The Insurance Council of Australia (ICA) and the Australian Financial Complaints Authority (AFCA) are currently preparing their test case for the NSW Court of Appeal.
The case, HDI Global Specialty SE v Wonkana No 3 Pty Limited trading as Austin Tourist Park, is chiefly intended to seek clarity from the Court in relation to certain exclusion clauses which reference the Quarantine Act 1908 (Cth) as amended, whether those references encompass the Biosecurity Act 2015 (Cth) and, if so, the timing of the application of the exclusion.
While that case was being prepared, the High Court in England was reaching its verdict in relation to similar but discrete issues under English law, relating to several business interruption insurance policies in the UK market. Recently, the High of Justice handed down judgment in that test case: The Financial Conduct Authority v Arch & Others  EWHC 2488 (Comm) (FCA Case). The Court considered 21 exemplar insurance policy wordings from eight insurers in the market.
The purpose of examining those wordings was, in short, to consider whether they could respond to certain types of business interruption loss that affected insureds during the Novel Coronavirus SARS-CoV-2 (COVID-19) pandemic.
Unlike the Australian test case, the FCA Case dealt with more than just the construction of particular exclusion clauses. As summarised by the High Court, the case dealt with how business interruption policies could and ought to operate in circumstances where there has been no physical damage to the insured premises. That issue was tested in other Commonwealth jurisdictions following the outbreak of Severe Acute Respiratory Syndrome (SARS) outbreaks in 2002 but not in the magnitude dealt with by the Court in the FCA Case.
In short, the Court largely agreed with the FCA's arguments. Subject to an appeal, the expected effect of this would be that many insureds under those policies may be entitled to cover. Of course, cover will still be dictated by the terms of those policies and the circumstances of each case.
In the midst of the global COVID-19 pandemic, the global 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, in the UK, the FCA determined to resolve questions relating to the coverage available under certain exemplar insurance wordings by way of the test case.
The eight insurer defendants agreed to participate in the test case. The FCA represented the interests of the policyholders, many of which were small to medium sized enterprises. There were 21 sample wordings considered, but the FCA estimates that, in addition to these particular wordings, some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the test case.
Business interruption policies
The business interruption policies in question in the UK, as in Australia, were issued by insurers to small, medium and large businesses alike. Such policies are ordinarily intended to cover damage and loss to business premises, as well as the consequential loss of profit and any additional expense consequent upon that physical loss.
Classically, the business interruption cover in those policies would trigger following incidents such as floods, fires and building collapses. However, a large number of those policies also extend to cover other incidents which do not strictly result from damage to the property. Those types of cover were directly called into question by COVID-19 and examined by the Court.
Background facts to the case in the UK
The parties to the case agreed a set of facts, as well as numerous assumed facts. Those were not particularly in question, since the COVID-19 was and remains a globally recognised pandemic, with varied approaches taken by sovereign governments in an attempt to contain the outbreak.
The following matters were largely agreed for the purposes of the FCA Case:
- On 3 March 2020 the British Government announced its COVID-19 action plan.
- On 5 March 2020, England and Wales deemed COVID-19 a notifiable disease.
- On 11 March 2020 the World Health Organisation (WHO) declared COVID-19 to be a pandemic.
- On 16 March 2020, the British Government directed people to stay at home, stop non-essential contact and unnecessary travel, work from home where possible, and avoid social venues.
- On 20 March 2020, the British Government directed various categories of business to close, such as pubs, restaurants, gyms etc (given legal effect by Regulations coming into force on 21 March 2020).
- On 23 March 2020 the British Government announced a lock-down involving closure of further businesses including all non-essential shops and restrictions on individual movement (given legal effect by Regulations coming into force on 26 March 2020).
Different businesses were affected in differing ways across each of the above steps. The Court acknowledged this, and the parties generally agreed certain matters had different application to, for instance, schools, churches and holiday accommodation.
The policy wordings considered
As identified by Lord Justice Flaux in the FCA Case, the Court examined three specific categories of policy wording issues arising from the exemplar policies:
- 'Disease clauses' - these were sections of the insurance policy which afforded business interruption cover in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
- Prevention of access / public authority clauses - these were policy sections which afforded business interruption cover in the event of a prevention or restriction of access or use of the insured's premises as a consequence of government or other authority action or restrictions.
- Hybrid disease & prevention clauses - these were a hybrid of the first two categories, where policies featured cover which would be triggered by restrictions imposed on the premises in relation to a notifiable disease.
The findings published by the Court are lengthy and will apply differently to each affected insured. The extent to which each insured will be entitled to cover will depend upon the specific wording used, and the facts of each insured's circumstances. UK insureds will benefit from a thorough review of the Court's reasoning and ought to seek legal advice. Australian insureds and insurers should also be aware of the findings, given we have seen similar issues here.
Disease Clause findings
The 'Disease Clauses' appeared in policies written by four insurers in the market (RSA, Argenta, MS Amlin and QBE). Each policy contained its own variation of the wording, but in general the clauses provided cover for loss which was the result of:
'interruption or interference with the business… following / arising from / as a result of any notifiable disease / occurrence of a notifiable diseases / arising from any human infectious or human contagious disease manifested by any person…within 25 miles / 1 mile / the “vicinity” of the premises / insured location'.
Some of the QBE wordings deviated from that language slightly, importantly using the words 'in consequence of…any occurrence of a notifiable disease'. As noted below, the Court considered this variation was important in the context.
In summary, it was the position of each relevant insurer that the Disease Clauses would only provide cover for a local occurrence of a notifiable disease. Given COVID-19 was actually a wider disease spread, the Insurers said that only the effects of the particular local element would be covered. The Court disagreed with that approach and favoured the FCA's argument, which was that the proper test was not a 'but for' test in relation to a local outbreak, but a proximate cause test.
