The German Federal Court of Justice confirms the position of insurers: business closure insurance does not cover losses related to COVID-19
On January 26, 2022 (Case No. IV ZR 144/21), the German Federal Court of Justice issued its first decision on whether a business closure related to the COVID-19 pandemic is insured under a stand-alone business closure insurance policy (“Betriebsschließungsversicherung”) maintained by a business owner.
- Contrary to the opinion expressed by some trial and appellate courts, the Federal Court has determined that an “intrinsic risk” is not necessary to trigger the coverage of a business closure insurance policy. As, in the present case, the conditions of cover did not provide for such a requirement, it was immaterial that no infection had occurred on the premises of the insured company.
- Business closures, following the measures taken by the public authorities in response to COVID-19, could therefore satisfy the business closure insurance clause.
- However, the Federal Court upheld the views of most German courts of appeal who previously ruled that typical (stand-alone) business closure insurance does not address losses incurred during closures, not least because such coverage only covers diseases or pathogens that have been expressly listed in the insurance conditions and, importantly, COVID-19 and SARS-CoV-2 were not included in these lists.
- The Federal Court emphasized that the terms and conditions of insurance must be interpreted as the average policyholder would understand them. The Federal Court is of the view that the way an average policyholder would view the relevant clauses in these cases is conclusive. She held that the purpose of explicitly listing the diseases and pathogens insured in the terms and conditions of a policy would confirm this conclusive understanding.
- The Federal Court has determined that the inclusion of a list of covered diseases or pathogens in the terms and conditions is not invalid or non-transparent (given the clear wording of the terms and conditions). Such conditions do not unreasonably disadvantage the policyholder.
- The above guidelines of the Federal Court apply to stand-alone business closure insurance policies adopting the generally used formulations which come from the standard conditions published by the Association of German Insurers (GDV).
The plaintiff operates a restaurant in Schleswig-Holstein and holds a business closure insurance policy (policy BC) with the defendant insurance company (the insurer).
According to the terms and conditions of the insurance policy (Terms and Conditions), the Insurer is obliged to compensate the Claimant for the loss of income up to a compensation period of 30 days in the event of a conditional closure of the ‘business. The Terms and Conditions include (by extract) the following provisions:
“Second. 2: Insured risks
No. 1: Scope of insurance
The insurer pays compensation if, on the basis of the law on the prevention and control of infectious diseases in humans (Infektionsschutzgesetz – IfSG), the competent authority in the event of an outbreak of diseases or pathogens in Notifiable (see #2) closes the insured business or an insured establishment to prevent the spread of notifiable diseases or pathogens to humans; prohibitions of activities against all the employees of a company or an establishment are assimilated to a closure of a company;
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 Art. 6 and 7 IfSG:
(a) Diseases: …
(b) Pathogens: …
Notably, the Covered Lists of Diseases and Pathogens contained in Section 2 No. 2 (a) and (b) of the Terms and Conditions did not mention COVID-19, SARS-CoV or SARS-CoV-2.
After the policy began, the state government, through a state ordinance effective March 2020, ordered, among other things, the closure of all catering establishments, sales at home being authorized 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 required to pay him compensation under this insurance because of the closure of his restaurant. The plaintiff’s claim was dismissed at first instance and on appeal, against which he appealed to the Federal Court of Justice.
The judgment of the Federal Court of Justice
The Federal Court dismissed the appeal. According to the Federal Court, the plaintiff was not entitled to any loss compensation from the insurer under the BC policy because a business closure in order to prevent the spread of the COVID-19 disease or pathogen SARS-CoV-2 is not covered by the Terms and Conditions.
According to the decision, the catalog of diseases and pathogens covered by the British Columbia policy is conclusive and COVID-19 and SARS-CoV-2 are not included. This interpretation would be consistent with the understanding of an average insured, which is decisive for the interpretation of the General Conditions. An average policyholder would understand from the addition in parentheses in section 2 #1 of the general conditions – “(see no. 2)” – that the notifiable diseases and pathogens covered by the insurance are defined in more detail in article 2 n° 2 of the general conditions. From the wording “within the meaning of these conditions“In No. 2, an average insured would understand that a conclusive and exhaustive definition of these two terms (diseases and pathogens) is given.
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 interpreted by the average insured as a simple clarification.
The Federal Court held that the use of a list in Article 2, No. 2, of the general conditions supported the conclusive character of the definitions. An average policyholder would not assume that an insurer would also cover diseases and pathogens that are not listed in the definitive and comprehensive catalog. This is based on the fact that additional diseases and pathogens may manifest or arise years after the conclusion of the contract and for 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 Article 2 no. 2 of the general conditions, the Federal Court did not consider the clause invalid. According to the judgment, the provision was not opaque due to the clear wording of the terms and conditions – an insured does not feel that every IfSG-based business closure is covered by the insurance. Nor would the provision unreasonably disadvantage a policyholder.
The full reasoning of the Federal Court has not yet been published. We will update this alert as soon as the full text of the judgment is available.
Key points to remember
The decision of the Federal Court is in line with the majority of the decisions of the lower courts. Since the first lawsuits for coverage of 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 to disregard them. as invalids. The divergent decisions were mainly due to differences in the specific conditions of the policies, which did not sufficiently indicate that a list of illnesses covered by the insurance was conclusive or which did not contain any list.
Where individual lower courts have nevertheless upheld claims under comparable insurance conditions, the decision of the Federal Supreme Court is likely to lead to an alignment of lower court decisions in the future.
The decision also contains a belated clarification on whether insurance cover under a business closure insurance policy still requires an “intrinsic risk” – the Federal Court says that this is not the case.
However, whether insurance cover also exists for business closures as a result of the COVID-19 pandemic is of course always dependent on the specific conditions involved in the case. If these 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.
Finally, it should be noted that the business closure guarantee is sometimes included in other policies, in particular home policies, as an element of additional cover. These formulations usually explicitly require the presence of the disease or pathogen on company premises and a business closure as a result. The Federal Court’s verdict does not apply to these wordings.