Lemon & Duke case

Published 23 February 2021

Background facts

The case involved four pubs (three in Dublin, serving food and alcohol (the service of food being of relevance as it facilitated earlier re-opening) and one ‘wet pub’ outside Dublin) who had purchased policies with FBD.  All of the policies were standard form policies containing a BI extension.  Some 1300 of these policies were sold in Ireland, mainly directly to insureds without broker input.

The position with one publican plaintiff, Lemon & Duke was somewhat different in that its policy was renewed on 20 February 2020.  At that time, news reports emanating from China and Italy had caused the owner some concern and confirmation was specifically sought that cover in relation to Covid-19 was available.  FBD issued a side letter to Lemon & Duke on 2 March, 2020 confirming that cover would be available if the premises were the subject of an imposed closure by reason of coronavirus.  FBD subsequently sought to withdraw this letter on 15 April 2020 however Lemon & Duke sought to claim that FBD agreed to cover all effects of coronavirus (and not just enforced closure).

The chronology of the ‘lockdown’ in Ireland differs somewhat from that of the UK in that the Irish government reacted more swiftly to the presence of Covid-19.  Covid-19 became a notifiable disease on 20 February 2020 and the first case of Covid-19 was reported in Ireland on 29 February 2020.  On 11 March 2020, the Taoiseach closed schools, asked people to work from home and placed limits on people congregating indoors. The subsequent week showed a drop off in business in the hospitality sector and for the four plaintiff pubs.   On 15 March 2020, following demands from lobby groups for clarification, in a press release dated 15 March 2020, the Irish government asked pubs to close.  

It is noteworthy that while the Supreme Court in the UK deemed this type of instruction to be an enforced closure, this was not specifically considered by the Irish Court.  However, on 27 March 2020 in a response to arguments that this request was not an enforced closure, the Minister for Finance issued a letter to the CEO of Insurance Ireland indicating that he “fundamentally disagreed” with insurers taking the line that the Government’s advice to close businesses was not the same as a Government direction or mandate to do so, demonstrating the likely attitude of the CBI.

In Ireland, some pubs which served food were allowed to reopen on 29 June 2020 however currently, all pubs are shut. 

The Policy wording

Unlike the FCA decision, and while reference is made in the judgment for comparative purposes to other policies available in the Irish market, the Irish court was only asked to consider FBD’s policy wording.  Furthermore, while the FCA decision considered twenty one different policy wordings, none of these were identical to the FBD wording before the Court.

Section 3 of the FBD Policy was an extension to cover providing cover for consequential loss. The wording of the relevant extension was as follows:

“The Company will also indemnify the Insured in respect of (A), (B) or (C) above as a result of the business being affected by:

(1) Imposed closure of the premises by order of the Local or Government Authority following:

(a) Murder or suicide on the premises

(b) Food or drink poisoning on the premises

(c) Defective sanitary arrangements, vermin or pests on the premises

(d) Outbreaks of contagious or infectious diseases on the premises or within 25 miles of same. …..” 

The Insured Peril – a composite one.

The Court considered the scope of the insured peril and its conclusions are in line with the Supreme Court’s decision in the FCA decision.

FBD argued that the policy was neither priced nor designed to cover “extraordinary” risks such as Covid-19.  They argued that the insured peril was the enforced closure of a pub and that the references in the policy to infectious or contagious diseases were not intended to describe the peril.  If FBD was correct, this would have substantially reduced the extent of any recovery to which the plaintiffs might be entitled under the policy as the plaintiffs would have to show that their losses arose from the imposed closure, as opposed to the outbreaks of Covid-19 giving rise to the closure. 

FBD further maintained that the order to close was a response to a national situation rather than a localised outbreak.

In contrast, the publicans argued that all that was required is that there should be an occurrence of a case of the disease within the 25 mile radius and that each occurrence was part of a wider picture which dictated the response of the government.  The Plaintiffs argued, in the alternative, that each of the individual occurrences was a separate but effective cause.

The Irish Court agreed with the Plaintiffs’ approach and found that the relevant peril was a composite one; namely the imposed closure following outbreaks of infectious or contagious disease (in this case Covid-19) on or within 25 miles of the premises. Provided that there was an outbreak within the 25 mile radius and that outbreak was one of the causes of the closure, cover was available.

