The now notorious suite of COVID-19 business interruption cases, known as the 'second test case', is gradually establishing itself as part of the canon that is Australian insurance law. The High Court of Australia put to bed the majority of concerns raised by policyholders against their insurers when it declined Special Leave to Appeal from:

• 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).

According to many pundits, the High Court's hearing of special leave applications was intended to be a final step in the COVID-19 business interruption industry test cases. Those cases had commenced in mid-2020. The insurance industry's intention was to reach consensus on whether COVID-19 business interruption was covered under small business insurance packs, or the Mark IV Industrial Special Risk wording. In what we might see as a conventionally Dickensian or Dostoyevskian perpetuation of history, the market's intent seems to be much longer in the making.

We reported on the state of the legal position in Australia in our article Business Interruption Insurance for COVID-19: The Law Two Years On. It is fitting now that, another two years on, we write again about the most recent developments in the ongoing COVID-19 business interruption insurance saga.

Here we report on what we have lovingly come to dub the 'Grey Area', being how and whether certain insurance policies would respond to later sets of State and Federal business closures, restrictions and lockdowns: matters not fully qualified or determined during the second test case. Nor were they required to be, since these issues were still unfolding when the second test case(s) were commenced in the Federal Court of Australia.

Our sleek and mysterious Grey Area has now had one of its days before the judiciary, in the very jurisdiction where the majority of Statewide closures occurred – the State of Victoria. On 16 August 2024, the Victorian Supreme Court (Delany J at first instance) issued the first authoritative determination on our so-yclept Grey Area in Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors [2024] VSC 485 (Transit).

The 'Grey Area'

At the risk once more of oversimplifying our preamble, her Honour Justice Jagot (as she then was) concluded in the second test case that orders/directions issued by the Federal and State governments with the effect of closing or restricting business during the pandemic were made in response to the general threat of COVID-19 rather than in response to any particular outbreak. Those were primarily orders made with effect from 23 March 2020. That date is important because it goes towards informing the meaning of our Grey Area.

For Justice Jagot, the causative element required by the business interruption insurance policies in question (that the orders be made as a result of an outbreak of COVID-19 at, or within 20km of, the insured's premises) could not be satisfied by the policyholders in that case, primarily in respect of the 23 March 2020 orders. The second test case concluded that unless evidence could be shown to the contrary, policyholders would fail to establish that the orders closing or restricting their business were made as a result of a specific outbreak within their geographical radius, but rather, were made as a result of something else, more akin to a general concern and threat of the spread of COVID-19 state wide.

That is not to say that her Honour did not consider other Federal and State orders in the second test case. She did in fact consider several, and in obiter dicta made reference to them (see [809] of the second test case judgment). Nonetheless, her Honour was not tasked with that specific exercise as part of the second test case, and we pause to note that her Honour's judgment already traversed 1,152 paragraphs of carefully reasoned prose.

As such, our Grey Area was born. One such order within the Grey Area that has now been further examined is the Victorian State Government's Restricted Activity Directions (Restricted Areas) issued by Dr van Diemen, Chief Health Officer on 8 July 2020 (8 July 2020 Direction). In addition to that direction, a number of other Victorian State Government orders have also raised the question whether they should be treated any differently to the 23 March 2020 and other orders examined in the second test case.

Transit Decision (and AMFR) The Victorian Supreme Court's decision in Transit is the first judicial authority on the Grey Area. Although the case is referred to as the Transit decision, our parenthetical heading above clarifies that it in fact concerns two separate COVID-19 business interruption insurance disputes, determined in tandem:

• Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors (Transit)
• AMFR Holdings Pty Ltd & Ors v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors (AMFR)

In Transit, his Honour Justice Delany was asked to consider some of the Grey Area matters that arguably fell outside the ambit of the second test case. In particular, his Honour started with the 8 July 2020 Direction. The preamble to that direction was of particular importance, and provided as follows:

'The purpose of these directions is to restrict the operation of certain business and undertakings in the Restricted Areas in order to limit the spread of Novel Coronavirus 2019 (2019-nCoV).'

His Honour noted that the 8 July 2020 Direction distinguished between Greater Melbourne, the Shire of Mitchell and other parts of regional Victoria, and identified those as the Restricted Areas emboldened in the extract above.

