COVID-19 insurance issues to watch out for in civil law countries | Zelle LLP

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[co-author: Miguel Torres]

Insurance law360
March 2, 2021

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A recent judgment from an appeals court in Spain shows that the outcome of COVID-19 business interruption coverage disputes in civil law jurisdictions may be different than one would expect in a common law country.

The ruling raises important questions for international insurers and reinsurers, especially those based in the United States or other common law jurisdictions, who may not be familiar with the civil law principles applied by the court.

On February 3, the Court of Appeal of Girona delivered the first reported judgment of a court of appeal,[1] whereas a commercial insurance policy covers business interruption losses directly related to the closure and lockdown order issued by the Spanish government declaring a state of alarm due to the pandemic.[2]

The judgment was widely reported in the Spanish press and, as we have seen in the UK following the UK Supreme Court ruling on the model case,[3] this can lead to an increase in claims and litigation in Spain and possibly in other civil law jurisdictions.

However, although issued by a court of appeal, due to the amount claimed – € 6,000 – the judgment was rendered by a single judge and not by the chamber (three members), and is not susceptible to appeal to the Court of Cassation. Therefore, media opinion aside, it is not clear whether this judgment could be the first of many with a similar trend.

Facts and provisions of the policy

The policyholder and insured, a pizzeria company, has taken out insurance covering, among other risks, loss of profits and “[paralyzation] of the activity. “[4] The coverage contracted was 200 euros per day with a maximum of 30 days, for an amount of 6,000 €. The insurance clause reads as follows:

The insurer covers, depending on the type of compensation agreed and within the temporary and economic limits agreed in the Special Conditions, the economic losses resulting from the temporary, total or partial paralysis of the insured professional activity, provided that it this is a consequence of a peril covered by this policy and included among the guarantees of Chapter III of these General Conditions “Damage Guarantee”, which had been expressly contracted.

Following the mandatory government-ordered lockdown by Royal Decree 463, the restaurant closed and requested a daily allowance of € 200 for the 30-day period set in the policy.

Although the related insurance clause (“direct consequence of“) the guarantee for operating losses at the risks covered by the contract, the judgment declares[5] that while loss of earnings insurance is generally conditional on the existence of prior material damage covered by the policy, the legal representatives of the insurer have not raised this question as a defense.

This article will not deal with this aspect of the coverage requirements, since it appears that, oddly enough, this was not part of the parties’ contractual insurance dispute and the judgment itself does not, in our opinion, provide the information needed to provide a full analysis.

It is important to note, however, that in many court decisions in common law jurisdictions, insurers have prevailed precisely because the presence of the virus that causes COVID-19 does not constitute the direct physical loss or property damage necessary for trigger business interruption and other time element blankets.

The insurer alleged that the policy did not cover any business interruption resulting from a government resolution following the declaration of a pandemic at all. The relevant exclusion reads as follows:

We do not cover losses produced, caused, deriving or resulting from limitations or restrictions imposed by any public body or authority or for any other cause of force majeure, including forfeiture or destruction for repair of damage or for development. normal business activity.

It appears the insurer’s argument was that the foreclosure met the requirements to apply the exclusion.

The Specific Requirement for Acceptance of Limitation Clauses

In Spain, insurance contracts are governed by the Insurance Contracts Act of 1980. In accordance with Article 2 of the LCA, the provisions of the law are mandatory, with the exception of other rules or provisions. specific statutory provisions that could be more advantageous for the insured. This applies to all insurance contracts, except those considered to be significant risks.[6]

It is a legal mandate[7] that the policy must describe in a clear and understandable manner the guarantees provided and the applicable exclusions and limitations. Within the framework of the general conditions, the clauses which limit or restrict the rights of the insured must be typographically highlighted – in practice, in bold type – and must also be explicitly accepted by the policyholder or the insured.[8]

That is to say that the provisions limiting the rights of the insured must be the subject of a specific acceptance; otherwise, the provision may be null and void. Concretely, the exclusions are generally considered as limiting, they must therefore be highlighted and specifically accepted in order to be binding on the insured.

The Supreme Court, following numerous other decisions in the same direction, recently explained that:

Theoretically, the distinction between the clauses defining the guarantee … and the limiting clauses is simple, since the former specify the object of the contract and establish the dangers which, if they arise, give the insured the right to receive the consideration which is the object of the insurance. Contract. Whereas the limiting clauses restrict, condition or modify the right of the insured to receive the indemnity or any other consideration guaranteed in the contract, once the peril that is the subject of the contract occurs.[9]

Although in practice this distinction is not always clear, in general the defining clauses are those describing the risks covered, the limits, the duration or the period of insurance.

