Author: Tom Baker

Author: Jordan Einstein Date: 07.30.20

Reading the Particulars of Claim and transcripts from the FCA test case proceeding in the UK, I learned about another important difference between the test case and the US cases. The scope of the test case is limited to non-damage policy wordings. That means the court in that case will not address potential interpretations of “physical loss of or damage to property” and similar wordings that insurers rely heavily on in the US cases.

For example, in Gavrilides Management Company et al. vs. Michigan Insurance Co., the presumptive first Covid-19 insurance coverage case decided in the US, Judge Joyce Draganchuk granted the defendant insurance company’s Motion for Summary Disposition. Judge Draganchuk granted the motion on the procedural grounds that the plaintiff failed to allege any “physical loss of or damage to” property, not on the merits of the argument that there was “physical loss of or damage to property.” Nevertheless, she made her views of the merits of that argument plain. Watching the video of the argument on YouTube, I heard her say (as the transcript confirms), “The plaintiff just can’t avoid the requirement that there has to be something that physically alters the integrity of the property. There has to be some tangible, i.e., physical damage to the property.” I heard that as suggesting that she didn’t think restaurants could make that showing. Judge Draganchuk was unimpressed with the argument that “the physical requirement is met because people were physically restricted from dine-in services,” calling it “nonsense.”

Because the plaintiff didn’t allege physical loss or damage, Gavrilides doesn’t tell us much about how other cases or judges will come out. Our reading of the motions to dismiss and other documents filed in other cases shows that there are many different arguments (and defenses) courts have yet to hear. Moreover, case law interpreting the “physical loss” and/or “physical damage” requirements is still relatively undeveloped in the US, and some lawyers claim that it differs between states. Such causal requirements are likely to be the center of gravity in many cases in the US, but the UK test case won’t provide much, if any, guidance on that issue.

Author: Jordan Einstein Date: 07.22.20

There is at least one big difference between the insurance policies at issue in the UK test case currently taking place in the High Court in London and those at issue in the US cases. In the US, insurance companies typically issue “all-risk” property insurance policies, meaning insurers cover losses not explicitly excluded. By contrast, insurers in the UK commonly issue “insured peril” policies (sometimes called “named peril” policies), which cover only those losses caused by the “perils” specifically named in the policy (such as fire, lightning, wind, public authority). Thus, while many of the broad issues in dispute are the same in the business interruption litigation in both countries, some of the arguments for each side look quite different.

With an all-risk policy, the policyholder starts with an important advantage in the litigation.  All the policyholder has to do is to prove that there was the right kind of harm – typically “physical loss of or damage to” insured premises.  Then the burden shifts to the insurer to prove that an exclusion in the policy – such as the virus exclusion – applies to eliminate coverage for the loss or damage.

In contrast, with an insured peril policy, the policyholder has to prove, not only that there was the right kind of harm, but also that the harm was caused by one of the perils specifically named in the policy.  Only then does the burden shift to the insurer to prove that the loss or damage is specifically excluded.

The nature of the “insured peril” is already a hotly contested issue at trial in the test case. The FCA – relying on a number of different policy wordings in public authority, prevention of access, and disease clauses, among others – contends that the “insured peril” is Covid-19 broadly and that policyholders’ losses result from a combination of these causes which are all connected. Conversely, the insurers seek to define the “insured peril” more narrowly.

This fundamental difference in the structure of the coverage in the policies sold on the other side of the Atlantic means that a favorable outcome for an insurer in the UK test case may not be persuasive to US courts.  By contrast, because policyholders face a more difficult burden of proof in the UK test case, a favorable outcome for policyholders could prove quite persuasive to US courts.

Here is a link to the transcript of the first day of the FCA proceeding.