The open question to be answered, and which at law had not yet been settled, came down in part to the identification of certain areas of closure. That question was whether government directions or orders such as the 8 July 2020 Direction sufficiently defined a 'targeted area' of closures in order to trigger that causal element of the business interruption cover. If they could so trigger the policy then, the argument followed, such orders might be said to have been made as a result of an outbreak of COVID-19 within a geographical radius of the policyholder's premises.

In Transit, his Honour Justice Delany considered the orders and the policy wording in question. In reaching his determination, in favour of the insurers, his Honour found that neither Transit nor AMFR's policies would respond to business interruption claims arising from COVID-19 as a result of the 8 July Directions. Therefore, his Honour dismissed both claims with the policyholders to pay the insurers costs in both proceedings.

Is the 'Grey Area' settled?

Unfortunately, a conclusive adjudication of the Grey Area remains elusive. The Transit case, although decided in favour of insurers, is the first determination touching on the issue but was determined on the specific policy wording before the Court. If the Dostoyevskian narrator of our introduction were to weigh in on it, he might say: '[business interruption insurance] is a mystery. It needs to be unravelled, and if you spend your whole life unravelling it, don't say that you've wasted time'.

Like Justice Jagot in the second test case, his Honour in Transit adopted orthodox contractual interpretation principles to give effect to the meaning within the policies. As such, the judgment will assist the understanding of those insurers and policyholders who hold a policy with the same language as the Arch wordings. It unfortunately is not a panacea to policy interpretation for other claims, though.

Looking specifically at the Arch wording in question, the CLOSEBX4 'Hybrid Clause' included the words: '…closure or evacuation of the whole or part of the Premises or other premises in the vicinity of the Premises by order of a competent public authority directly or indirectly arising from infectious or contagious human disease occurring at such premises...'

As to his Honour's determination on the 8 July 2020 Direction, he considered that although it could be said that the direction was indirectly caused by 'the cumulative number of cases in Greater Melbourne', that was only in the context of the particular CLOSEBX4 clause (at [264]). In order to arrive at this finding, his Honour relied on two advices issued by the Victorian Government indicating that the purpose of the 8 July 2020 Direction was to '[enforce] stricter social distancing practices in Restricted Areas in light of recent outbreaks in those areas' (at [324]) and that the 8 July 2020 Directions 'are targeted at areas where the virus is circulating at higher levels...' (at [324]). Having regard to those advices, his Honour concluded that the 8 July 2020 Direction could be said to have indirectly arisen from cases of COVID-19 in specific geographic areas i.e. Greater Melbourne.

However, this was not sufficient to establish the necessary causation under the relevant business interruption policy. The policy required that the orders arise from infectious or contagious human disease occurring at a premises in the vicinity of the insured's Premises. Notwithstanding that the insured's Premises was within the Greater Melbourne area, the insured failed to establish that there was an occurrence of COVID-19 'in the vicinity of' the insured's Premises, such that it could be causative of the 8 July 2020 Directions. In this regard, his Honour construed vicinity as meaning ‘near or about, in the neighbourhood of’ the Premises and being concerned with physical proximity.

Having failed to factually establish proximity, even with the benefit of the word 'indirectly' in the CLOSEB4X clause, the insured's claim for business interruption losses arising from the 8 July 2020 Direction was unsuccessful at first instance.

What happens next?

Transit is the first in a line of active business interruption cases concerning, amongst other things, the Grey Area. Each of those cases is pending trial as at the date of this article.

Given the balance of outstanding COVID-19 business interruption cases, and the prospects of an appeal in Transit, his Honour's findings are, as mentioned, not conclusive or final on this issue. They might, however, be used as a rough guide for the insurers and policyholders dealing with the same wording as the CLOSEBX4 clause.

As always, the Transit case is a timely reminder that there is no one-size-fits-all approach to policies or claims. In each instance, it is important to bear in mind that each claim will have its own particular factual circumstances, and its own particular insurance policy wording. Policyholders, brokers and insurers should always consider those matters on a case by case basis.

For more information about your own policy or whether cover applies, please contact our team.