9 out of 10: FCA finds in favour of insurers in Second COVID-19 Insurance Test Cases
On 8 October 2021 the Federal Court of Australia handed down judgment in the second business interruption test case. The Court found that in 9 of the 10 proceedings, the insuring clauses did not respond and the insurer was not liable to indemnify the insured.
- Whether the policies applied to losses claimed to have been suffered by various businesses as a result of the effects of the COVID-19 pandemic in 2020.
The Second Test Case brought together 10 distinct small business claims made across 6 insurers – Allianz, Chubb, Guild, IAG, QBE, and Swiss Re – for business interruption/interference during the COVID-19 pandemic. In each case, the insured had made a claim under the policy, the insurer had declined the claim, and the insurer sought a declaration from the court that the insuring clauses in the policy did not apply.
The insuring clauses in issue generally comprised:
- Hybrid clauses which provided cover for loss from orders/actions of a competent authority closing or restricting access to premises, but only where those orders/actions are made or taken as a result of infectious disease or the outbreak of infectious disease within a specified radius of the insured premises;
- Prevention of access clauses which provided cover for loss from orders/actions of a competent authority preventing or restricting 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);
- Infectious disease clauses which provided cover for loss arising from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius of the insured premises; and
- Catastrophe clauses which provided cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.
The decision at trial
Her Honour Justice Jagot held that, in all cases but one, the insuring clauses did not respond. Her Honour found that the proper construction of the hybrid clauses required the orders/actions of the authorities to be made as a result of disease at the insured premises or within a specified radius of the insured premises. Although the public health directions applied to the insured premises, it could not be said that the directions were made as a result of anything occurring at the insured premises or within the specific radius. Further, in some cases the order/action of the relevant authority did not require closure of the premises.
Her Honour found that the prevention of access clauses could not properly be construed as applying to disease. In circumstances where the policies specifically provided for disease in one insuring clause (the hybrid clauses), interpreting the prevention of access clauses as applying to disease would involve profound incongruence and incoherence in the operation of the policy which should be avoided.
The only case in which her Honour found that the insuring clause did respond was the policy issued to Meridian Travel. Meridian Travel operated a travel agency in inner Melbourne. The policy contained an infectious disease clause which operated by reference to the outbreak of a human infectious or contagious disease occurring within a 20km radius. The clause did not require that the premises be closed and it did not refer to any action by an authority. The insurer conceded that there was an outbreak of COVID-19 within a 20km radius, and therefore Justice Jagot found that the infectious disease clause responded.
However, her Honour flagged that Meridian Travel would have substantial difficulty proving that the outbreak of COVID-19 within a 20km radius of its premises was the proximate cause of any loss. On the evidence, the principal (and perhaps sole) cause of the business interruption/interference was the federal government’s overseas travel ban, which is a different cause from the insured peril. Further, any loss that could be established would be reduced by the amount of any compensation received by way of either the JobKeeper payments made by the Australian Government or rental reductions or abatements allowed by the landlord of the insured premises.
Implications for you
An appeal to the Full Federal Court has been fixed for 8 November 2021. Until then, this decision sets a high bar for businesses seeking to bring claims for business interruption/interference caused by the effects of the COVID-19 pandemic. Even where an insuring clause is triggered, businesses will need to prove that the losses claimed where a direct result of the outbreak of COVID-19 within the area stipulated in the policy wording. Any JobKeeper payments received or rental reductions allowed by landlords will also reduce the quantum of their claim.