“Following”

At the time of policy inception there was no direct authority on the meaning of the word “following” however this had been considered by the English Divisional Court.  In the FCA case, the FCA argued that “following” should be given a meaning beyond a purely temporal meaning and that a causal connection short of proximate cause should be attributed. The English Divisional Court accepted this approach. 

The Irish Court similarly rejected the argument that “following” should be limited to its temporal meaning and considered what level of causative meaning should be attributed.  The language used in the policy as a whole suggested that a lesser standard than proximate cause should be attributed to the word “following”. The Court found that the outbreak of the disease within the 25 mile radius of the insured premises should be a cause but not necessarily the dominant cause of the imposed closure.

Whether the Insured Peril caused the plaintiffs’ losses

Once it could be shown that the government imposed closure followed the admitted outbreaks of Covid-19 within 25 miles of the insured premises, it then needed to be shown that the plaintiffs’ businesses had suffered losses as a result of the insured peril.

While this issue would need to be considered at the hearing on quantum, the Court noted that the Policy used the words “as a result of the business being affected by … imposed closure of the premises …” (emphasis added) which denoted the requirement that the closure which followed the outbreaks was a proximate cause of the publicans’ losses.

Was the closure the proximate cause of the Plaintiffs’ losses?

In considering whether the composite peril was the proximate cause of the plaintiffs’ losses, the Court accepted that it was difficult to distinguish the effects of the composite insured peril from the effects of public reaction to the existence of the disease.  FBD sought to advocate the use of the ‘but for’ test for causation relying on the Orient- Express case.

Mr Justice MacDonald opined that if the usual “but for” test was to be applied without modification it would create significant problems for the publicans in that it could be said that many of the publicans’ losses would have arisen in any event by reason the “societal reaction” to the Covid-19 pandemic.  He considered whether the ‘but for’ test should therefore be relaxed.  

While he did not go so far as to overrule the Orient –Express case as the UK Supreme Court had done in the FCA appeal, Mr Justice MacDonald distinguished the decision.  Instead, he referred to Hart & Honore[¹] as authority for the view that where there are two sufficient overlapping causes of loss, both, rather than neither should be regarded as causes.  He was of the view that this was an “entirely sensible” approach where there are two overlapping proximate causes of the plaintiffs’ losses, in this instance, the composite peril described in the Extension and the alteration of societal behaviour in response to Covid-19.  It would be fair and reasonable to modify the “but for” test which would otherwise give rise to manifest injustice. 

The appropriate counterfactual

The Court was asked to consider what the appropriate counterfactual was i.e. what would have been the position of the business of each of the publicans, had the insured peril not occurred.  This was in order to establish what losses arose from the occurrence of the insured peril.

The Plaintiffs argued that the appropriate counterfactual was where there was no imposed closure and no Covid-19.  This however ignored the geographical limitation in the FBD Extension.

FBD proposed a scenario where there was no closure of the pubs but outbreaks of Covid-19 within a 25 mile radius. In that scenario, the pubs remained open but they were affected by societal changes which had taken place due to Covid-19. Given that the Court had not accepted FBD’s view that the insured peril was limited to the enforced closure of the pubs and not a composite peril, the Court was of the view that FBD’s counterfactual could not apply.   

The Court accepted that there was difficulty in constructing a counterfactual where there was no closure or Covid-19 within a 25 mile radius, when the world beyond that radius was still affected by Covid-19.  Having regard for the FCA decision, the Court considered that it was wrong to construct a counterfactual of what an insured’s financial position would have been, ignoring a concurrent proximate cause.  The Court found that to the extent that the existence of Covid-19 outside of the 25 mile radius was a concurrent proximate cause (and not excluded by the FBD policy), it must also be stripped out of the counterfactual.  So long as the plaintiffs could establish that the closure following the outbreaks was a proximate cause of their loss, their recovery should not be reduced just because a change in societal behaviour was also a proximate cause.