As the Supreme Court said:

The goal is to individualize the perils by establishing an objective basis, remove the ambiguity, and specify the nature of the risk consistent with the object of the contract or the uses, provided that the perils are not defined in contradiction with the special conditions or in an unusual or unusual way (surprising clauses).[10]

The exclusion of the powers of politics was inapplicable

The legal question before the appeals court was whether the paralysis of a restaurant’s business, due to the government’s lockdown decision due to the COVID-19 pandemic, is covered by the policy.

The court found that lockdown restrictions resulting from the COVID-19 pandemic caused the loss of profits, as the insured had to close and his income declined.

According to the court, since the general conditions of the police do not expressly include “paralysis resulting from government resolution following a pandemic,“and the insurer refused to provide coverage under an exclusion for damages caused by public authorities, the case presented “a clear limitation of the insured’s rights in the membership contract. “

The court ruled that as such, the requirements of Article 3 of the ICA must be met. However, the judgment states that there was no evidence that the particular policy and terms and conditions had been signed by the insured.

Therefore, the main conclusion of the judgment is that the court of appeal allowed the appeal and granted coverage and compensation on the grounds that the exclusion of the authorities, which the court considers to be a limitation clause, had not been accepted in accordance with the formal requirements envisaged. under section 3 of the LIC.

This may be a surprising result for insurers and reinsurers in common law jurisdictions, where the general rule is that an insured has a duty to read the insurance policy and is presumed to have understood its contents, so that ‘Once the policy is issued, the insured is bound by its terms and conditions, including the exclusion clauses.

It is also interesting from both a practical and academic point of view that the judgment further states that, given the absence of pandemic exclusion as such in the police, the application of the exclusion of authorities could also lead to the conclusion that indeed the policy did not provide actual coverage since the insured expects to be covered against loss of profit and business paralysis, and such a restrictive exclusion could distort the natural content of the insurance contract.

The judgment cites a decision of the Supreme Court, which, in accordance with the case cited above, warned that perils cannot be “defined in contradiction with the special conditions or in an unusual or unusual way. “[11] In other words, even if the acceptance by the insured and the policyholder of the limiting clauses of the policy had satisfied the requirements of section 3 of the LSA, it is possible that the court made the same decision.

The argument raised – but not decided – by the Court of Appeal is somewhat analogous to the concept of illusory coverage in common law jurisdictions, which applies in general terms when a policy defines coverage in such a way that the coverage will never actually be triggered, and may allow a court to reform the policy to meet the insured’s reasonable expectations for coverage. In our experience, at this time, this argument is not advanced by policyholders in disputes related to COVID-19 coverage.

Courts in common law jurisdictions would most likely reject such an argument. The general rule in these jurisdictions is that coverage is illusory when the insured does not purchase effective protection. On the other hand, the granting of a cover is not illusory if the contract meets certain risks, even if it contains a potentially broad exclusion.

The provisions relating to the time element in commercial property insurance policies are not illusory, as they cover many risks that may lead to an interruption of the insured’s activities, even if the losses caused by the decisions of government authorities are excluded.

Conclusion

Since the court relied on legal formalities firmly anchored in Spanish statutory law, the potential impact of the judgment is more likely to be felt in civil law jurisdictions with similar insurance statuses.

The judgment and other decisions following its reasoning may lead to an increase in coverage disputes in several jurisdictions. International insurers and reinsurers should be aware of the different approaches to coverage issues in civil law countries, and the additional exposure they face as a result.

[1] Judgment 59/2021, Audiencia Provincial de Girona, civil section.

[2] Royal Decree 463/2020 of March 14 (RD463).

[3] The Financial Conduct Authority v. Arch and others [2021] UKSC 1.

[4] All quotes from police provisions and court judgments are free translations from the original into Spanish.

[5] Paragraph 13.

[6] Large exposures are defined in section 13 (27) of Solvency II Directive (2009/138 / EC). In Spain, major risks are defined in article 11 of Law 20/2015 on the regulation, supervision and solvency of insurance and reinsurance entities. The contractual autonomy of the parties prevails in large risks.

[7] Article 8 LIC.

[8] Article 3 LIC.

[9] Judgment 58/2019 of January 21.

[10] Judgment 82/2012 of March 5.

[11] Judgment of July 19, 2012.


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