On 8 October 2021, the Federal Court of Australia handed down its first instance decision in the second Australian business interruption insurance test case, Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206 (Second Test Case). The decision is the latest judicial guidance in Australia around whether certain business interruption insurance policies provide cover to businesses for losses arising from Novel Coronavirus SARS-CoV-2 (COVID-19).
After the First Test Case, which addressed whether a specific exclusion in business interruption insurance policies would exclude COVID-19-related losses, the market identified a number of outstanding questions in those policies which required legal guidance. In the Second Test Case, Justice Jagot in the Federal Court addressed those issues in detail.
In short, the Court identified four types of insuring clause (and policy extensions) under which claims for COVID-19 business interruption losses could arise. Only one of those clauses – the 'Disease Clause' – could entitle a business to activate its policy according to the Second Test Case. As to the other three, the Court found that closure or restriction orders from the Commonwealth or State Governments were not made as a result of disease, damage or threat at or near the insureds' premises.
As such, cover was not available to the insureds under those clauses. It also found that COVID-19 was not a 'catastrophe' in the context of the particular insurance policies examined, so that clause also would not provide cover to the insureds.
Following this decision, many policyholders are still asking the question 'will my policy respond?'
The answer remains that it will depend on the policy in question, coupled with the particular facts giving rise to a claim.
The outcome in this decision is on appeal, and we will be reporting further on developments following the appeal.
The latest legal instalment of the Australian business interruption insurance cases, which revolve around COVID-19-related business losses, has been handed down by the Federal Court of Australia. This first instance decision Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206 (Second Test Case), is the most recent judicial guidance in Australia around whether certain business interruption insurance policies provide cover to businesses for losses arising from COVID-19 at or near their business premises.
Since the High Court of Australia refused leave to appeal in the First Test Case, on 25 June 2021, the Second Test Case has been fast tracked through the Federal 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 acted more like a 'prequel' to the First Test Case than a sequel.
The First Test Case had primarily considered the efficacy of a particular exclusion clause (the words 'declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments' are not sufficient to exclude claims for COVID-19).
Exclusion clauses are usually considered after determining whether there is insurance cover available to the policyholder in the first place. However in this case, where the First Test Case considered the particular exclusion clause, the Second Test Case went back to basics to examine the actual insuring clause mechanisms in specific business interruption policies. That is, the Second Test Case started from first principles to determine firstly whether the insuring clause, or policy extension, could would provide cover to policyholders for COVID-19 losses.
If the policyholders surmounted that hurdle, the next questions would be whether they fell down at the next hurdle (exclusion clauses) or whether the claim should be adjusted or curtailed due to particular policy conditions such as the trends and adjustments clauses.
An overview of the Second Test Case: the 'prequel'
Justice Jagot in the Federal Court of Australia was asked to revisit the origin of the policyholders and the insurance policies in question. The Second Test Case involved nine separate policyholders, each having been issued a commercial insurance policy containing a business interruption coverage section.
Most of the policyholders operated across sectors most affected financially by the presence of the COVID-19 pandemic in Australia. Those included gyms, cafes, restaurants, health, travel and hospitality industries. While all policyholders noted they had been affected by the pandemic, each industry type faced its own unique difficulties. Cafes, for instances, recorded losses where foot traffic was reduced. Travel agencies recorded losses where international travel bans had been imposed.
The Federal Court took note of the idiosyncrasies of each policyholder's business and issued the timely reminder that no two policyholders will experience the same identical factual circumstances.
It also noted that the insurance policies in question – although similar – differed in some ways from one another.
The insuring provisions of each policy could, however, be categorised as one of four types:
- 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.
The Court found that only the Disease Clause was capable of providing cover in the circumstances. None of the Hybrid, Prevention of Access, or Catastrophe Clauses would trigger in respect of COVID-19 for several reasons.
The primary reason, however, was that none of the orders of the Commonwealth or State Governments were made as a result of the particular presence or outbreak of COVID-19 at the relevant policyholder's premises. The same was said for other peak 'authorities' such as the Dental Council of NSW (though some bodies were not authorities, such as the Australian Dental Association).
The Court identified – in the case of one particular policyholder Meridian Travel – that there could be cover for policies where there is an identified case of COVID-19 at the premises and that case of COVID-19 causes loss. However, in those circumstances it would also be up to the particular policyholder to show that the cause of their loss was the sheer presence of COVID-19 and not some other cause such as an international travel ban.
In short, the Second Test Case identified that in many cases, policyholders would not be entitled to coverage under the Hybrid, Prevention of Access, or Catastrophe Clauses save for in very specific circumstances. Where they can identify specific circumstances (such as the actual presence of COVID-19 or an order directly made to that particular policyholder to shut their business premises) they will then have several further matters to establish, including: their loss resulted from that particular matter, there is no exclusion that would preclude cover, and their loss has not been otherwise compensated – eg. by way of JobKeeper or JobSeeker payments.
Details around the four clauses
Hybrid & Prevention of Access Clauses
A key determining factor under the Prevention of Access and Hybrid Clauses was that the policies in question 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. The Court determined at [77] that it was not possible to characterise the 'cause or underlying fortuity giving rise to the insured peril and the cause or underlying fortuity giving rise to the uninsured peril as the same'.
Rather, for the Commonwealth Government, the cause of the insured peril was the existence of COVID-19 cases overseas and the threat this presented to Australia because of people (including travelling Australian residents) from overseas entering Australia. For State Governments, it was the known COVID-19 cases in the State (known) and the associated threat or risk of COVID- 19 to people (from cases both known and unknown) across the State as a whole. These were not directed to specific policyholder premises.