The Court formed the view that in relation to the three publicans (other than Lemon & Duke) the correct counterfactual was a world in which there was no imposed closure and no outbreaks within 25 miles of the plaintiffs’ premises.  Losses which have no sufficient connection to the composite peril should not be excluded from the counterfactual as they would never arise from the insured peril.  Mr Justice MacDonald gave the example of the loss of revenue owing to the refusal of a dance licence. Such losses are to be contrasted with losses proximately caused by the overlapping effects of both the composite peril and the public reaction to the dangers of Covid-19 which would exist both within and beyond the 25 mile boundary.

The position was different in relation to Lemon & Duke, in circumstances where FBD’s specific representation that cover would be available if the premises were the subject of an imposed closure by reason of coronavirus, made no reference to outbreaks being confined within a radial distance of 25 miles from its premises.   

This finding also differed from the FCA case, in that the Divisional Court did not regard the geographic limitation as part of the insured peril and for that reason, in defining the counterfactual, it did not have regard to the 25 mile radius.

Furthermore, unlike in the FCA decision however, where the geographical limits of the counterfactual were limited to those within the UK, Mr Justice MacDonald opined that further submissions were necessary in order to determine whether the only elements to be stripped out from the counterfactual are those referable to the territory of the State.  He did not rule out that the presence of Covid-19 worldwide could have a bearing on the counterfactual as the effects of Covid-19 on the outside world could have an impact on the plaintiffs’ business if say, they were dependent on tourists from abroad.

Disaggregation

The Court considered FBD’s arguments in relation to disaggregation (that is, whether one can separate the effects on business of the outbreaks of Covid-19 from the effects of the peril itself).  

FBD argued that it was possible to disaggregate losses arising from the insured peril and losses arising from societal behavioural changes due to Covid-19.   MacDonald J considered this to be lacking in reality.

MacDonald J accepted that there may be cases where specific heads of loss are proximately caused by an uninsured peril, these could be separated.  Where however, the losses are proximately caused by a combination of the composite peril embodied in Extension 1 (d) and societal reaction to Covid 19, he considered that the approach taken in Miss Jay Jay and Silversea was appropriate.

Trends and circumstances

Trends clauses are present in a policy to ensure that the indemnity provided by the policy corresponds with the cover available under the policy and is not inflated by factors unrelated to cover. 

The FBD Policy stated that the losses claimed should be “adjusted for the trend of or other circumstances affecting the business” however trends were not defined in the FBD policy.

The dispute between the parties relates to whether the fall off in sales suffered by the plaintiffs in the days preceding the imposed closure on 15 March, 2020 constituted a trend or circumstance that should be carried forward into the period of closure. In other words, the question is whether those losses should be assumed to continue throughout that period.

FBD sought to argue that the effect of the clause was that the fall off in sales in the days preceding 15 March 2020 constituted a trend or circumstance that should be taken into account in adjusting the amount to be paid, even if they are ultimately part of the composite insured peril.  In advancing this argument, FBD relied on the Divisional Court finding in FCA, particularly the approach taken in relation to the RSA3 policy and the Arch policies.

The Plaintiffs accepted that in producing the relevant comparator, the fall off in sales leading up to 15 March should be taken into account.  Because the peril had not eventuated before 15 March, 2020, these losses could not be said to have arisen as a consequence of the insured peril.  After this however, once the insured peril had occurred, it would be thereafter, contrary to principle, if any element of the insured peril was to be taken into account in adjusting the amount of the payment to be made by FBD under the policy.

The Irish Court disagreed with FBD on this issue and with the view taken by the UK’s Divisional Court in the FCA case which it noted had been overturned by the Supreme Court.  In applying the trends and circumstances provision of the FBD policy, the effects of the insured peril should be excluded from the calculation. While the losses incurred prior to 15 March could be taken into account in calculating revenue for the purposes of creating a comparator, these losses should not be carried forward as a trend for the duration of the insured peril. 

Conclusion

The Court found in favour of the publicans in this case in interpreting the insured peril as a composite one and finding that the publicans could recover losses arising from the enforced closure, as opposed to the outbreaks of Covid-19 giving rise to the closure.   Quantum in the case remains to be determined. 

Although a decision based on a single policy wording, given the breadth of issues considered, the decision is likely to have a significant impact on the treatment of business interruption claims.

[¹] Hart and Honore on Causation in the Law (2nd ed.) at pp. 123-124