[co-author: Miguel Torres]
March 2, 2021
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A recent judgment from a court of appeal in Spain shows that the outcome of coverage disputes over COVID-19 business interruption losses in civil law jurisdictions may be different from what would be expected in a common law country.
The decision raises some important issues for international insurers and reinsurers to consider, particularly those based in the U.S. or other common law jurisdictions, who may not be familiar with the civil law principles applied by the court.
On Feb. 3, the Court of Appeal of Girona rendered the first reported judgment from a court of appeal, holding that a commercial insurance policy provides coverage for business interruption losses directly arising from the closure and lockdown order issued by the Spanish government declaring the state of alarm due to the pandemic.
The judgment has been widely reported in the Spanish press and, as we have seen in the U.K. following the U.K. Supreme Court's ruling on the test case there, it may lead to an increase in claims and litigation in Spain and possibly other civil law jurisdictions.
However, although issued by a court of appeal, due to the quantum claimed — €6,000 — the judgment was rendered by one single judge and not by the chamber (three members), and cannot be appealed before the Supreme Court. Therefore, media opinion aside, it is unclear whether this judgment could be the first of many others with a similar trend.
Facts and Policy Provisions
The policyholder and insured, a pizzeria business, purchased insurance covering, among other risks, loss of profits and "[paralyzation] of the activity." The contracted coverage was 200 euros on a daily basis with a maximum of 30 days, totaling €6,000. The insuring clause reads:
The insurer covers, depending upon the type of compensation agreed and up to the temporary and economic limits agreed in the Particular Conditions, those economic losses arising from the temporary paralysation, total or partial, of the insured business activity, provided that it is a direct consequence of a peril covered under this policy and included among the covers of Chapter III of these General Conditions "Coverage of Damages," which had been expressly contracted.
Following the compulsory lockdown ordered by the government through Royal Decree 463, the restaurant closed and made a claim for the daily compensation of €200 for the 30-day time limit established in the policy.
Although the insuring clause linked ("direct consequence of") the business interruption cover to perils covered by the policy, the judgment declares that while loss of profit insurance is generally dependent on the existence of a prior material damage covered by the policy, the legal representatives of the insurer did not raise this issue as a defense.
This article will not address that aspect of the coverage requirements, since it appears that, strangely, it was not a part of the parties' contractual insurance dispute and the judgment itself does not, in our view, provide the information necessary to provide a full analysis.
It is important to note, however, that in many judicial rulings 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 damage to property required to trigger business interruption and other time element coverages.
The insurer did allege that the policy did not cover at all business interruption losses arising from a governmental resolution following the declaration of a pandemic. The relevant exclusion read as follows:
We do not cover those losses produced, caused, deriving or resulting from limitations or restrictions imposed by any Public Body or Authority or for any other force majeure cause, including confiscation or destruction for the repair of damages or for the normal development of the business activity.
It seems that the insurer's argument was that the lockdown met the requirements to apply the exclusion.
The Specific Acceptance Requirement for Limitative Clauses
In Spain, insurance contracts are governed by the Insurance Contract Act of 1980. Pursuant to Article 2 of the ICA, the statute's provisions are mandatory, save for other specific statutory rules or provisions which could be more beneficial for the insured. This applies to all insurance contracts, save for those regarded as large risks.
It is a legal mandate that the policy must describe in a clear and comprehensible manner the covers provided and the applicable exclusions and limitations. In connection with general conditions, clauses that limit or restrict the rights of the insured must be typographically highlighted — in practice, in bold letters — and also need to be explicitly accepted by the policyholder or insured.
That is, those provisions limiting insured's rights must be subject to specific acceptance; otherwise, the provision may be null and void. In practical terms, exclusions are generally considered limitative, thus they need to be highlighted and specifically accepted to be binding on the insured.
The Supreme Court, following many other decisions in the same line, has recently explained that:
Theoretically, the distinction between those clauses defining the coverage … and limitative clauses is simple, since the former specify the object of the contract and establish the perils which, if take place, entitle the insured to receive the consideration which is the purpose of the insurance contract. Whereas the limitative clauses, restrict, condition, or modify the right of the insured to receive the compensation or any other consideration guaranteed in the contract, once the peril object of the contract occurs.
