By four judgments issued on the 1st of December 2022, the “Cour de Cassation” (French High Court) ruled in favor of the insurer. A fifth decision, rendered on the 19th of January 2023, confirms the position of the Cour de cassation.
The Cour de Cassation marks a turning point in the context of the “Operating Loss” storm since it considers that the insurer Axa was not required to indemnify the operating losses suffered by the restaurant owners following the administrative closure of their establishments linked to the Covid-19 through the implementation of an exclusion clause, which was deemed formal and limited in application of the provisions of article L. 113-1 of the French Insurance Code (I) and did not render the contract null and void pursuant to the provisions of Article L.113-1 of the French Insurance Code and article 1170 of the French Civil Code (II).
As a reminder, article L.113-1 of the French Insurance code provides in its first paragraph that “Losses and damages caused by fortuitous events or by the fault of the insured are to be borne by the insurer, except in the case of a formal and limited exclusion contained in the policy“.
Article 1170 of the French Civil code provides that “Any clause which deprives the essential obligation of the debtor of its substance shall be deemed unwritten”.
The guarantee clause invoked by the insureds stipulated that “The guarantee is extended to operating losses resulting from the total or partial temporary closure of the insured establishment, when the following two conditions are met: 1. The decision to close was taken by a competent administrative authority, external to yourself. 2. The decision to close the establishment is the result of a contagious disease, murder, suicide, epidemic or poisoning”.
The exclusion clause referred to by the insurer excluded from the scope of the guarantee “operating losses when, on the date of the closure decision, at least one other establishment, whatever its nature and activity, is subject to an administrative closure measure in the same departmental territory as that of the insured establishment, for an identical cause“.
The insureds have notably positioned themselves on the absence of definition of the notion of epidemic to say the outline of the vague exclusion clause and the absence of limitation entailed by the terms “other establishment”.
The Cour de Cassation’s answer is no. The debate is not about the definition of the word “epidemic” but about the notion of identical cause and thus brings to light a completely different debate which may admit a solution different from the one adopted by the Court of Appeal judges , which was favourable to the insured.
I. A formal and limited clause
The Cour de Cassation recalls that the exclusion clause, in order to be valid, must be formal and limited, i.e. it must refer to precise criteria and not require interpretation.
In this case, the Cour de Cassation judged the exclusion clause invoked by the insurer to be formal and limited, since it did not refer to the definition of the notion of “epidemic”, which was not defined in the insurance policy, but to the fact that in order to be excluded from the benefit of the guarantee, the insured had to be, at the date of the administrative closure of its establishment, in a situation identical to that of another establishment for an identical cause to one of those listed in the insurance policy, which could not be subject to interpretation.
II. A clause that does not render the contract meaningless
The Cour de Cassation states a well-established principle in French law, namely that the exclusion clause, in order to be limited, must not empty the guarantee of its substance.
In common law, a clause must not empty the contract of its substance, i.e., it must not deprive the contract of its object, or it will be deemed unwritten.
This means that after the application of the exclusion clause, the guarantee must still exist and not be reduced to what the Cour de cassation calls a derisory guarantee.
In this case, if the “epidemic” cause was excluded from the policies, the other causes referred to in the exclusion clause remained, so that the disputed clause had to be said to be limited and therefore valid.
One might wonder whether by ruling in this way, the Cour de Cassation does not allow the exclusion of all epidemics that might exist, which would nevertheless deprive the clause of its substance on this ground, especially since no definition of “epidemic” is given in the contract.
However, as the guarantee remains in effect in the absence of an identical cause for the administrative closure of another establishment in the same department, the clause excluding epidemics does not deprive the guarantee of its substance.
In any event, this decision raises doubts as to the position that AXA and the insurers concerned by a similar clause will adopt in future negotiations with their policyholders who would find themselves in the same situation as the restaurant owners who have just lost their right to compensation.
In light of these rulings, we can advise underwriters to be cautious regarding the advice given to their candidates for insurance when subscribing to policies, and for the latter to state all their needs in order to be certain of being covered within the framework of the risks that interest them.
CG Avocats is at your disposal to provide you with any additional information you may require on this subject. Do not hesitate to contact us.