An exercise in “Legal Pedantry”? The interpretation of policy wording in Carbis Bay Hotel Ltd & Anor v American International Group Ltd [2025]

Carbis Bay Hotel Ltd & Anor v American International Group Ltd [2025] EWHC 1041 (Comm)

This matter concerned the interpretation of policy wording in an insurance contract – in particular, whether COVID-19 fell within the scope of an infectious diseases extension (‘the ID Extension’) to the Business Interruption section (‘the BI Cover’) to a ‘Commercial Combined’ insurance policy (‘the Policy’).

The claim was brought by way of Part 8 against the Defendant (‘AIG’), both in its own right and as representative of Covea Insurance (together ‘the Insurers’), who underwrote the relevant risk. Pursuant to the Policy, the Claimants made their claim to recover business interruption losses associated with the COVID-19 lockdown, which led to a loss of custom due to hotel and other hospitality premises being closed.

After a thorough analysis of the parties’ arguments, HHJ Russen KC decided that COVID-19 did not fall within the ID Extension to the BI Cover, and accordingly agreed with the position advanced on behalf of the Insurers.

A. The Key Question

The central question the Court was invited to determine was as follows:

On true construction of the Policy, is the word “Disease” appearing in the phrase “any human infectious or human contagious Disease (excluding Acquired Immune Deficiency Syndrome [AIDS] or an AIDS related condition)” in the Infectious Diseases extension to the Business Interruption section of the Policy to be understood:

(a) As limited to the specific diseases listed in the definition of ‘Disease’ in the business interruption section (which does not include COVID-19); or

(b) As not so limited but including any kind of human infectious or human contagious disease (including COVID-19).

The Claimants contended for meaning (b); and the Insurers for meaning (a).

B. The Factual Background

The Claimants owned and operated businesses in the Carbis Bay area of Cornwall, including restaurants, bars and hotels. Each of those business were affected by COVID-19 events, including:

1. On 20 March 2020, the Government advising public houses, restaurants and bars to close on the following day;
2. On 21 March 2020, the passing of the Health Protection (Coronavirus, Business Closure) Regulations 2020 – which required the closure of such premises;
3. On 23 March 2020, the Government announcing an intention to prevent (inter alia) weddings from taking place;
4. On 24 March 2020, the Government issuing guidance to businesses offering holiday accommodation to close for commercial purposes; and
5. On 26 March 2020, the passing of the Health Protection (Coronavirus, Business Closure) Regulations 2020 – which updated the earlier regulations and required the closure of holiday accommodation.

The Claimants were therefore prevented from operating their businesses between 26 March 2020 (at the latest) and 6 July 2020. Even after reopening, earnings and profitability were reduced pursuant to social distancing regulations and measures. The Claimants’ insurance broker submitted a claim on the policy in respect of the losses suffered by the businesses. The policy administrators, acting as the Insurers’ agents, notified the broker that the Insurers had declined the claim.

C. The Policy

The Policy incepted on 2 August 2019 and was for the period of one year, such that the BI Cover expired on 1 August 2020.  An appendix to the BI Cover section confirmed the limit of the indemnity in respect of business interruption through infectious diseases was £100,000. That risk was addressed in the ID Extension, which provided:

“Infectious Diseases

The insurance by this Section extends to include interruption of or interference with Your Business in consequence of closure of the Premises or part thereof on the order advice or stipulation of any government or local authority as a result of

1) any human infectious or human contagious Disease (excluding Acquired Immune Deficiency Syndrome [AIDS] or an AIDS-related condition) manifested by any person whilst at the Premises or within a 25 mile radius of the Premises

2) murder or suicide occurring at the Premises

3) injury or illness sustained by any visitor arising from or traceable to foreign or injurious matter in food or drink provided on the Premises

4) defects in the drains or other sanitary arrangements at the Premises or the Premises becoming infested with vermin or pests

1) – 4) are stated in the Appendix as Infectious Diseases

For the purpose of this Extension Indemnity Period means the period during which the results of Your Business are affected in consequence of the outbreak or Event beginning with the date when restrictions on the Premises are imposed and ending not later than the Indemnity Period.”

