Insurers generally successful in second business interruption test case
On 8 October 2021, the Federal Court of Australia handed down its judgment in the second COVID-19 business interruption insurance test case, Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases)  FCA 1206 (Second Test Case), generally finding in favour of the insurers as to the operation of various insuring clauses. The Court found that, in nine of the ten claims, none of the insuring clauses in the policies applied and, therefore, the insurers were not liable to make any payment in response to policyholders’ claims for indemnity.
This follows the NSW Court of Appeal’s decision in the first COVID-19 business interruption insurance test case, which dealt with the operation of exclusion clauses in business interruption policy wordings and, in which, the Court found in favour of the policyholders (First Test Case).
This decision is temporary, though, in the sense that, even before it was handed down, an appeal to the Full Court of the Federal Court had been programmed. The appeal is due to be heard in early November 2021, with judgment to be handed down in December 2021.
Due to the COVID-19 pandemic and the large number of business shutdowns, the insurance market saw, and is still seeing, numerous notifications of loss to businesses due to the disease, interruption to trade, and government-mandated closures. Insurers have also worked to respond to those notifications, with varying effect.
As a consequence, a number of test cases have been brought in various jurisdictions to resolve questions relating to the coverage available under certain exemplar insurance wordings. These include the test case commenced by the Financial Conduct Authority in the United Kingdom (UK Test Case), and the First and Second Test Cases in Australia.
UK Test Case
The UK Test Case considered a sample of 21 policies issued by eight insurers in the United Kingdom. The policies contained cover for business interruption as a consequence of property damage or other causes, in particular infectious or notifiable diseases and prevention of access and public authority closures or restrictions.
In September 2020, the High Court of England and Wales found that the disease clauses and the prevention of access clauses in 12 policies issued by six insurers provided cover, and that the COVID-19 pandemic and the UK Government response caused the business interruption losses. That is, generally speaking, the High Court found in favour of the policyholders.
This decision was appealed by the six insurers.
In January 2021, the Supreme Court of the United Kingdom dismissed the appeals.
First Test Case
The First Test Case, which was co-ordinated by the Insurance Council of Australia (ICA) and the Australian Financial Complaints Authority , considered whether business interruption policies issued by insurers in Australia excluded cover for the COVID-19 pandemic through a reference in exclusion clauses to the Quarantine Act 1908 (Cth) (Quarantine Act), even though this Act was repealed in 2015 and replaced with the Biosecurity Act 2015 (Cth) (Biosecurity Act).
In November 2020, the NSW Court of Appeal held that the reference in policies excluding cover for “diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments” could not be construed as extending or referring to “diseases determined to be listed human diseases under the Biosecurity Act”. That is, the NSW Court of Appeal found in favour of the policyholders that the exclusion clauses were not triggered.
In June 2021, the insurers’ application for special leave to appeal was refused by the High Court of Australia, meaning the NSW Court of Appeal is the standing authority.
Second Test Case
In February 2021, the ICA brought the Second Test Case, which comprised of 9 separate proceedings commenced by insurers in the Federal Court of Australia.
The Second Test Case concerned the proper construction and application of provisions in business interruption insurance policies. The issue was whether the policies applied to losses claimed to have been suffered by various businesses as a result of the effects of the COVID-19 pandemic.
Specifically, the Second Test Case sought to resolve questions relating to the coverage available under 9 insurance wordings. Similar to the UK Case Test, the Second Text Case sought clarification on the operation of a variety of policy wordings in response to COVID-19 related shutdowns, specifically:
- Infectious disease clauses, which provide cover for loss that arises from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius of the insured premises;
- Prevention of access clauses, which provide cover for loss from orders/actions of a competent authority preventing or restricting access to insured premises because of damage or a threat of damage to property or persons (often within a specified radius of the insured premises);
- Hybrid clauses, which provide cover for loss from orders/actions of a competent authority closing or restricting access to premises, but only where those orders/actions are made or taken as a result of infectious disease or the outbreak of infectious disease within a specified radius of the insured premises; and
- Catastrophe clauses, which provide cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.
An assessment of these clauses necessarily required the interpretation of such issues as the definition of “disease”, an evaluation of proximity of an outbreak to a business (and what is meant by “outbreak”), and the impact of government mandates preventing access to business premises. These issues are not dissimilar to those determined in the UK Test Case, albeit that the wordings were slightly different.
In addition to the Second Test Case, in April 2021, an insurer commenced a separate proceeding in the Federal Court of Australia seeking declaratory relief against a policyholder and its liquidator regarding a claim for indemnity for COVID-19 related business interruption losses. The insurer sought a declaration that section 61A of the Property Law Act 1958 (Vic) applied to the policy, such that the reference to the repealed Quarantine Act was to be construed as a reference to the Biosecurity Act, meaning that a disease determined to be a “listed human disease” under the Biosecurity Act (such as COVID-19) fell within the scope of the exclusion from cover for business interruption losses. This proceeding was heard together with the Second Test Case, as two other proceedings in the Second Test Case were also considering the section 61A issue.
