Property Insurance Update – Implications for Australian Insurers of the UK Covid-19 Test Case
The United Kingdom’s High Court delivered its judgment in Financial Conduct Authority v Arch and Others1 on 15 September 2020. The case found largely in favour of policyholders and that business interruption cover would extend to COVID-19 losses under some covers. The judgment is not binding on Australian courts, but may be persuasive authority. A copy of our case summary can be found here.
There are a number of important differences between the common business interruption policy wordings in Australia and those in the United Kingdom case. For disease covers in particular, most Australian wordings contain an exclusion likely to apply to COVID-19 claims. For prevention of access covers, many Australian wordings require property damage to have occurred. The consequence of these and other policy differences mean that the Australian coverage position will not necessarily follow the United Kingdom.2
In Australia, disease cover is commonly provided under an extension to the policy headed ‘Infectious or Contagious Diseases’. The wording typically requires closure or evacuation of whole or part of the insured premises, by order of a competent public authority, consequent upon infectious or contagious disease manifested by any person, whilst at the premises or in a defined vicinity. In the United Kingdom case, the wordings considered required a notifiable disease, arising from a human infectious or contagious disease manifested by any person, at or in a defined vicinity of the insured location. Notably, there is no requirement for an order for closure by an authority, as required under Australian wording.
Pandemic coronavirus exclusion
Most disease covers in Australia are subject to an exclusion for any Listed Human Disease under the Biosecurity Act 2015 (Cth). This Act lists diseases that are communicable and may cause significant harm to human health. In response to COVID-19 “human coronavirus with pandemic potential” was declared a Listed Human Disease on 21 January 2020. In consequence of this exclusion, many COVID-19 claims will fall outside the terms for coverage in Australia.
However, there are still policies within the market where the disease cover exclusion refers to the repealed Quarantine Act 19083 or any amendments. This leads to an argument that as human coronavirus with pandemic potential is not listed in the Quarantine Act 1908 and there are no effective amendments to that Act, the exclusion does not apply. The contrary position is that the references to the Quarantine Act 1908 should be construed as references to the Biosecurity Act 2015. That construction would arguably give effect to the intention of the exclusion to exclude significant communicable diseases.
This is likely to be the more significant issue for Australian disease covers and a test case addressing Quarantine Act 1908 exclusions is being pursued by the Australian Financial Complaints Authority and Insurance Council of Australia. The test case will be heard by the New South Wales Court of Appeal and will commence on 2 October 2020. See our earlier update about that case here.
Manifestation of disease
One of the issues considered by the United Kingdom’s High Court was when COVID-19 was considered to have ‘manifested’. In this respect, the Court made findings that the disease had manifested when it had been ‘sustained’, which specifically arose from the definition of Notifiable Disease under the Health Protection (Notification) Regulations 2010 (UK). Based on the meaning of ‘sustained’, the Court found that the disease manifests when the person is symptomatic and that diagnosis was not a requirement, except for any cases which were asymptomatic.4
As the Court’s approach to this issue arose from the definition of Notifiable Disease under United Kingdom legislation, Australian courts may take an alternative approach to determining the manifestation of COVID-19 at the premises. This may require the more restrictive requirement for COVID-19 to have been evidenced through testing or medical diagnosis.
Causal nexus between insured disease and government restrictions
A significant aspect of the judgment addressed the casual connection between the government measures and the disease manifested within the specified insured area. The Court held that “the right way to analyse the matter is that the proximate cause of the business interruption is the Notifiable Disease of which the individual outbreaks form indivisible parts”.5 On this analysis, all of the outbreaks were effective causes, because the authorities acted on a national level on the basis of information about all the occurrences of COVID-19.
The Court also did not accept that the disease cover was confined to disease which ‘only’ manifests within the insured area and not to disease which manifests both inside and outside the insured area. The Court held that this construction was not expressly, nor implicitly, made out on the wording.6
However, the Court took a different approach to this issue in respect of two QBE policies. For those policies, the Court found that the insureds would only be able to recover if they could show that the cases of COVID-19 within the insured area, as opposed to any elsewhere, were the cause of the business interruption.7 The Court considered that this arose from the overall wording including the references to “in consequence of” and “event”.8
The approach in Australia will likely depend upon the evidence as to the basis of decisions made by the government, but there is likely to be similar scope to argue that the government action was based upon all COVID-19 cases, which included any COVID-19 case within the insured premises. In contrast the United Kingdom however, many restrictions in Australia will be state or territory based, and others national. The Australian wording generally also requires that the loss “arise from” the orders for closure from the authority and that these orders be “consequent upon” the disease at the premises or defined area.