Aside from the heading “Infectious Diseases”, the relevant wording was that found in paragraph (1) of the ID Extension. Nothing was said in the Policy about the significance of headings as an aid to interpretation – and, importantly, “Infectious Diseases” was not a defined term. The Appendix simply confirmed that the ID Extension had a limit of cover of £100,000, and therefore that the other causes set out in paragraph (2) and (4) were deemed to be within it.

The ‘About Your Policy’ section of the Policy stated:

“Each Section may include terms Definitions Conditions and Exclusions unique to the Section which should to be read in conjunction with the Policy Definitions Conditions and Exclusions.”

For the ID Extension, the term ‘Disease’ (by the definition section of the Policy which was specific to BI Cover) was defined as follows:

“Disease means any of the following diseases sustained by any person acute encephalitis acute infectious hepatitis acute meningitis acute poliomyelitis anthrax botulism brucellosis cholera diphtheria enteric fever (typhoid or paratyphoid) food poisoning haemolytic uraemic syndrome (HUS) infectious bloody diarrhoea invasive group A streptococcal disease legionellosis leprosy malaria measles meningococcal septicaemia mumps plague rabies rubella SARS scarlet fever smallpox tetanus tuberculosis typhus viral haemorrhagic fever (VHF) whooping cough and yellow fever”.

That was a list of 33 diseases, and was a closed list (the language was ‘means’ and not ‘includes’); it therefore encompassed only those diseases listed, and not COVID-19.

D. The Correct Approach to the Interpretation of the Policy

HHJ Russen KC’s analysis of the Policy commenced with an overview of relevant legal principles.

His Lordship noted that in Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1; [2021] AC 649, Lords Hamblen and Leggatt said at [47] that the core principle in construing the meaning of an insurance policy is that, like any other contract, it must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.

That is the approach that has been restated by the highest authority over the last 10 or so years – in particular since the leading authority of Arnold v Britton [2015] UKSC 36; [2015] AC 1619 at [14] – [22]. Of Lord Neuberger’s propositions, the following were particularly relevant:

1. The court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” (i.e. the basic task identified again in FCA v Arch);
2. In discerning that intention, the court focuses upon the objective meaning of the relevant words, in their documentary, factual and commercial context. That meaning is assessed in the light of (i) their natural and ordinary meaning; (ii) any other relevant provisions of the contract, (iii) the overall purpose of the contract; (iv) the facts and circumstances known or assumed by the parties at the time it was made; and (v) commercial common sense. Commercial common sense cannot be invoked retrospectively. The party’s subjective intentions are of course to be disregarded in this process of interpretation;
3. It is points (i) and (v), in particular, which require the court to look at what the language of the ID Extension would have conveyed to the mind of the ordinary conscientious policyholder. The clearer the natural ordinary meaning of the words, the more difficult it will be to justify a conclusion that the policyholder would have understood them to have had a different meaning. The court should not embark ‘on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.’

HHJ Russen KC stated that the process of interpretation was not to be influenced by the ‘wisdom’ of hindsight; the purpose of interpretation is to identify what the parties have agreed, not what the Court thinks that they should have agreed. This was particularly important where an insurance risk of a type expressly contemplated (business closure through infectious disease) manifests itself in a form of disease that was not known about at the date of the policy’s inception, and only became a notifiable disease after that date.

His Lordship referred to the approach set out in FCA v Arch, namely that discerning what a reasonable and informed person would understand the policy to mean is one that involves reading it as an ordinary policyholder would, rather than a ‘pedantic lawyer who will subject the entire policy wording to a minute textual analysis’. The policyholder, ‘…on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.’

Indeed for parties with the benefit of insurance brokers, the interpretation of an insurance policy can also involve attributing the policyholder with the understanding of his broker – the reasonable person being someone ‘who has been able to consult with well-informed brokers’: Stonegate Pub Company Ltd v MS Amlin Corporate Member Ltd [2022] EWHC 2548 (Comm); [2023] Lloyd’s Rep. IR 672 at [54].

The Court also had regard, inter alia, to Lewison, The Interpretation of Contracts (8^th ed.) at §5.108 in relation to the use of headings as an interpretative tool: ‘A heading to a clause may be taken into account in construing the clause, but it cannot override clear words in a clause or create an ambiguity where, but for the heading, none would otherwise exist. Where the contract so provides, headings should be taken into account.’