Since the COVID-19 outbreak in the relevant local area policy area was indivisible from the broader disease spread, it should be covered under the Disease Clauses. They also argued that it was not truly 'local versus global' but that the outbreak was the same disease in a large number of places. The Court determined that:
- When the disease broke out in the relevant area, that was an 'occurrence'. The Disease Clauses were therefore triggered as soon as there was a diagnosable case of the disease in the area relevant to the particular policy (ie. within the relevant radius to that insured's business).
- The insured peril is the combination of interruption/interference to the Business, which follows the occurrence of the notifiable disease within the relevant radius.
- The Court determined that there must be proximate causation between the loss claimed by the insured and the insured peril (interruption flowing from the occurrence of the disease within the radius).
- Cover was not limited to outbreaks wholly occurring within the relevant policy area. As such, cases in one radius were not independent separate causes from other cases outside the radius.
As noted above, the Court separately dealt with two wordings issued by QBE which contained the words 'in consequence of' and 'events'. Those words distinguished the clause from the others outlined above, and limited the clause to matters occurring at a particular time, in a particular place and in a particular way.
The practical effect would therefore be that insureds under the particular QBE wordings would only be able to recover if they could show that disease cases in that local area (but not elsewhere) were the cause of the business interruption.
The Prevention of Access / Public Authority Clauses
The Prevention of Access Clauses appeared in policies written by six insurers in the market (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich). Again, each policy contained its own variation of the wording, but in general the clauses provided cover for loss which was the result of:
'Prevention / denial / hindrance of access to the Premises… Due to actions / advice / restrictions of / imposed by order of… A government /local authority /police / other body… Due to an emergency likely to endanger life / neighbouring property/incident within a specified area.'
In construing those clauses, the Court indicated they should be given a more restrictive interpretation than most Disease Clauses. The particular words of those Prevention of Access Clauses were key to the Court's assessment, and some of the matters the Court noted were:
- Words such as 'emergency in the vicinity', and 'injury in the vicinity' required an event that was more specific than a general existence of an outbreak. It had to occur at that place and at a particular time. Those types of clause provide a narrower, local cover.
- British Government announcements on 16, 20 and 23 March 2020 were not mandatory, but advisory. That could trigger some of the wordings which featured the word 'advice', or 'action'.
- Wordings which required there to be steps or action to 'prevent' access, required more than mere advice, but called for the force of law to prevent access. The same was held for the requirement that there be any restriction 'imposed by order'.
- Wordings which specifically required a 'prevention' of access (eg. rather than mere 'hindrance') did not require physical prevention but there needed to be closure of those premises such that business could not be carried on there.
- Wordings requiring 'interruption' did not mean a complete cessation of the business but only the general interruption of business (including disruption or interference). Some policies had defined 'interruption', so those were not captured by the Court's observation.
In short, determining whether the Prevention of Access Clauses will trigger depends still on the particular terms of that policy and the precise facts affecting the insured.
For instance, directions for a café to close could be a 'prevention of access', since the premises themselves were closed to business. If the insured's wording features that wording then there may be cover (subject to other terms and facts). If the café continued to offer takeaway, then that wording might not offer cover since they were not strictly 'prevented access'. Each case will turn on its facts.
Disease & Prevention Hybrid
The Hybrid Disease & Prevention of Access Clauses appeared in policies written by Hiscox and RSA. The policies contained their own variations of the wording, but in general the clauses provided cover for loss which was the result of:
'An interruption to the business…Due to an inability to use the premises…Due to restrictions imposed by a public authority…Following an occurrence of disease.'
In summary, the Court largely followed its interpretation for the Disease Clauses. It agreed with the FCA that they should not be limited to local outbreaks only. Further, in line with the Prevention of Access construction mentioned above, the Court also noted that 'restrictions imposed' and 'inability to use' should be construed narrowly (again, they required something more compulsory or mandatory such as force of law or, for 'inability to use' the premises, something more than ordinary impairment of use.
Practical takeaways for Australia
While the Court noted again that each case had to be determined on its own facts, the Court provided its guidance in relation to how each policy wording should be effectively construed. It also outlined that certain pieces of evidence could potentially be used by the insureds to establish whether there had been outbreaks, or cases falling within their local radius areas. Those included:
- Categories of evidence put forward by the FCA (eg. specific evidence, NHA Deaths Data, and reported cases) may prima facie demonstrate the presence of COVID-19;
- A distribution-based analysis, or an undercounting analysis (eg. there are more cases than the reported cases), could in principle discharge insured's burden of proof; and
- Insurers did not indicate that they would require exact precision to establish cover.
Subject to an appeal, the Court's interpretation will assist a large number of insureds in assessing whether their particular circumstances fall for cover under the Disease Clauses, Prevention of Access Clauses or Hybrid policy wordings.
As noted above, the Australian test case has not raised the scope or extent of issues that were canvassed by the High Court in the FCA Case. However, that determination will go some way towards assisting Australian insureds and insurers in considering whether their own policies might cover their business interruption losses resulting from COVID-19.
The common law doctrine in England and Australia dictates that, while compelling, the English Court's determination is not strictly binding on Australian courts. As such, once the Australian test case determines the questions raised regarding the Quarantine Act 1908 (Cth) and the Biosecurity Act 2015 (Cth), it seems probable that Australian insureds might seek to run a second test case. That case would, much like the FCA Case, likely need to address the Australian position in relation to when, how, and whether various classes of policy in the Australian market provide cover for an insured's business interruption losses.
For more information about your own policy and how your cover applies, please contact our team.