COVID-19 and the declarations of the states of alarm

The health situation caused by COVID-19 first made itself felt in China in late 2019 and subsequently spread to Europe in early 2020, leading the World Health Organization to raise the level of the COVID-19 public health emergency to an international pandemic on 11 March 2020.

This health crisis, unprecedented in the past century, devastated countries all over the world, collapsing national health systems with enormous numbers of people falling ill and subsequently a huge death toll, caused the governments of the different countries take a series of urgent measures that as a rule tended to be rather drastic.

In an attempt to keep the disease from spreading and to protect the health and safety of the citizenry, the government issued Spanish Royal Decree 463/2020 of 14 March 2020 declaring a state of alarm to manage the COVID-19 virus health emergency [Real Decreto 463/2020, de 14 de marzo 2020, por el que se declara el estado de alarma para la gestión de la situación de crisis sanitaria ocasionada por el COVID-19], which was published in Spain's Official State Gazette [Boletín Oficial del Estado] that same day.

The decree contained a series of measures. For our purposes in this article, the ones of interest to us on the one hand restricted the free movement of persons, limiting it solely to the activities enumerated in the decree, and on the other hand ordered retail shops and establishments (other than grocers' and shops selling specified essential commodities), public entertainment establishments, leisure and sporting establishments, hotels, and restaurants that did not offer home delivery to be closed.

With certain changes, these prohibitions and restrictions were extended several times until midnight on 21 June 2020, and in many cases they brought the business activities of large numbers of businesses, shopkeepers, and tradespeople to a halt, inevitably causing a drop in earnings, which in some cases tailed off to zero. Many of the persons affected who had loss of profit covers in their insurance policies have sought to remedy this situation by bringing claims based on those covers, in many cases without a clear understanding of the scope of the coverage they had purchased. This has given rise to large numbers of claims being brought by the insured against their insurers. More claims are still being instituted even now, though perhaps less than before, when many shopkeepers clutched at this possibility as their sole hope of being able to refloat their businesses.

Background

With the exception of certain historical precedents in the seventeenth and eighteenth centuries, legislation traditionally held loss of profit not to be insurable. In fact, formerly property owners even had to bear at least a 10% share of losses to their belongings in the case of property damage claims, except when an insured party was travelling with his or her own merchandise. This would seem to indicate a certain mistrust of the insured by lawmakers in that period.

Starting in the nineteenth century, these biases began to be left behind, and the idea of loss of profit as insurable began to gain force in legislation on the continent of Europe, influenced by the situation in the English-speaking countries, where coverage was more extensive. Business interruption insurance was therefore envisaged in the 1885 Spanish Commercial Code [Código de Comercio].

Accordingly, section 395 Commercial Code (repealed by the Spanish Insurance Act Ley de Contrato de Seguro), provided as follows in respect of fire insurance:

Section 743 Commercial Code (repealed by sections 406 to 467 Spanish Maritime Navigation Act [Ley de Navegación Marítima], which regulates marine insurance contracts and has repealed the provisions on marine insurance in the Commercial Code) likewise made provision for insurance in marine insurance by express covenant. The Insurance Act precludes direct applicability but not secondary applicability where not provided for in the Maritime Navigation Act. Section 743 provided that "expected profit" could be insured:

Insurance Act

Business interruption insurance, though in some sections referred to as "expectation loss", is regulated in Title II (INSURANCE AGAINST LOSS), Chapter Five (Business interruption insurance) Insurance Act, specifically in sections 63 to 67. 

Section 63 defines this as follows:

It is therefore essential for this type of insurance, and indeed for all insurance generally, to describe and specify clearly the loss or types of loss covered in the insurance policy. 

Section 64 provides: 

This article reflects what has been a common practice in relation to business interruption insurance in our country's market, namely, joint engagement of both types of insurance. Because property insurance is based on the indemnity principle and the prohibition against unjust enrichment, actual general property insurance and expectation loss insurance are usually taken out together, given the close connection between certain both these types of insurance. For instance, this is the case for salvage costs covered by property insurance (general damage) and coverage of the extraordinary expenses caused by a loss, normally included in the business interruption cover, or the effects of salvage measures in case of fire, which usually shorten the time a company has to stop doing business and hence reduce lost profits.

For this reason, in the uncommon case in which an insured takes out property insurance from one insurer and business interruption insurance from another, section 64 Insurance Act requires the insured to notify each insurer of the existence of both policies, the sums insured, and the basic covers. Property damage and lost profit from a given cause are usually taken out with the same insurer, but the law includes this precaution because this is not always the case.

