Business Closure Insurance does not cover for COVID-19-related losses - German Federal Court of Justice confirms insurers' position

On January 26, 2022 (Case No. IV ZR 144/21), the German Federal Court of Justice issued its first ruling on whether a business closure in connection with the COVID-19 pandemic is insured under a stand-alone business closure insurance policy (“Betriebsschließungsversicherung”) maintained by a business owner.

Executive Summary

• In contrast to the view expressed by some first instance and appeal courts, the Federal Court has determined that an 'intrinsic risk' is not necessary to trigger cover under a business closure insurance policy. As, in this case, the terms and conditions to cover did not provide for such a requirement, it was irrelevant that no infection had occurred at the insured business’s premises.
• Business closures, following measures taken by public authorities in response to COVID-19 could therefore satisfy business closure insuring clause.
• However, the Federal Court upheld the views of most German appellate courts that have previously ruled that typical (stand-alone) business closure insurance does not respond to losses incurred during lockdowns, namely because such cover provides only for diseases or pathogens that were expressly listed in the insurance terms and, crucially, COVID-19 and SARS-CoV-2 were not included in those lists.
• The Federal Court pointed out that insurance terms and conditions are to be interpreted as the average policyholder would understand them. The view of the Federal Court is that how an average policyholder would consider the relevant clauses in these matters is conclusive. It held that the purpose of the explicit enumeration of the insured diseases and pathogens in the terms and conditions of a policy would confirm that conclusive understanding.
• The Federal Court determined that including a list of covered diseases or pathogens within the terms and conditions is not invalid or non-transparent (given the clear wording of the terms and conditions). Such terms do not unreasonably disadvantage the policyholder.
• The above Federal Court guidance applies to stand-alone business closure insurance policies adopting the typically used wordings that originate from model terms issued by the German Association of Insurers (GDV).

Key Facts

The Plaintiff operates a restaurant in Schleswig-Holstein and holds a business closure insurance policy (BC policy) with the defending insurance company (the Insurer).

Under the terms and conditions of the insurance policy (Terms and Conditions) the Insurer is obligated to compensate the Plaintiff for loss of income up to a period of indemnity of 30 days in the event of a conditional business closure. The Terms and Conditions include (in excerpts) the following provisions:

"Sec. 2: Insured risks

No. 1: Scope of insurance

The insurer shall pay compensation if, on the basis of the Act on the Prevention and Control of Infectious Diseases in Humans (Infektionsschutzgesetz - IfSG), the competent authority in the event of the occurrence of notifiable diseases or pathogens (see No. 2)closes the insured business or an insured establishment in order to prevent the spread of notifiable diseases or pathogens in humans; prohibitions of activities against all employees of a business or an establishment are treated as equivalent to a business closure;

...

No. 2: Notifiable diseases and pathogens

Notifiable diseases and pathogens within the meaning of these conditions are the following diseases and pathogens mentioned by name in the in Sec. 6 and 7 IfSG:

(a) Diseases: ...

(b) Pathogens: ...

..."

Notably, the covered lists of Diseases and Pathogens contained at Section 2 No. 2 (a) and (b) of the Terms and Conditions did not list COVID-19, SARS-CoV, or SARS-CoV-2.

After commencement of the policy, the state government, through a state ordinance that took effect in March 2020, ordered, among other things, the closure of all restaurant establishments, with out-of-house sales permitted under certain conditions. The Plaintiff subsequently closed his restaurant and offered a delivery service

The Plaintiff sued for a declaratory judgment that the Insurer is obligated to pay him compensation under this insurance due to the closure of his restaurant. The Plaintiff's claim was dismissed in the first instance and on appeal, against which he appealed to the Federal Court of Justice.

The ruling of the Federal Court of Justice

The Federal Court dismissed the appeal. According to the Federal Court, the Plaintiff was not entitled to any compensation of loss from the Insurer under the BC policy because a business closure in order to prevent the spread of the disease COVID-19 or the pathogen SARS-CoV-2 is not covered by the Terms and Conditions.

According to the ruling, the catalogue of diseases and pathogens covered by the BC policy is conclusive and COVID-19 and SARS-CoV-2 are not included. This interpretation would accord with the understanding of an average policyholder, which is decisive for the interpretation of the Terms and Conditions. An average policyholder would understand from the bracketed addition in Section 2 No. 1 of the Terms and Conditions – “(see No. 2)” – that the notifiable diseases and pathogens covered by the insurance are defined in more detail in Section 2 No. 2 of the Terms and Conditions. From the wording "within the meaning of these conditions" in No. 2, an average policyholder would understand that a conclusive, exhaustive definition of these two terms (diseases and pathogens) is set out.

According to the Federal Court, the reference to "diseases and pathogens mentioned by name in Sec. 6 and 7 IfSG" in No. 2 would be understood by the average policyholder merely as a clarification.

The Federal Court considered that the use of a list in Section 2 No. 2 of the Terms and Conditions supported the conclusive nature of the definitions. An average policyholder would not assume that an insurer would also provide cover for diseases and pathogens that are not listed in the definitive, exhaustive catalogue. This is on the basis that additional diseases and pathogens may manifest or occur years after the conclusion of the contract and in respect of which no proper premium calculation would have been possible due to the uncertainty of the liability risk.

Despite the conclusive interpretation of the list contained in Section 2 No. 2 of the Terms and Conditions, the Federal Court did not consider the clause to be invalid. According to the judgment, the provision was not untransparent because of the clear wording of the Terms and Conditions - a policyholder is not given the impression that every business closure based on the IfSG is covered by the insurance. The provision would also not unreasonably disadvantage a policyholder.

The full reasoning of the Federal Court has not yet been issued. We will update this alert once the full text of the judgement is available.

Key Takeaways

The decision of the Federal Court is in line with the majority of decisions of the lower instance courts. Since the first lawsuits for coverage under business closure insurance policies were filed, there has been a tendency to regard terms and conditions, such as those relevant here, as conclusive and also not to deem them invalid. Diverging decisions were mostly explained by differences in particular policy terms and conditions, which did not sufficiently express that a list of diseases covered by the insurance was conclusive or which did not contain a list at all.

Where individual lower instance courts have nevertheless upheld claims under comparable insurance conditions, the Federal Court's decision is likely to lead to an alignment of lower court judgments in the future.

The decision also contains an overdue clarification on the question of whether insurance cover under a business closure insurance policy always requires an 'intrinsic risk' - the Federal Court says it does not.

However, the question of whether insurance cover also exists for business closures as a result of the COVID-19 pandemic of course always depends on the specific terms and conditions concerned in the case. If such terms simply contain a reference to the diseases or pathogens mentioned in the IfSG, losses caused by measures to prevent the spread of COVID-19 or SARS-CoV and SARS-CoV-2 could be covered. Such conditions, however, have not been used often.

It should finally be noted that business closure cover sometimes is included in other policies, namely property policies, as supplemental coverage element. These wordings usually explicitly require the presence of the disease or pathogen on the premises of the business and a business closure as a result. The Federal Court verdict is not applicable in respect of these wordings.