The Court considered that the term vicinity would depend in part on the nature of the relevant “event” but which could be very extensive. In the context of the disease cover, the Court considered that a reasonable person would understand the term ‘Vicinity’ to mean an area whose extent would depend in part on the nature of the relevant event.9 On this basis it found that when COVID-19 occurred, it was of such a nature that any occurrence in the United Kingdom would reasonably be expected to have an impact on insureds and their businesses, and therefore that all occurrences of COVID-19 were within the relevant “Vicinity”.10
In Australia however, disease covers are generally confined to the insured premises or a more geographically defined vicinity.
Prevention of Access
In Australia, prevention of access cover is commonly provided under an extension headed ‘Premises in the Vicinity (Prevention of Access)’. Primarily, this extension only covers damage to property within the vicinity of the insured premises, but not always.
There are also policies in the Australian market with cover in similar terms to the United Kingdom policies considered by the Court. This includes cover where there is a risk to life in the vicinity of the premises, and an action or order of an authority, which prevents or hinders, the access to or use of, the insured property. Given the commonality of terms, the Court’s views on these terms, particularly in the context of COVID-19 claims, is likely to be relevant within the Australian market.
Prevention of Access and Hindrance
The Court examined the meaning of the term ‘prevention of access’ as opposed to ‘hindrance’ and found that, in this context, prevention of access means more than simply a physical impossibility of access but could also include the prevention of access to premises as a result of government action or advice. The Court further explained that there was only a prevention of access to premises if government actions or advice required or recommended complete, not partial, closure of the premises.11
Whereas, ‘hindrance’ merely referred to access to premises being made more difficult.12 For example, the United Kingdom’s government advice for certain essential business to stay open and for people to only visit these businesses for essential supplies may amount to a hindrance in the use of the premises, but not a prevention of access.13
The Court then considered what the nature of the government action or advice would need to be to give rise to prevention of access coverage. Ultimately, the Court found that this connotes steps taken by a relevant authority to prevent access to premises which have the force of law.14 Government advice, no matter how strongly worded, did not have the force of law until mandatory regulations were passed by the government requiring business to close. Only then was there ‘action’ by the government within the meaning of most prevention of access clauses.15
The final key issue considered was the reference to an emergency or danger ‘in the vicinity of the premises’, which the Court considered required something specific happening at a particular time and in the local area. The Court stated that the term ‘vicinity of premises’ is an elastic concept but does connote neighbourhood and could not include the entirety of the United Kingdom for the purposes of the restriction of access clauses examined.16
The Court stated that what ‘in the vicinity’ means in any particular case may depend upon the nature of the ‘emergency’ and the facts of the case.17 However, absent any special definition of the term, vicinity evidences an intention to provide narrow localised cover and so action taken in response to a national pandemic did not necessarily satisfy the requirement that there be an emergency in the vicinity (or neighbourhood) of the insured premises.18 In this respect, there could only be cover under this wording if the insured could show that there was an emergency by reason of COVID-19 in the vicinity of their premises as opposed to the country as a whole.19
The Court’s findings on the extent of cover available under prevention of access clauses is likely to be considered in the context of any Australian COVID-19 claims. The narrow localised requirement of vicinity will be of particular relevance, but needs to be considered in the context of the Australian restrictions, most of which are state and territory based, rather than national.
While the usual wordings for disease and prevention of access covers generally differ in the United Kingdom and Australia, the policy wordings and implications of the decision should be carefully considered by insurers, as well as the factual circumstances giving rise to the government orders within Australia in the context of each policy response.
Many disease covers will have an operative exclusion for COVID-19 where the Biosecurity Act 2015 is referenced, and for those with outdated references to the Quarantine Act 1908, the pending determination of the New South Wales Court of Appeal will be important. Most prevention of access covers will require property damage to have occurred, but those which extend cover where life is endangered, may warrant consideration of the Court’s determinations regarding the narrow localised element of vicinity and the mandatory nature relating to government actions.
The COVID-19 pandemic and any unexpected coverage consequences are also likely to result in underwriting changes such that coverage and any restrictions on cover are clear in any future pandemics. This may include assessment of broad exclusions relating to pandemics, which are applicable to all sections of the business interruption policy.
1  EWHC 2448 (Comm).
2 The comments in this article are of a general nature only.
3 Repealed on 16 June 2016 under the Biosecurity (Consequential Amendments and Transitional Provisions) Act 2015 (Cth).
5 , .
8 Notably the RSA wording also used “in consequence of” but was treated differently to the QBE 2 and 3 wordings.