COVID-19 and Business Interruption insurance policies in Australia

IMPORTANT UPDATE: 10 November 2022
COVID-19 and Business Interruption insurance policies in Australia second BI test case

High Court refusal of leave

1. As noted in our previous update below, on 21 March 2022, applications for special leave to appeal to the High Court were filed by two policyholders and one insurer (IAG) to appeal parts of the judgment of the Full Court of the Federal Court delivered on 21 February 2022 (the second BI test case).
2. The appeals filed by two of the policyholders dealt with whether cover is available under the ‘infectious disease clauses’, the ‘prevention of access clauses’, the ‘catastrophe clauses’ or the ‘hybrid clauses’ in the relevant policies.  Importantly, these clauses included an element of proximity which required a certain event to either be on the premises of the insured, or within a certain radius of those premises.
3. The appeal filed by IAG was confined to the issue of whether JobKeeper payments are to be taken into account when calculating the amount of the insurance payment (if any) to the policyholder.  Although the trial judge held that JobKeeper payments should be taken into account, the Full Court of the Federal Court took a different view, reasoning that any adjustment for JobKeeper or other COVID payouts would not be appropriate.
4. The High Court’s decision in Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16 and LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17 now brings to an end the formal test case process concerning the Covid-19 related business interruption cases.
5. For completeness, we wish to note that there is one possible exception to this. The Full Court of the Federal Court found in favour of one of the five policyholders on appeal, holding that cover had been triggered but that there were substantial issues as to whether the policyholder could prove any relevant business interruption. As a result, the policyholder in this case is entitled to bring the matter back before the Federal Court for determination if it considers that it can identify any loss covered by the policy. This policyholder was not one of the applicants seeking special leave to appeal to the High Court.
6. As seen, the decisions of the Full Court of the Federal Court (upheld by the High Court through its refusal to grant special leave to the applicants) largely favour the insurance industry, with insurers in most instances not liable to indemnify the policyholders for COVID-19 related business interruption claims.  The cases offer guidance on the way in which the COVID-19 pandemic (and any future outbreaks or pandemics) may be treated by Australian courts regarding insurance policies.
7. The cases were distinguished from the precedent set in the UK case of FCA v Arch [2021] UKSC 1, by confirming that a government’s decision to impose restrictions in response to the outbreak of an infectious disease cannot be equally attributed to each case of Covid-19 (or other disease).  As a result, proximity clauses and other related restrictions in insurance policies will be vitally important when considering whether an insurer is liable to indemnify their insured for loss of business as a result of a pandemic.
8. It is also clear that pandemic payments, including the JobKeeper allowance and all other payments provided by the government in connection with the COVID-19 pandemic, are not to be taken into account when calculating an award of damages in these types of cases.
9. Claims will be determined on the basis of applicable principles of the final judgment in the test cases and the wording of the particular policy of the policyholder.
10. More information about business interruption insurance cover for COVID-19 related losses, can be found on the Insurance Council of Australia’s website at this link: https://insurancecouncil.com.au/resource/high-court-declines-special-leave-applications-in-bi-test-case/.

The information contained in this update is general in nature. For specific information or advice about your business interruption insurance policy, you should get in touch with your broker or other professional adviser.

IMPORTANT UPDATE: 23 August 2022
COVID-19 and Business Interruption insurance policies in Australia Second test case appeal judgment

On 21 March 2022, applications for special leave to appeal to the High Court were filed by two policyholders and one insurer (IAG) to appeal parts of the judgment of the Full Court of the Federal Court delivered on 21 February 2022 (the second test case). Please see update of 24 February below for more detail about the appeal judgment.

The appeals filed by two of the policyholders deal with whether cover is available under the ‘prevention of access clause’, the ‘catastrophe clause’ or the ‘hybrid clause’ in the relevant policies. Both the trial judge and the Full Court of the Federal Court found in favour of the insurers on these issues, holding that the policyholders were not entitled to cover under any of these insuring clauses.

