Business interruption insurance: Aggregation

The recent case of Bath Racecourse v various insurers decided a series of issues left unresolved from the earlier proceedings between the parties regarding the claimants' claim under a business interruption policy for Covid-19 losses.

There were two main points: 

1. was the closure of the claimants' premises on the order of a "competent authority" – in this case the restrictions were ordered by the British Horseracing Authority and Greyhound Board of Great Britain; and
2. what constituted "any one loss" in the context of multiple premises closed by a series of official actions. 

Background 

The claimants had a Material Damage and Business Interruption Policy underwritten by the various insurers for the period 1 January 2020 to 31 December 2020. The policy included BI cover with an extension for denial of access, which was limited to £2.5m any one loss. The claimant policyholder alleged that this extended cover was engaged when lockdown and other measures were put in place as a result of Covid-19. 

The policy wording 

The Denial of Access extension read as follows:

“This Section extends to include any claim resulting from interruption of or interference with The Business carried on by The Insured at The Premises in consequence of:

…

(b) action by the Police Authority and/or the Government or any local Government body or any other competent authority following danger or disturbance within a one mile radius of The Premises which shall prevent or hinder use of The Premises or Access thereto

…

provided that

1. after the application of all other terms conditions and provisions of this Section the liability of the Insurer shall not exceed…

(ii) GBP 1,000,000 in respect of (b) above any one loss

...”

The schedule went on to amend the limit as follows:

“Proviso (ii) and (iii) are amended in respect of (b) and (c) to GBP 2,500,000 and a maximum indemnity period of 3 months.”

1. Was the closure of the claimants' premises on the order of a "competent authority"

The Court held that if someone had asked a reasonable policyholder who understood something about the regulation of horse and greyhound racing which authorities might issue instructions with which the claimants would have to comply restricting the use of the racecourses in the event of a danger to public safety, the British Horseracing Authority and Greyhound Board of Great Britain would have been on the list – towards the top of it. The answer was therefore yes. 

2. What constituted "any one loss" in the context of multiple premises closed by a series of official actions

The Court concluded that the "any one loss" limit is intended to apply per premises or facility – i.e. per racecourse, hotel, and golf course – following the way in which the parties had divided up such facilities for the purposes of identifying different maximum indemnity periods and different aggregate sums insured under the policy. An argument that it applied per affected race was rejected.

The Court looked at the definitions in the wording of “the Business” and the “Premises”, both of which were widely defined. Nevertheless, the underwriters were unsuccessful in their arguments that the claimant only had one “Business” and therefore any fall in revenue should be captured in a single calculation. The decision that “any one loss” applied per premises was based on the way in which the parties divided up such facilities. A spreadsheet which referenced (a) racecourses (b) hotels and (c) golf clubs, with different maximum indemnity periods applying to the three different types of facilities. Estimate gross revenues had also been divided up based on the three different types of facilities. For insureds who operated multiple facilities, there were multiple line entries.

The Court held that the spreadsheet made it clear there was an intention for the facilities to be treated separately when performing a loss calculation. There was a clause in the wording which provided in certain circumstances for trading results to be ascertained by looking separately at each department, but there was nothing equivalent for different facilities or premises. Nevertheless, separate £2.5m limits applied to each individual racecourse, hotel and golf course – not to the whole business or per category. 

The Court reasoned that: “If a separate loss calculation for each affected facility is going to be necessary when performing loss calculations for “ordinary” BI cover, one might expect the same to be true when the denial of access extension operates”. Further saying that “absent some suggestion in the wording to the contrary, one might anticipate that the subdivisions would be the same for damage and non-damage BI.” The underwriters had argued that the alternative trading clause cover was meant to be looked at across the business in the round – the Court implicitly rejected this.

The Court reasoned that a "loss" is the immediate consequence of a trigger event – the interruption to the business caused by the operation of the insured peril. Where quantification is arrived at by looking at differences in gross revenue over a defined period, all of the consequences of that interruption must form part of a single loss, such that each lost ticket sale or meal is not a separate loss. The Court found it helpful to think of "one loss" as meaning something akin to one "loss calculation" – the activity that would need to be performed after an insured risk caused an interruption to determine what, if anything, was owed by the underwriters.

The Court concluded that if there was a new trigger event, there would need to be a further and separate calculation, with its own indemnity period. Each would be a separate "loss" for the purposes of the limit. A new trigger could be the action of the authority imposing an increased restriction. However, such an increase must be material although "materiality" need only be a relatively low hurdle – if the further restriction at least has the potential to affect the claimants' gross earnings. Each new trigger event would have been subject to its own limit of £2.5m. The occurrence of a fresh trigger event and therefore the commencement of a new indemnity period necessitates a new loss calculation and results in a further “loss” for the purposes of the limit.

What this means for insurers 

Scope of "competent authority"

The ruling confirms that private sector regulatory bodies – not just state or statutory authorities – can qualify as "competent authorities" for denial of access purposes. The Court found it impossible to place the BHA and GBGB outside a common genus with government and police on the basis of their coercive powers alone. Insurers should review policy wordings carefully if they intend to limit cover to state bodies, as clear and express language to that effect will be required.

Application of the “any one loss” limit

The "any one loss" limit applied per facility – racecourse, hotel, golf course – not per insured entity, absent specific language to the contrary. For policyholders operating multiple facilities, this significantly increases the potential aggregate limit exposure for insurers where the same action affects several sites. The wide definition of “Business” was not enough to successfully argue that all losses across multiple facilities must be aggregated into a single calculation and be subject to a single limit. Insurers who wish to ensure that a single “any one loss” limit applies to an insured entity across all its facilities need to say so explicitly in the policy. 

Multiple trigger events

A separate £2.5m loss calculation applied for each relevant measure or action and for each affected facility. This means that each material escalation in government or regulatory restrictions could generate a fresh limit, multiplying potential exposure substantially.