E. The Court’s Analysis and Decision

The Court preferred the interpretation of the ID Extension offered by the Insurers for the following reasons:

1. If the Claimants were right (‘any’ kind of human infectious disease was covered), then the closed-list basis of infectious disease cover (i.e. that found in the definitions section of the BI Cover) would be transformed into an entirely open one. This would be a significantly different underwriting proposition than the one to which the Insurers apparently agreed;
2. The Claimants’ construction strained against commercial common sense, that being one of the key considerations by which the Court tests the objective interpretation of the contractual position under scrutiny. Further, as regards the facts and circumstances known by the parties at the time the Policy was incepted, the parties would not in August 2019 have been alive to the potential need to include COVID-19 specifically as a potential risk;
3. In considering the language of the ID Extension within the Policy, pursuant to the principles in Arnold v Britton at [17], the meaning of the contractual provision is most obviously to be gleaned from the language of the provision, which, if sufficiently clear, may be found by the Court to dispose of the argument over its interpretation. The Court found that it was sufficiently clear;
4. By the language of the ID Extension, the parties appeared to have agreed upon the inclusion of a defined term which exhaustively defined the diseases covering it. A compelling reason or reasons would need to emerge from the exercise of contractual interpretation to justify the material change of the underwriting risk contended for by the Claimants, who had been unable to identify an incoherency in the ID Extension’s language to displace the ordinary and natural meaning to be attributed to its inclusion of the definitional term ‘Disease’;
5. No legal pedantry was involved in encountering a capitalised and defined term (‘Disease’) and having to turn back a few pages to see what it means;
6. The Claimants had argued that the wording of the ID Extension was incoherent: the definition of the word ‘Disease’ did not refer to AIDS, but the exclusion referred to AIDS and AIDS-related illnesses. If the definition of ‘Disease’ was exhaustive, there would be no need to have excluded AIDS or AIDS-related conditions from cover under the ID Extension. However, the Court held that the Claimants’ argument that the use of the words ‘AIDS or’ in ID Extension was significant enough to compel a departure from what would otherwise be the ordinary and natural meaning of the provision was, as the Insurers had described it, a ‘contrived inconsistency’;
7. The drafting of the exception was ‘not the most felicitous’ but did not operate to make the key definitional term redundant, containing as it did no fewer than 33 carefully chosen words;
8. The consequence of the Claimants’ argument was that the language of an exception to insurance cover would prevail in determining the scope of that cover. This was probably the kind of interpretation that should be categorised as pedantry. It was not how a reasonable policyholder, assisted by a broker, would understand the impact of the carve-out;
9. HHJ Russen KC therefore concluded that the ordinary and natural meaning of the language of the ID Extension is that it did not extend to cover in respect of COVID-19.

F. An Answer to the Question

The Court therefore answered the question raised by the Part 8 claim as follows:

“On the true construction of the Policy, the word “Disease” appearing in the phrase “any human infectious or human contagious Disease (excluding Acquired Immune Deficiency Syndrome [AIDS] or an AIDS-related condition)” in the Infectious Disease extension to the Business Interruption section of the Policy is to be understood as limited to the specific diseases listed in the definition of “Disease” in the business interruption section (which does not include Covid19).”

This case serves as a useful reminder that the starting point is that a policy of insurance is a contract like any other. Questions of interpretation must be approached objectively, by asking what a reasonable person with the relevant knowledge at the time of entry into the contract would have understood its language to mean. However, the policyholder who has the advantage of a broker can be attributed with the understanding of a well-informed broker.

The Court will, however, resist arguments which seek to subject the entire policy wording to a minute textual analysis – that being the realm of the pedantic lawyer rather than the conscientious policyholder. The consideration of a fundamental definition is unlikely to be legal pedantry, but instead consistent with the conduct of the reasonable policyholder. Lawyers should therefore be careful to avoid conjuring clever argument which strains against the ordinary and natural meaning of the language used in an agreement or policy of insurance – particularly where the Policy contains an exhaustive definition.

Article by Michael Maris