The appeal filed by IAG is confined to the issue of whether JobKeeper payments are to be taken into account when calculating the amount of the insurance payment (if any) to the policyholder.  Although the trial judge held that JobKeeper payments should be taken into account, the Full Court of the Federal Court took a different view.  This is an important issue for policyholders and insurers throughout the industry given the number of businesses that participated in the JobKeeper program.

On 4 August 2022, the Insurance Council of Australia acknowledged the High Court’s request to hear oral arguments on the applications for special leave to appeal the Full Court of the Federal Court of Australia’s recent judgment on the interpretation of policy wordings in business interruption policies in the context of COVID-19.  The High Court indicated that the oral hearing will not be listed before October 2022 at the earliest.

IMPORTANT UPDATE: 24 February 2022
COVID-19 and Business Interruption insurance policies in Australia Second test case appeal judgment

1. On 21 February 2022, the appeal judgment in the second business interruption test case was handed down by the Full Court of the Federal Court of Australia.
2. Following our recent post about both the first and second business interruption test cases, which can be found at below, we now provide an update about this development.
3. In its appeal judgment, the Full Court has substantially agreed with the conclusions made by Justice Jagot in the first instance decision, which was delivered on 8 October 2021, and which found mostly in favour of insurers regarding the way in which the business interruption provisions under consideration operate.  
4. The Full Court has however come to a different view with respect to two issues which arise if cover is available: first, that a policyholder would not need to account for certain payments or benefits received from third parties, such as JobKeeper  payments, and second, regarding the date from when an entitlement to interest is to be calculated.
5. The case name and citation of the appeal judgment in the second test case is LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17 and the full judgment can be found at this link: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2022/2022fcafc001.
6. It is open to the parties to the second test case to seek special leave to appeal to the  High Court of Australia. Any special leave application must be filed within 28 days from the date of the second test case judgment. Probitas will provide a further update about any special leave application made to the High Court.
7. More information about business interruption insurance cover for COVID-19 related losses, can be found on the Insurance Council of Australia’s website at this link: https://insurancecouncil.com.au/bi-test-cases/.
   

The information contained in this update is general in nature. For specific information or advice about your business interruption insurance policy, you should get in touch with your broker or other professional adviser.

IMPORTANT UPDATE: 17 February 2022
COVID-19 and Business Interruption insurance policies in Australia Second test case appeal judgment

1. In order to clarify and bring certainty to insurers and policyholders alike, two test cases regarding the application of common provisions in business interruption insurance policies have come before the Courts for determination.
2. Business interruption insurance policyholders may be affected by these test cases and this update is provided to assist in understanding the test case judgments and how COVID-19 related business interruption claims may be impacted*.
3. There are no appeal avenues remaining in the first test case, however an appeal has been heard in the second test case and that judgment is yet to be delivered.It will not be possible to finalise COVID-19 related business interruption policy claims which are impacted by the second test case until that judgment is delivered and any further appeal which may be made to the High Court.
4. Probitas is committed to supporting all policyholders and provides this update as a guide to the first test case and an interim guide to the second test case pending the appeal judgment. 

First test case – Quarantine Act exclusion

5. The business interruption insurance policies under consideration in the first test case each contained exclusion clauses excluding from cover diseases declared to be quarantinable disease “under the Quarantine Act, 1908 and subsequent amendments” (Quarantine Act exclusion).
6. The Quarantine Act was repealed in June 2016 and COVID-19, which first manifested in late 2019, could not be, and was not, a declared quarantinable disease pursuant to it.
7. The Quarantine Act was replaced by the Biosecurity Act, 2015. In January 2020, COVID-19 was determined to be a “listed human disease” pursuant to the Biosecurity Act.
8. The matter was heard by the New South Wales Court of Appeal. The issue the Court considered was whether diseases declared to be quarantinable disease “under the Quarantine Act, 1908 and subsequent amendments” should be understood as extending to diseases determined to be “listed human diseases” under the Biosecurity Act.
9. The Court of Appeal concluded that a determination that COVID-19 was a listed human disease under the Biosecurity Act did not trigger the Quarantine Act exclusion and the exclusion therefore did not apply.
10. Special leave was sought by insurers to appeal this issue to the High Court. The leave application was refused on 25 June 2021, bringing the case to an end and confirming the Court of Appeal decision.
11. The first test case decision means that, if there is a Quarantine Act exclusion in a business interruption insurance policy, that exclusion will not apply to exclude cover for a COVID-19 related claim.
12. The case name and citation of the first test case is HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 and the full judgment can be found at this link: https://www.caselaw.nsw.gov.au/decision/175d83c4c19face7f3e6bc2c.