The Court noted that the UK Supreme Court had grappled with similar issues arising out of the United Kingdom's experience with COVID-19 insurance claims and reached a different conclusion. While the Court agreed with much of the UK Supreme Court's decision, it drew a key distinction: in the UK, the circumstances dealt with:
- a small in area and densely populated country,
- a national outbreak of COVID-19,
- material numbers of cases inside and outside of the specified areas,
- even if there were no cases within the specified areas the UK Government would still have taken the actions it did including in respect of those areas, and
- by inference, the cases inside the specified areas would also have caused the UK Government to take the actions it did, at the least in respect of those areas.
The Australian experience was not the same, across each of those categories. The reason for both Commonwealth and State Governments taking action on closures and restrictions were not the outbreak or existence of the disease in the particular area. Since each policy with a Hybrid Clause or Prevention of Access Clause required that causal trigger to be met, it meant that none of those policies provided cover and the policyholders' claims under those coverage clauses would fail.
Disease Clause
The Court considered the specific Disease Clause in the case of Meridian Travel. Importantly, the clause did not require any action by an authority for it to trigger. As such, 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? That must be proven by contemporaneous circumstances as they existed at the time of the interruption/interference. The parties conceded that there had been an outbreak of COVID-19 within the relevant radius no later than 30 March 2020.
Under Meridian's policy, the next question was whether the loss suffered by the policyholder was the 'direct result' of the outbreak. That is: was the actual presence the proximate cause of Meridian's loss? It must be the actual presence and not 'the concept of COVID-19 generally'. On the evidence, the Court could not infer that any decline in Meridian's revenue resulted from that fact. Noting Meridian was a travel agent, the Court flagged that a number of events had occurred likely to cause a decline in Meridian Travel’s revenue including:
- various Commonwealth travel restrictions on foreign nationals entering Australia indicating the presence of COVID-19 internationally,
- the imposition of self-isolation requirements on persons arriving in Australia,
- agreements about banning non-essential gatherings in the National Cabinet, and
- the ban on cruise ships from foreign ports arriving at Australian ports, when a large part of Meridian's business involved international cruises.
As to the Disease Clause, the Court determined it would trigger prima facie. The exercise for the policyholder would be to prove that it was the presence of the outbreak, and not some other unrelated circumstance, which caused the loss. Any amount not caused by the outbreak would 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 in both the Second Test Case and in Star Entertainment Group v Chubb Insurance Australia Ltd [2020] FCA 907.
In short, the Federal Court in both cases determined that COVID-19 might ordinarily be called a catastrophe but in the context of the business interruption insurance policies in question, is was not a 'catastrophe'. The insurance context was that the catastrophe was linked to the word 'conflagration'. Conflagration ordinarily meaning a physical event requiring action to retard its progression. A pandemic, said the Court, was not such an instance and nor were the actions of the Government(s) determined to be action to retard such a catastrophe or conflagration.
The policyholders were therefore unable to obtain coverage under that particular extension.
See some of the Court's key word guidance for insurance policies.
Exclusion clause commentary
The Federal Court was asked to consider a number of other matters in detail, which matters are not apt to be summarised in this article. That is particularly the case in circumstances where we are anticipating many of those will be further considered on appeal.
However, for completeness we note the Court determined the following key matters of interest to many insurers and policyholders in the market:
Exclusion Clauses — the Court found that exclusions which referred to listed diseases under the Biosecurity Act 2015 (Cth) would be effective to exclude cover. As to other formulations of the exclusion, we expect further analysis on appeal and in the Star Entertainment case.
Section 61A of the Victorian Property Law Act — the argument advanced for insurers was that section 61A of that Act would convert references to Quarantine Act 1908 to be references to the Biosecurity Act 2015 where they appeared in exclusion clauses. The Court disagreed – section 61A did not apply to the policies in question because the word 'Act' in that section did not include Acts of the Federal Parliament.
Section 54 of the Insurance Contracts Act — this section has been the subject of much litigation over its lifetime. In short, where the act or omission of the insured or other person gave the insurer a basis to decline the claim, the insurer may not so decline. While the Court found that 'other person' need not be a party to the contract of insurance in order to fall within the scope of s 54(1), the person must have a relevant connection to the insured or the policy. This is whether as a beneficiary under the policy or by having some function in the performance of the insured’s obligations under it. The argument was that the Director of Human Biosecurity had 'acted' so as to list COVID-19 and thereby give insurers a basis to decline (for instance under the Biosecurity Act exclusion). The Court found that the Director has no connection with the insured nor any obligation under the policy, and therefore declaring COVID-19 to be a listed disease was not an 'act of some other person within the meaning of s 54'.
Next steps – an appeal and further recourse
The Federal Court's decision is listed for appeal. Having said that, the decision was made robustly and with detailed reasoning. It also sets out alternative points which suggest that, even if the policyholders succeed on appeal, there will be many factual and circumstantial hurdles for them to address before coverage is available on their policy (if at all).
It is important that before a policyholder gets to the question of whether their claim is excluded under the policy, they must specifically address whether they have a claim in the first place.
A policyholder should carefully consider its operative insuring clause. They should seek advice from their broker or legal team about whether the facts and circumstances in their case will trigger the particular policy in the first place.
No policyholder or policy will be the same in all respects, and if cover does trigger prima facie, the policyholder should then assess any exclusion clauses applicable to their policy.
Although we have now seen both the opening act and its prequel, the business interruption test cases are yet to reach the denouement of their trilogy.
The appeal, and potential further recourse to the High Court of Australia, will determine whether this will conclude with a trilogy at all or evolve into a saga.
For more information about your own policy and how your cover applies, please contact our team.