While in practice such distinction is not always clear, in general defining clauses are those describing the covered perils, the limits, term or period of insurance.
As the Supreme Court has stated:
The purpose is to individualize the perils establishing an objective base, removing ambiguity, and specify the nature of the risk consistently with the object of the contract or the usages, provided that the perils are not defined in contradiction with the particular conditions or in uncommon or unusual fashion (surprising clauses).
The Policy's Authorities Exclusion Was Unenforceable
The legal issue before the court of appeal was whether the paralyzation of a restaurant's activity, as a consequence of the government lockdown decision due to the COVID-19 pandemic, is covered under the policy.
The court found that the lockdown restrictions resulting from the COVID-19 pandemic caused the loss of profits, since the insured had to close and its income decreased.
According to the court, since the general conditions of the policy do not include expressly "paralysation arising from governmental resolution as a consequence of a pandemic," and the insurer declined to provide coverage pursuant to an exclusion for losses caused by public authorities, the case presented "a clear limitation of the rights of the insured in the adhesion contract."
The court held that, as such, the ICA's Article 3 requirements need to be met. However, the judgment states that there was no evidence that the particular policy and general conditions had been signed by the insured.
Therefore, the main conclusion from the judgment is that the court of appeal upheld the appeal and granted coverage and compensation based on the argument that the authorities exclusion, which the court considers a limitative clause, had not been accepted in accordance with the formal requirements envisaged under Article 3 of the ICA.
This may be a surprising outcome 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 exclusionary clauses.
It is also interesting from both a practical and academic perspective, that the judgment additionally states that, given the absence of a pandemic exclusion as such in the policy, the application of the authorities exclusion could also lead to a conclusion that indeed the policy did not provide real cover since the insured expected to be covered against loss of profit and paralyzation of activity, and such a restrictive exclusion might distort the natural content of the insurance contract.
The judgment quotes a Supreme Court decision, which in line with the case quoted above, warned that perils cannot be "defined in contradiction with the particular conditions or in uncommon or unusual fashion." In other words, even if the insured's and policyholder's acceptance of the policy's limitative clauses had met the requirements of Article 3 of the ICA, it is possible that the court might have reached the same decision.
The argument raised — but not ruled upon — by the court of appeal is somewhat analogous to the concept of illusory coverage in common law jurisdictions, which in general terms applies when a policy defines coverage in such a manner that coverage will never actually be triggered, and may allow a court to reform the policy to meet the insured's reasonable expectations of coverage. In our experience, at present this argument is not being advanced by policyholders in COVID-19 coverage litigation.
Courts in common law jurisdictions would most likely reject any such argument. The general rule in those jurisdictions is that coverage is illusory where the insured purchases no effective protection. In contrast, a coverage grant is not illusory if the policy responds to some risks, even if it contains a potentially wide exclusion.
Time element provisions in commercial property insurance policies are not illusory, because they provide coverage for many perils that can cause an interruption in the insured's business, even if losses caused by decisions of government authorities are excluded.
Given the court's reliance on legal formalities rooted firmly in Spanish statutory law, the potential impact of the judgment is most likely to be felt in civil law jurisdictions with similar insurance statutes.
The judgment, and other decisions following its reasoning, may lead to an increase in coverage litigation in multiple jurisdictions. International insurers and reinsurers need to be aware of the different approaches to coverage questions in civil law countries, and the additional exposure they face as a result.
 Judgment 59/2021, Audiencia Provincial de Girona, Civil Section.
 Royal Decree 463/2020 of 14 March (RD463).
 The Financial Conduct Authority v. Arch and Others  UKSC 1.
 All quotations of policy provisions and court judgments are free translations from the original in Spanish.
 Paragraph 13.
 Large risks are defined in Section 13(27) of the Solvency II Directive (2009/138/EC). In Spain, large risks are defined in Section 11 of Law 20/2015 on regulation, supervision and solvency of insurance and reinsurance entities. Party contractual autonomy prevails in large risks.
 Article 8 ICA.
 Article 3 ICA.
 Judgment 58/2019 of January 21st.
 Judgment 82/2012 of March 5th.
 Judgment of 19 July 2012.