Business interruption in a COVID-19 Australia – Part 2

Following up on the previous piece on business interruption, Joey Chen summarises the key points from the second test case for COVID-induced business interruption insurance.

Since COVID-19 first arrived in Australia in January 2020, State and Federal Governments have implemented controls, including lockdowns, which have hindered businesses’ ability to operate at full capacity. Impacted business owners have turned to their business interruption (BI) insurance, but most policies were not originally intended to cover pandemics. Disputes between insurers and insureds have taken to the courts.

Amongst these are two ‘test cases’ on the interpretation of BI policy terms:

  • The first concerned exclusion clauses, specifically whether insurers could rely on exclusions referring to the now-repealed Quarantine Act.

  • The second concerned whether policy wording covered the BI event, and what the insurers were liable for. Issues addressed include disease definitions, COVID-19 outbreak proximity, impact of government mandates, other policy wording matters, and issues of payment and interest.

The outcomes relied heavily on the interpretation of the insurance contracts, and therefore policy wording was key to the determination of the result. This article aims to describe some of the discussions from the second test case, but will try to avoid relaying particular legal and contractual interpretations used in the reasoning.

What happened in the second test case?

The decision on the second test case in the first instance was handed down by Justice Jagot of the Federal Court of Australia on 8 October 2021, and the appeal decision by the Full Court of the Federal Court of Australia on 21 February 2022.

Ten matters formed part of the test case, five of which went to the appeal at the Full Court.

The key issues addressed were:

  • Coverage of the policy wording;

  • The Quarantine Act exclusion; and

  • Assessment of the insured’s loss.

The Full Court substantially agreed with Justice Jagot, with the key differences being on the last point, in particular around treatment of JobKeeper and interest payable.

Coverage of policy wording

Justice Jagot classified the relevant provisions under four classes based on generalising the cover they provided, but noted there were differences in wording between different policies.

Class Provide cover for…
Hybrid clauses
  • 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
Infectious disease clauses
  • Loss that arises from either infectious disease or the outbreak of an infectious disease

  • At the insured premises or within a specified radius of the insured premises
Prevention of access clauses
  • Loss from orders/action 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)
Catastrophe clauses
  • Loss resulting from the action of a civil authority

  • During a catastrophe

  • For the purpose of retarding the catastrophe

Justice Jagot also thoroughly discussed the meaning and interpretation of common words and certain concepts in the various policy terms.

In all but one matter, Justice Jagot determined that the insuring clauses did not apply. Although specific reasoning was based on the wordings in the BI policies in each matter, generally, reasons included:

  • Hybrid clause – the authority’s order was not specific to the area within the radius, and was to prevent the spread of COVID-19 more generally (i.e. across the state), or the premise was not closed by an order of the authority.

  • Prevention of access clause – these did not apply to diseases.

  • Catastrophe clause – COVID-19 is not a catastrophe within the meaning of the clause.

In the matter of Meridian Travel, Justice Jagot determined that one insuring clause (infectious disease clause) did apply. (Meridian Travel was the only matter that addressed an infectious disease clause.) However, there were issues as to whether Meridian Travel could provide the proof, that an infectious disease within 20 km was a proximate cause of their loss. The nature of their business was discussed, as Justice Jagot noted that they had a mix of business from walk-in and from telephone or internet, and also had 90% of their business being international travel.

The Quarantine Act exclusion and the Property Act 1958 (Vic) section 61A

In the first test case, the NSW Court of Appeal determined that policy wording referring to the “Quarantine Act…and subsequent amendments” could not be read to refer to the Biosecurity Act, as the Biosecurity Act was a replacement and this was not within the ordinary meaning of ‘amendment’.

Three insurers, where Victorian law applied to the BI policies, attempted an alternative argument that references to the Quarantine Act are to be read as references to the Biosecurity Act. They based this on a piece of Victorian legislation that states that references to a repealed Act would be construed as a reference to its re-enactment (Property Law Act 1958 s 61A).

Justice Jagot rejected this, on the basis that the Property Law Act s 61A did not apply to Commonwealth legislation (which Biosecurity Act and Quarantine Act both are or were), and that the Biosecurity Act is not a re-enactment with modifications of the Quarantine Act.

Assessment of the insured’s loss

During the lockdowns, some businesses received certain payments and financial relief. The court determined whether these were to be taken into account in assessment of their loss, in accordance with policy wording.

