An Exercise In “Legal Pedantry”? The Interpretation Of Policy Wording In Carbis Bay Hotel Ltd & Anor v American International Group Ltd [2025] – Insurance Laws and Products

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:

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:

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

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:

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.