Section 65 stipulates the minimum content of business interruption insurance unless otherwise stipulated, and section 66 again makes express reference to the need to specify the events covered by the insurance contract. This shows that the natural content of this cover is insurance for a given expectation loss supplementarily to the general property insurance cover of the policy, not an abstract general lost profit cover for any reason, although there is no prohibition against purchasing a general lost profit cover. Section 67 reiterates that this business interruption insurance is normally a supplementary cover in a general property insurance policy and therefore prohibits the parties from predetermining the amount of the indemnity where lost profits are insured separately.

As already mentioned, based on this convention, the lost profit cover contained in the vast majority of Spanish business interruption policies requires the prior existence of material damage covered by the policy. That is, in these cases, business interruption insurance is not a separate cover but one that is conditional upon the occurrence of damage to insured property by one of the covers provided for in the policy that have actually been enumerated in the particular terms and conditions, not by another cause.

The legal claims discussed here can be divided into two groups, firstly, legal claims brought against insurers, and secondly, legal claims brought against Consorcio de Compensación de Seguros (CCS), which have fortunately been few. The former are discussed first.

Claims against insurers

This generic category lumps together the different legal claims brought by the insured against regular insurers. To begin with, it is not easy to group these claims into a single category, in that each insurer has a different type of standard policy containing different covers and in particular specifying those covers differently, in some cases in the form of clauses specifying the insured risk and in others in the form of agreed limits on coverage. Taken together with the different arguments put forward by insurers in the answers to the claims and the broad range of interpretations of one and the same clause by different triers of fact, each claim and each judgment should really be considered separately based on the facts of each case. However, the author will try to make certain general considerations by way of an overview of the situation, if only as a rough approach.

Oddly, one of the most common arguments put forward by claimants is the strange claim that they did not have the opportunity to review the specifications of or limits on the lost profit cover before signing the policy. This claim is something that is hard to verify, unless the insured has first signed an insurance proposal or precontractual information document and then later the policy in accordance with section 3 Insurance Act. 

Another common argument used by claimants is that these clauses describing lost profit relied on by insurers are limiting (the descriptions exclude cases) or are unclear or partially vitiate the scope of coverage being purchased. Some courts have accepted these assertions based on the settled doctrine of the Spanish Supreme Court requiring limiting clauses to be signed twice and the contra proferentem doctrine that ambiguous clauses should be construed against the interests of the party that provided the wording, both taken in the framework of the "in dubio pro ’insured’" principle [interpretation favourable to the insured] that underpin cases of this kind. In contrast, in their statements of defence, insurers have made little use of the precept set out in the last paragraph of section 8 Insurance Act allowing a policyholder to demand that an insurer remedy a discrepancy between the content of the policy and the clauses agreed to before the policy was taken out within one month of handover of the policy in the hypothetical case in which clauses differing from those in the policy had in fact been agreed before the policy was signed, as claimants have sometimes argued. Or at least this has not been addressed in the few judgments we have been able to review so far.

In any case, whether a given clause limits rights or defines the risk is a decision at the discretion of the courts, so it should not be surprising to find that judgments by different courts have interpreted a given clause differently. An example of this comes from the Provincial Court of Appeals of Girona. After handing down two judgments finding that the clause linking the lost profit cover to the existence of material damage limited rights, on 23 March 2022 the Board of Judges of the Civil Division subsequently took the decision set out below pursuant to section 264 Spanish Judiciary Act [Ley Orgánica del Poder Judicial] by a majority vote of six to two. This decision was relied upon in the Court's own judgment of 20 June 2022: 

The Board also unanimously took a second decision: 

The judgment of 12 December 2019 by the Supreme Court sitting en banc summarised the doctrine on the difference because limiting clauses and specifying clauses in the following terms. No comment is needed.

The issues ordinarily in dispute in these legal proceedings on which the courts will have to adjudicate in future mainly concern the general questions noted above. The detailed legal arguments in each case are much broader in scope and are outside the focus of this article.

Claims against CCS

As already mentioned above, other insured parties have also sued CCS, either secondarily to the insurer or separately in place of the insurer, on grounds that the COVID-19 pandemic was itself an extraordinary risk and as such should be covered by CCS.

Generally speaking, setting aside individual differences in certain cases, these claims are based on the argument that the pandemic and the declaration of the state of alarm are not ordinary events but are instead extraordinary events and hence that since CCS's task is to cover extraordinary risks, it should cover these claims for lost profit.

In replying to this argument, it should be noted that it is necessary to differentiate between the technical legal notion of the phrase "extraordinary risk insurance" and the concept of risk commonly referred to as "extraordinary" in the vernacular. In this latter case, which is a lay concept, according to the dictionary of Spain's Royal Spanish Academy, extraordinary means "outside the natural order or the commonplace".

As a technical insurance concept, extraordinary risk insurance is insurance that covers only those risks specified and defined in the legislation on extraordinary risks. This risk specification has the function of a numerus clausus.