Second test case – Coverage under ten sample policy wordings

13. In the second test case, the Federal Court of Australia was asked to consider whether business interruption cover is available for COVID-19 related loss pursuant to various policies in respect of ten individual small business claims.
14. On 8 October 2021, the Federal Court of Australia handed down its first instance judgment in this test case. The Court found that, in nine of the ten claims, none of the insuring clauses in the policies applied and, therefore, the policyholders were not entitled to cover.  In one of the cases, the Court found that the insuring clause was triggered, but that it was not clear that any insured loss had been sustained and a decision is yet to be made on that question.
15. On 8 November 2021, an appeal from the first instance judgment was heard by the Full Court of the Federal Court. The Full Court’s judgment is expected to be delivered soon. The Full Court may confirm the decision made at first instance or overturn it in whole or in part. Accordingly, the first instance judgment in this test case cannot be regarded as a final decision.
16. The following is a broad guide to the first instance decision:

• the types of policyholders seeking cover include small business owners operating a laser therapy clinic, travel agencies, bars, cafes and restaurants, dry cleaning and laundry services, costume hire, commercial leasing, a gym and dentist practice;
• the Court categorised the business interruption insuring clauses under consideration in four main categories:
• infectious disease clauses: which provide cover for loss that arises from either infectious diseases or the outbreak of an infectious disease at the business premises or within a specified kilometre radius of them;
• prevention of access clauses: which provide cover for loss that arises from the orders or actions of a competent authority, such as a government body, which prevents or restricts access to business premises because of damage or a threat of damage to property or people, also often within a specified kilometre radius of the business premises;
• hybrid clauses: which are a hybrid of the above two clauses and provide cover for loss that arises from the orders or actions of a competent authority, such as a government body, closing or restricting access to premises, but only where those orders or actions are made or taken as a result of infectious disease or the outbreak of infectious disease within a specified kilometre radius of the business premises; and
• catastrophe clauses: which provide cover for loss which results from the action of a civil authority during a catastrophe for the purpose of impeding the catastrophe.

the Court found at first instance that:

• in nine of the ten claims, the insuring clauses were not triggered or there was an applicable exclusion, in summary, as follows:
• in some cases, although the actions of authorities resulted in the closure of business premises, the orders themselves were not made as a result of infectious disease or an outbreak at the premises or within the specified radius of them;
• in some cases, the order or action of an authority did not require business premises to be closed;
• in some cases, the insuring clause was not triggered by reason of disease or an outbreak;
• in one case, the policy had a specific exclusion for listed human diseases pursuant to the Biosecurity Act, noting that COVID-19 was such a listed disease;
• in one case, an infectious disease insuring clause was found to be triggered, but cover was subject to whether any insured loss had been sustained and this question was not determined.

17. The case name and citation of the Federal Court’s first instance decision in the second test case is Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206 and the full judgment can be found at this link: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca1206.
18. Probitas will provide a further update about the appeal judgment of the Full Court of the Federal Court following its delivery.
19. More information about business interruption insurance cover for COVID-19 related losses, can be found on the Insurance Council of Australia’s website at this link: https://insurancecouncil.com.au/bi-test-cases/.

* The information contained in this update is general in nature. For specific information or advice about your business interruption insurance policy, you should get in touch with your broker or other professional adviser.