The Full Court of the Federal Court of Australia has recently clarified previous judicial guidance in Australia around whether business interruption insurance policies cover businesses for losses related to Novel Coronavirus SARS-CoV-2 (COVID-19).

On 21 February 2022, the Full Court of the Federal Court of Australia handed down two appeal decisions:

• LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17 (the Second Test Case); and
• Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16 (Star Appeal).

With some exceptions, discussed below, the Full Court's decisions uphold the first instance decisions of Justice Jagot in Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206 and Chief Justice Allsop in Star Entertainment Group v Chubb Insurance Australia Ltd [2020] FCA 907.

The Full Court has confirmed, at least for now, the current state of insurance law in Australia insofar as it concerns business interruption claims arising from COVID-19. With regard to five of the six policyholders across the two cases, it meant that there was no insurance coverage available for their particular business interruption claims. As to the other policyholder, that question was left open by the Full Court.

We have previously reported on the outcome of the First Test Case pertaining to COVID-19 business interruption insurance claims. Since the First Test Case parties were denied special leave to appeal to the High Court, the Second Test Case collection of cases – and The Star litigation – have been fast-tracked through the Federal Court of Australia and its Full Court in order to provide initial guidance to policyholders and insurers in relation to how specific insurance contracts should be interpreted.

The Second Test Case decision was heard and then determined swiftly and clearly by the Federal Court of Australia at the end of 2021. Our report on the outcome of the trial judgment of the Second Test Case can be found here. We have previously described the Second Test Case as a 'prequel' to the First Test Case, but they appositely form one part of the larger COVID-19 insurance law canon. The Star decision also takes its place among the ranks.

Second Test Case: Present Day

The Second Test Case appeal involved five separate policyholders, reduced from the initial group of nine. Each of the five policyholders had been issued a commercial insurance policy containing a business interruption coverage section. The policies were not identical and, therefore, raised separate questions in both fact and law.

It is by now well known that the policyholders operated across different business sectors. Each was financially affected in some way by the presence of the COVID-19 pandemic in Australia. Notably, cafes, restaurants, bars, health, travel and hospitality industries featured in the suite of cases. A more detailed background is set out in our earlier report here.

The Full Court of the Federal Court of Australia, constituted by their Honours Moshinsky, Derrington and Colvin JJ, concurred in main with the trial judge's categorisation of the insuring clauses:

• Prevention of Access Clause — these clauses would provide cover where the order or action of a competent authority prevented or restricted 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);
• Disease Clause — these clauses would cover loss that arises from the presence or outbreak of infectious disease at the insured premises or within a specified radius of the insured premises;
• Hybrid Clause — these were a hybrid of the first two, providing cover for loss where the orders/actions of a competent authority have closed or restricted access to premises, and the orders/actions are made or taken as a result of the presence or outbreak of infectious disease within a specified radius of the insured premises;
• Catastrophe Clause — these clauses would provide cover to a policyholder where they suffer loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.

Primary Judgment (Largely) Upheld

For the sake of brevity, we do not seek to unpack the entirety of the Full Court's reasons. It is more efficient to acknowledge that the Full Court substantively upheld the arguments put forward by the insurers.

In effect, the Full Court agreed that the facts presented and the specific policy wordings issued to each of the policyholders led to the conclusion that, with the exception of one policyholder, there was no insurance coverage available for those insureds.

Hybrid & Prevention of Access Clauses

The Prevention of Access and Hybrid Clauses required there to be an order or action of a competent authority (howsoever defined) as a result of the presence/outbreak/occurrence of COVID-19 at the policyholder's business premises. Similarly to the principled approach adopted by Justice Jagot at first instance, the Full Court considered the particular wording of each insuring clause and the matters required to establish cover.

Although a case-by-case assessment of insurance policies does not necessarily give rise to a general rule, the Full Court endorsed the primary judge's reasoning in relation to clauses such as the Hybrid/Prevention of Access clauses which contained a requirement for closure by an authority.

At [421] Derrington & Colvin JJ noted, in relation to 'competing' causes for closure proposed by one policyholder, that:

'…[the hybrid] clause required closure or evacuation of the business “by order” of a relevant authority, which was not the same thing as the order having the consequence that premises were closed… In particular, the Overseas Travel Ban did not close any part of Meridian’s business, nor did it impose on any obligation on Meridian to do so…. Rather, it imposed travel restrictions on Australian citizens and permanent residents with the practical consequence that they could not make use of Meridian’s business to book international travel. The Victorian Government directions also lacked the requisite operative character because they did not require the closure of Meridian’s business…. Her Honour further concluded that the Commonwealth Government actions were not consequent upon “the discovery of an organism likely to result in a human infectious or contagious disease at the Situation”, irrespective of which of several possible constructions was given to that clause. For those reasons, cover under the hybrid clause was not available.'

In summary, the policyholders asserting cover under clauses which contained the 'Hybrid' or 'Prevention of Access' type wording could not trigger coverage on the basis of the facts known. As outlined further below, we should note the Full Court reiterated that its role was not to provide advisory guidance – the Court must make an assessment on the facts presented and the law as it stands but not hypothesise.

Disease Clauses

As to the 'Disease Clause', the Full Court agreed with Justice Jagot's reasoning on that issue. The Disease Clause was primarily relevant only to one policyholder, Meridian Travel.