In the vernacular, a loss is extraordinary when it does not happen often, e.g., a lightning strike or a gas explosion. Fortunately, these are not normal events, yet they are ordinary risks covered by most ordinary insurers under most policies, usually together with fire in the case of lightning (fire, lightning, and explosion). Similarly, an airplane crash is not normal or ordinary, in the common sense of the word, but this does not make it an "extraordinary risk", hence the above-mentioned claim that the pandemic and the decree are extraordinary risks is entirely incorrect, technically speaking.

Extraordinary risks are either the risks as prescribed by law (CCS's Enabling Statute [Estatuto Legal del Consorcio aprobado por RDL 7/2004], the "Statute") and the Implementing Regulations on Extraordinary Risks enacted by Spanish Royal Decree 300/2004 [Reglamento de Riesgos Extraordinarios, aprobado por Real Decreto 300/2004] (the "Implementing Regulations"), or they are simply not extraordinary risks. 

As stated above, the Statute and the Implementing Regulations, more specifically sections 6, 7, and 8 Statute, prescribe the specific extraordinary risks to people and property covered by the extraordinary risk insurance cover. For instance, section 6(1) Statute states (author's underlining):

1. f. A lack or deprivation of something that had been possessed.
2. f. Harm or impairment to something.
3. f. An amount or a thing lost.

1. Direct injury to persons or damage to property, i.e., what is generally referred to as injury or damage but which fall within the grammatical meaning of "losses", and
    
2. Pecuniary losses resulting from direct injury or damage in the terms and subject to the limits prescribed by regulation, generally referred to as lost profit or expectation loss.

It can likewise clearly be seen that the only pecuniary losses covered are those resulting from directly covered damage suffered by the insured property. The essential condition is the existence of direct damage covered by the policy. Absent direct damage to the property, the extraordinary risk insurance scheme does not cover pecuniary losses.

b) The second aspect set forth in this section is what comprises extraordinary risks or, as this provision is worded:

Thus, it should be noted that there are only THREE types of extraordinary risk, a clear NUMERUS CLAUSUS, namely:

a) The following natural phenomena: earthquakes and tsunamis, extraordinary floods, volcanic eruptions, atypical cyclonic storms, and falling celestial objects and meteorites.

b) Events caused by violence resulting from acts of terrorism, rebellion, sedition, riots, and civil unrest.

c) Action by the armed forces or law enforcement agencies in times of peace.

That is all. These specific risks are the ones covered according to law. The pandemic caused by COVID-19 is a worldwide tragedy that has had grave adverse effects on people and businesses all around the globe, but it is not one of the extraordinary risks protected under the extraordinary risk insurance scheme. It is not one of the stated natural phenomena; nor is it an act of terrorism, rebellion, sedition, or civil unrest; nor is it harm caused by the armed forces or law enforcement agencies, and the same can be said for the decree declaring the state of alarm.

As we can see, the Statute itself prescribes what comprises the extraordinary risks, only leaving the individual definitions of those risks to the Implementing Regulations. Rule 1 in the Implementing Regulations states (author's underlining):

Section 2 sets forth the definitions of the only events considered to be extraordinary risks in the Implementing Regulations. As stipulated in the Statute, these are:

In addition to the above, specifically in relation to lost profit in which connection extraordinary events and extraordinary risks and all other requirements must be satisfied for there to be entitlement to lost profit coverage, rule 3 Implementing Regulations states in reference to lost profit generally:

In other words, having all the foregoing in mind, from a technical standpoint it must be concluded that the pandemic and the state of alarm cannot be considered to be extraordinary risks and/or that restriction of the activities carried on at the premises cannot be considered to be direct harm.

To date, fifteen claims for lost profit suffered during the state of alarm have been brought against CCS in all, separately or jointly from or secondarily to the insurer of the ordinary risks, as the case may be. Most of the claimants are involved in the food and drink sector, primarily bars and restaurants, though there are also hotels, night clubs, automobile repair shops, leasing arrangements for restaurant premises, and even cinemas.

The outcomes of these proceedings can be said to have been clearly favourable to CCS. In particular, one claim was withdrawn by the claimant based on the response to the claim, and judgments have been delivered in five other proceedings. All five judgments have found in favour of CCS, though some have been appealed by the other party and hence are not yet final.

Finally, the geographic distribution of the above claims by region has been seven in Catalonia, two in the Balearic Islands, two in Madrid, and one each in the Basque Country, Castilla y León, Andalusia, and Galicia.

To conclude, it is our expectation that the rulings will continue to be favourable as they have been up to now and will continue to hold that the pandemic and the state of alarm cannot be considered to be extraordinary risks.