was provided without any statement of the relevant details or any stated limits for the purposes of making any BI claims or payments.

Although evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court's interpretative exercise, a 2022 insurance quote prior to renewal of the policy was held to form part of the factual matrix going to the background knowledge available to the parties when they entered the Policy. The quote included a Sum Insured for Property Damage of £1,015,000 (and 1 location), whereas the Gross Revenues for BI were entered as "N/A".

Insurable interest

In the alternative, if wrong on the question of construction, the court held that the insured did not have an insurable interest to which BI cover could attach. It is "of the essence of Business Interruption insurance that the cover indemnifies against the risk of an interruption to business income". Both as a matter of principle and based on the Policy wording, that means a partial or total loss of business revenue by reason of an insured event. As defined in the Policy, there was no care home business in operation at the insured property when the policy incepted or, indeed, at the date the water damage occurred. The insured business had no income stream, cash flow or turnover which stemmed from an operational business at the property and which required protection, so that the defendant did not suffer any "Loss of Gross Revenue" due to BI.

The court acknowledged that it is possible to insure future operations, although it also refused to take into account alternative cover available in the market (such as delay in start-up insurance) to inform the construction of the policy. However, in this case, the Policy did not provide cover against the "hope of starting a care home business from a particular date". For this reason too, the claim was not covered.

Waiver

Insurers had agreed to "reconsider" the BI claim, subject to evidence of loss, following a complaint by the insured to Lloyd's. The court dismissed the insured's arguments that insurer had, by indicating that it would reconsider its decision, thereby waived its rights in respect of the BI claim.

Waiver by estoppel requires: "... a representation, in words or conduct, which must be unequivocal and must have been relied upon in circumstances where it would be inequitable for the promise to be withdrawn" ) Kosmar Villa Holidays Plc v Trustees of Syndicate 1243). The court accepted arguments that insurers had made no such representation, and that in reconsidering the claim and asking for evidence insurers had not indicated that the BI claim they had previously declined was now accepted as a valid claim.

Commentary

This decision is unsurprising both as a matter of principle and of construction of the policy terms.

It is noteworthy that the court was willing to consider the quote document as part of the factual matrix against which the policy terms were construed. This should not be misinterpreted as allowing the content of negotiations to inform the construction of policy terms (which is inadmissible). Rather, the court recognised that the quote formed a key part of the offer and acceptance between the parties, based on which the contract was drawn up. In other words, it was part of the matrix of facts against which the policy fell to be construed. That said, it would be dangerous for any party to assume that reliance on a quote, or an element of the proposal form, or some other key document shared in the lead up to conclusion of the policy can trump the terms of the policy itself.

This also represents another case in which insurable interest has proven important, following on the back of Quadra Commodities SA v XL Insurance Co SE in 2023. The insured must have an insurable interest in the subject-matter of the insurance, otherwise the contract will not be an insurance contract. This can, as in this case, be important to determine whether there is cover. It might be relevant to determine whether outwards reinsurance responds. It can also be an important regulatory issue, both in terms of an insurers' permissions and the applicable regulatory regime. The borderline is not always straightforward. But in this instance, the court's conclusion on both insurable interest and contractual construction were very clear.