Like the other policyholders, Meridian Travel had been unable to establish an entitlement to insurance cover under the Hybrid Clause. As such, its secondary claim was for cover under the Disease Clause. That clause did not require any action by an authority for it to trigger, so the question became a matter of objective fact: was there an outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of Meridian's business premises?

The Full Court agreed that the factual presence of the disease was to be proven by contemporaneous circumstances as they existed at the time of the interruption/interference. The parties had already conceded that there had been an outbreak of COVID-19 within the relevant radius no later than 30 March 2020.

The critical question then became whether the outbreak of COVID-19 within the relevant radius (i.e. the insured peril) was the 'direct result' of Meridian Travel's loss. The Full Court affirmed Justice Jagot's conclusion that there was a distinction between the 'underlying fortuity' and the 'insured peril' covered by the relevant insurance policy. The distinction was critical at both first instance and on appeal. On the evidence present by Meridian, the outbreak of COVID-19 did not directly result in Meridian's loss. It was held that the various Commonwealth travel restrictions (e.g. the Overseas Travel Ban and cruise ship ban), which were not insured perils, caused the significant decline in Meridian Travel's business.

In summary, the Full Court affirmed that a Disease Clause may trigger if the policyholder could prove that the presence of the particular outbreak at the premises directly caused the loss. Any amount not caused by the outbreak at the premises could not form part of the amount agreed to be paid by way of indemnity.

COVID-19 = not a 'Catastrophe'

Whether COVID-19 was a 'catastrophe' was discussed by the Federal Court in both the Second Test Case Appeal and in The Star. In The Star, the Full Court agreed in full with the reasons of Chief Justice Allsop at first instance, and dismissed the appeal that had been lodged by The Star. In dismissing the appeal, the Full Court affirmed the trial judge's view on the term 'catastrophe'.

In both The Star and the Second Test Case, the Full Court upheld the view that the COVID-19 pandemic (and the response to it) was not a 'catastrophe' within the meaning of the insurance policies in question. That is not to say the Court agreed COVID-19 was not a catastrophe in its ordinary sense (lower case catastrophe). However the upper case catastrophe for the purposes of the insurance policy dictated that the catastrophe was linked to the word 'conflagration' (i.e. 'conflagration or other catastrophe'). Drawing on established authorities on the issue, the Full Court noted that 'conflagration' contemplates that there has been physical action by the authority seeking to retard it.

On this basis, in The Star the Full Court found that, in the particular insurance policies in question:

'the words 'or other catastrophe' are to be confined to catastrophic events that can be retarded by physical actions directed towards restraining or interrupting the progress of a physical phenomenon.' (at [127]).

The policyholders in both the Second Test Case and The Star were therefore unable to obtain coverage under the Catastrophe Extension in their applicable insurance policies.

Reversal of some Second Test Case points

Although agreeing with most of Justice Jagot's findings, the Full Court overturned the following matters of interest:

• Third Party Payments – The Full Court overturned the trial judge's conclusion that Government support payments (whether Federal, State or otherwise) could be deducted from the indemnity amount to be paid to an insured in the claims considered in the proceedings where an entitlement to cover was established in principle. In relation to Meridian Travel, the Full Court held that the critical question was whether the causal requirement in the basis of settlement clause was satisfied. As to whether JobKeeper payments should be taken into account, it was held that the particular 'sum saved' provision required a focus on the criteria for the JobKeeper payments rather than the general underlying policy of the scheme. The criteria for the payments were financial and did not depend upon whether there was an outbreak at or within a radius of the premises. As such, the JobKeeper payments did not satisfy the causal requirement and could not be taken into account as a 'sum saved'.
• Section 57 of the Insurance Contracts Act – The Full Court held that Justice Jagot had erred in her construction of this provision. They found that what is a reasonable period of time for an insurer to investigate a claim is a question of fact to be determined objectively by reference to the circumstances of each claim. As such, with most insurance policy and statutory interpretation exercises, this must be assessed on a case-by-case basis.

The Next Instalment

As to The Star, it remains uncertain as to whether there will be any further appeal. However, there is ongoing speculation about the next phase of the Second Test Case. However, the Full Court emphasised that each case should be taken on its own merits, so policyholders and insurers alike should take care to review the individual facts and circumstances of any insurance claim. Even in the event a High Court appeal proceeds, the issues ventilated at first instance and in the Full Court have now been well sifted into a set of finer facts and principles.

The Full Court made plain that it will not partake in going beyond those finer circumstances. Unlike in other jurisdictions such as the UK, it is not the role of the court to provide hypothetical advisory views. At [52] Justice Moshinsky cautioned that:

'Moreover, although these matters have been advanced as test cases for the purposes of exemplifying certain issues which may arise between many insureds and insurers, real caution must be exercised to avoid the giving of an advisory opinion or answering a question that is hypothetical.'

With that in mind, although we have now seen both the opening act and its prequel play out, it remains unclear whether the business interruption insurance collection will have many more substantive chapters. The key takeaway for insurers and policyholders remains that they should carefully consider the operative insuring clause of the insurance policy, along with its surrounding extensions and exclusions.

For more information about your own policy and how your cover applies, please contact our team.