Blog: Stonegate v MS Amlin and others - battle lines drawn in a £1bn dispute

The latest of the Covid pandemic business interruption cases concerns a staggering £1bn of losses claimed by over 750 hospitality businesses and turns on a number of complex topics including aggregation and causation. The case concerns a widely used “off the peg” Marsh Resilience wording which will cause many policyholders also holding this (and similar) wording to await the outcome with interest.

The battle lines are starkly drawn. Stonegate says it has claims valued at over £bn. Insurers say that they have accepted coverage under the Policy, paid out the BI losses which (they say) is limited to £2.5m together with an interim payment of £12m for Additional Increased Cost of Working cover.

Stonegate’s case is that if this is how the policy limits operate, the cover purchased for 750 businesses is virtually worthless. Whether the insurers are right will turn on issues that have long since been an important battleground for policyholders and insurers alike.

The case illustrates how, for policyholders, it is often not simply a matter of establishing a covered loss under a policy. When the parties are so far apart on the question of applicable limits, obtaining cover in principle may be an empty victory. As in Stonegate, the questions of causation and aggregation can have the effect of reducing the amount payable to a sum that appears commercially valueless.

Causation

For cover to be triggered, the loss must be proximately caused by the peril insured against. Stonegate will need to demonstrate that the interruption suffered was caused by occurrences of Covid-19 prior to the expiry of the policy. The issue is particularly contentious in this case as, in contrast to some policies which review annually and provide cover for a year, the policy in Stonegate expired on 30 April 2020, but benefits from a 36-month indemnity period during which time substantial losses were suffered. In order to benefit from the 36-month indemnity period, Stonegate will argue that the occurrences of the disease after the expiration of the policy, was a product of the disease being transmitted during the policy period.

Aggregation and the interpretation of the Marsh Resilience wording

Aggregation disputes typically concern an interpretation and function of one of two types of clause: one an “occurrence” or “event” wording; the other concerning the role of an “originating cause”. The purpose of the clause is to link losses which either arise from a single occurrence or event, or, in the case of the alternative wording, arise from one original cause. In general terms, based on established authority, the occurrence/event wording creates a narrower connection, whereas the originating cause language offers a broader ability to aggregate losses.

Stonegate’s policy does not contain “originating cause” language. The policy contains occurrence-based aggregation language and raises the question - do the claimed losses aggregate so as to be a single occurrence, or are there multiple occurrences, each attracting its own limit of cover?

The insurers argue that despite the use of occurrence-based language, the policy has an unusually broad set of linking phrases with the effect that it aggregates all BI loss which “arise from”, is “attributable to” or is “in connection with” a single occurrence. The insurers argue that the last phrase “in connection with” is unusual and very broad, which enables the insurers to argue that all BI loss suffered by Stonegate is in connection with the disease which occurred first in Wuhan. Stonegate says the fact of the pandemic cannot amount to “an occurrence” and the insurers’ approach is uncommercial and wrong in principle.

Policyholders should be aware of the aggregation language in their policies – across all lines of cover, not just business interruption. The broader the aggregation language, the more likely that claims will form a single loss.

Treatment of furlough and business rate relief (BRR) payments

In addition to the well-trodden battleground of aggregation, Stonegate raises another more discreet but still very significant issue relating to the treatment of furlough payments and the tax relief offered by the UK government and whether such payments and relief should be discounted from any assessment of revenue/turnover to calculate the loss to the business.

One of the main arguments advanced by Stonegate is a public policy one: these payments should not be deducted from its total loss; the effect of doing so would be that the insurers would be the beneficiaries of such payments (by having reduced liability under BI policies), and not the employees and small business who were the intended beneficiaries of the steps taken by the government.

Stonegate argues that a furlough payment was a gratuity from made by the UK government to help mitigate the economic effects of the pandemic. Moreover, the intention was to benefit employees by protecting their jobs (and not for the benefit of insurers by reducing any business interruption liability). The insurers argue that by not deducting the savings that resulted from furlough payments or BRR, Stonegate would benefit from an over-indemnification, or a ‘windfall’. Similar arguments apply to BRR: Stonegate argues that it was a gratuitous benefit for certain business to provide target support. The ultimate benefit of BRR should not be insurers.

The guidance from the FCA in its ‘Dear CEO’ letter following the Supreme Court’s decision in FCA v Arch was that insurers should consider the appropriateness of deducting government support received by policyholders on a case-by-case basis and emphasised the need to treat customers fairly. Whilst the decision in Stonegate will be based on the particular policy before the court, it will be informative to insurers and policyholders alike as to the expected treatment of such payments.

By Peter Hardy, partner, and Catherine Lewis, senior associate, Reed Smith