The decision in the Second Test Case was delivered by Her Honour Justice Jagot.
Justice Jagot found that, in all cases but one, the insuring clauses did not respond to loss suffered due to forced closure resulting from the pandemic. The Court focused on the fact that the clauses, in each case, were worded such that the outbreak or discovery of the disease was to be either at the insured premises or within a 20km radius of the premises.
Her Honour made it clear that, given the basis for the orders made by public health officials in relation to lockdowns was the existence of COVID-19 generally, this would mean it would be impossible to conclude that those order were contemplated by the insuring clauses. The different wordings to those in the UK Test Case appear to have lead to the different outcome.
The only case in which Justice Jagot was inclined to find that the insuring clause did respond was the policy issued to Meridian Travel, which was a peculiar case in which the headquarters of the business in question was based in the Melbourne CBD.
In this case, Meridian Travel operated a travel agency business. The policy contained an infectious disease clause that required the outbreak of an infectious disease occurring within a 20 kilometre radius of the insured’s premises. The insurer accepted that there was an outbreak of COVID-19 within 20 kilometres of Meridian Travel’s premises. On that basis, Justice Jagot decided that the insuring clause responded.
However, her Honour made it clear that Meridian Travel would have substantial difficulty proving its business interruption loss. Given the nature of Meridian Travel’s business, and without further evidence, her Honour could not infer that the outbreak of COVID-19 within the 20 kilometre radius of the premises was a proximate cause of the insured’s loss.
The critical issue was the nature of Meridian Travel’s business as a travel agency. Given 90% of Meridian’s business was international travel (which, in turn, comprised 65% international tours and cruises), the Australian Government’s overseas travel ban was a, if not the sole, proximate cause of Meridian Travel’s loss of revenue from international travel bookings. Similarly, to the extent that 10% of Meridian Travel’s business was domestic travel, the lockdown directions were a, if not the sole, proximate cause of Meridian Travel’s loss from domestic travel bookings. In this sense, Her Honour noted, the loss came from an insured peril different to that which was contemplated under the infectious disease clause.
Section 61A issue
Three of the proceedings in the Second Test Case also involved issues about the construction and application of section 61A of the Property Law Act 1958 (Vic). On this basis, the insurers attempted to distinguish the decision of the NSW Court of Appeal in the First Test Case.
For policies to which the law of Victoria applied, the insurers sought to rely on section 61A to operate so that the references in the policies to the Quarantine Act were to be construed as references to the Biosecurity Act. If the insurers’ arguments were accepted, it would have meant that losses resulting from COVID-19 were excluded from the scope of cover under the policies.
However, the insurers’ arguments were not accepted. Justice Jagot concluded that section 61A did not apply to Commonwealth Acts such as the Quarantine Act and, in any event, the Biosecurity Act was not a re-enactment of the Quarantine Act for the purposes of section 61A. Accordingly, the insurers could not rely on section 61A to operate to replace references to the Quarantine Act with references to the Biosecurity Act. Accordingly, her Honour found that exclusions in the policies based on the Quarantine Act did not apply, as COVID-19 was not a quarantinable disease under that Act.
Offsets for loss
Furthermore, and interestingly, her Honour noted that, even if she was incorrect, and the insuring clauses in question were in fact applicable in the circumstances, the loss suffered by the businesses would be reduced by any amount of compensation received by way of either the JobKeeper payments made by the Australian Government or rental reductions or abatements allowed by landlords of the insured premises. These measures were directed to mitigating the loss and should be treated as such when evaluating the extent of any indemnification.
The same could not be said of act of mercy payments such as the lump sum grants from the Government, which would not reduce the loss and would be claimable under the policies.
Leave to appeal
Although a formality, as it had been decided at an early stage in the Second Test Case that her Honour’s decision would be subject to an appeal regardless of its nature, her Honour granted leave to all parties to appeal her decision. The appeal is to be heard in early November 2021, with judgment expected in December 2021.
Although subject to an expedited appeal, at least for the time being, this decision will make it exceedingly difficult for businesses to substantiate a claim for Business Interruption losses caused by COVID-19 related restrictions. Businesses will, in effect, need to prove that the outbreak of COVID-19 within a 20km radius of their premises caused restrictions to be imposed, and that the interruption they experienced was directly related to those restrictions. Further, any payments received for JobKeeper, or any rental reductions allowed by landlords, will reduce the quantum of their claim, even if successful.
Insurers should be aware that they may face Business Interruption claims from those businesses that meet the above criteria, but that the decision puts them in will provide some basis to decline cover in most instances.
The appeal is eagerly awaited. If the decision is upheld, it will save the insurance industry millions of dollars, if not more.