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Associate Paul Grant discusses Oaxaca Ltd, which trades as Wahaca, seeking a payout over COVID-19 business interruption losses, and the consequences for UK insurers, in Law.com International.

Paul’s article was published in Law.com International, 20 June 2023, and can be found here. 

Mexican-style restaurant chain Wahaca has commenced proceedings against its insurer for allegedly failing to pay out for losses incurred when it was forced to temporarily close sites during the COVID-19 pandemic. Wahaca joins a list of other businesses seeking pay-outs from insurers, including Pizza Express, which recently had its hopes of securing a £260 million pay-out dashed by the High Court in a judgment which could have far-reaching consequences for UK insurers.

Oaxaca Ltd, which trades as Wahaca, said in a High Court claim on 24 May 2023 that its insurer, QIC Europe Ltd, has refused to provide cover for the losses that came after the UK Government ordered businesses to shut in 2020.

QIC Europe had agreed to insure Wahaca between October 2019 and October 2020, the claim says. This protection included cover for interference caused by a police authority or government, among other items.

Wahaca claims that the government orders – which included enforced closures and stay-at-home orders preventing the use of its restaurants – warranted indemnity from QIC. It is pleaded that Wahaca is entitled to an indemnity with a limit of £1,000,000 with an indemnity period of 18 months “in respect of each prevention and/or the hindrance of the use of each of the said premises”. Wahaca added that the failure by QIC Europe to pay out such sums also entitles it to damages.

Policyholders backed by Supreme Court in 2021 business interruption test case

The claim by Wahaca follow the landmark 2021 UK Supreme Court decision which held that insurers must pay out to hundreds of thousands of companies forced to close during the first pandemic lockdown (see Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1).

The Financial Conduct Authority’s (FCA) High Court test case, and subsequent appeals, sought legal clarity on the meaning and effect of certain business interruption insurance policy wordings. The aim of the test case was to resolve contractual uncertainty around the validity of many BI insurance claims related to the COVID-19 pandemic. The Supreme Court confirmed the correct interpretation of a variety of different standard business interruption insurance policy wordings in order to clarify whether they provided cover in principle for COVID-19 related losses. The practical effect of that analysis was that all of the insuring clauses put before the Supreme Court for consideration (including in relation to disease and prevention of access clauses) would provide such cover.

Pizza Express v Liberty: a cautionary tale

In a judgment delivered on 30 May 2023, the High Court held that that the Pizza Express restaurant chain had wrongly interpreted liability limits in its policy and sided with its insurers’ interpretation of how much Pizza Express could claim under its policy wording the insurer had denied coverage under both the ‘at the premises’ disease and ‘prevention of access’ BI extensions, arguing (among other things) that the cover provided by the extensions is “localised cover” which does not respond to business interruption losses caused by central government action taken in response to a nationwide public health emergency.

The policy schedule further stated that ‘all Limits of Liability apply any one Occurrence’, while Occurrence was defined in the Policy as ‘any one loss or series of losses arising out of and directly resulting from one source or original cause’. The Insurer, Liberty, successfully argued that in the absence of any words to the contrary, the sub-limit of liability was a ‘Limit of Liability’ that applied ‘per Occurrence’, meaning that Pizza Express’s losses were to be aggregated and that any indemnity due to Pizza Express would accordingly be limited to £250,000.

What does the Pizza Express judgment mean for future claimants?

The Court confirmed that established principles of construction were applicable, including that the policy must be construed objectively by asking what a reasonable policyholder would have understood the language of the policy to mean. The Court found that ‘as a matter of ordinary language, a sub-limit is just as much a limit of liability as an aggregate or overall limit’.

The case indicates that COVID-19 BI claims pursued under similarly-worded policies are likely to be subject to relatively broad aggregation by reference to one ‘source or original cause’, which will limit the amount recoverable, particularly in the case of policyholders with multiple insured premises.

However, the Pizza Express ruling turned on a narrow point of construction that was entirely specific to the policy wording in question, and the judge’s decision was influenced not just by the content of the standard policy wording, but by the structure and formatting of the policy schedule, which may vary considerably between policyholders and insurers. For policyholders insured under other policy wordings, the judgment may have limited relevance and the court is likely to consider matters on a case-specific basis.