In the case of Meridian Travel, where cover was to take into account “any sum saved…in respect of such charges and expenses…reduced in consequence of the interruption”, the following were considered:

Payment / financial relief

Orders

Jobkeeper payments

  • Not to be taken into account.

  • At first instance, Justice Jagot determined that JobKeeper was to assist businesses and workers, and the purpose was intended to compensate for the loss due to COVID-19. Therefore, JobKeeper payments should be taken into account as a ‘sum saved’.

  • On appeal, the Full Court disagreed. The Court determined that the JobKeeper’s eligibility criteria were financial ones, and not dependent on there being an outbreak within 20 km of Meridian’s business. JobKeeper, therefore, did not satisfy the ‘consequence’ aspect.

Federal COVID-19 Consumer Travel Support Program payments

  • Not to be taken into account.

  • The purpose of this was to alleviate negative economic impacts of COVID-19. Justice Jagot characterised these as mercy payments rather than meant to reduce the loss suffered by the businesses.

  • For reasons similar to JobKeeper, the Full Court agreed these were not to be taken into account.

The Victorian Government’s Support Fund

  • Not to be taken into account.

  • The purpose of this was to ‘help Victorian business and workers survive the devastating impacts of the coronavirus pandemic’, and thus characterised by Justice Jagot as mercy payments.

  • For reasons similar to JobKeeper, the Full Court agreed these were not to be taken into account.

Rental waiver from landlord

  • Yes – to be taken into account.

  • Saved rent payments reduced the insured’s expenses.

  • This issue was not appealed.

On whether and from what date interest was payable to the policyholder, Justice Jagot ordered that interest was only payable where the insured is entitled to cover (i.e. this only arose for Meridian Travel) – this entitlement is yet unconfirmed. She also stated it was not unreasonable for the insurer to withhold payment until a final determination of the test case, but the Full Court disagreed with this, and stated that more information would be needed to determine the relevant date from which interest would be payable.

What’s next?

On 22 March 2022, the Insurance Council of Australia (ICA) announced that three applications have been filed to appeal to the High Court of Australia. Two policyholders are appealing on whether cover is available under certain clauses, and one insurer (IAG) is appealing on whether JobKeeper payments are to be taken into account when calculating the amount of the insurance payment.

The ICA does not anticipate a decision on the applications for approximately three months, meaning a further period of uncertainty before insurers have resolution on the issues.

Outside of the test cases, four class actions have also been filed – against QBE, Lloyd’s underwriters, IAG, and Hollard. The case management hearings for all four insurers were originally set for April 2022, but is deferred until the determination of the last of the three applications, and another matter between the Star Entertainment Group and Chubb. It is again noted that, though the test cases address commonalities, ultimately there are still differences in the wordings of BI policies, even those sold by the same insurer.

So while the legal dust has settled a little around interpretations of key provisions, we may still hear of dispute over BI policies for some time.

References and further reading

Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206
Judgment: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca1206
Federal Court summary: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca1206/summary/2021fca1206-summary

LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17
Judgment: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2022/2022fcafc0017
Federal Court summary: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2022/2022fcafc0017/summary/2022fcafc0017-summary

Appeals to High Court regarding business interruption policies”, Insurance Council of Australia (News Release, 22 March 2022) –https://insurancecouncil.com.au/resource/appeals-to-high-court-regarding-business-interruption-policies/

“BI test cases”, Insurance Council of Australia (Web Page, updated 23 March 2022)https://insurancecouncil.com.au/issues-in-focus/bi-test-cases/

“Class action BI cases deferred as High Court awaited”, insuranceNEWS.com.au (online, 11 April 2022)https://www.insurancenews.com.au/local/class-action-bi-cases-deferred-as-high-court-awaited

“Claimants set to fight on despite insurers’ BI court win”, insuranceNEWS.com.au (online, 28 February 2022)https://www.insurancenews.com.au/local/claimants-set-to-fight-on-despite-insurers-bi-court-win

“Policyholders press issues in High Court BI appeal”, insuranceNEWS.com.au (online, 28 March 2022)https://www.insurancenews.com.au/local/policyholders-press-issues-in-high-court-bi-appeal

“Second BI Test Case- Appeal Judgment Summary”, Insurance Council of Australiahttps://insurancecouncil.com.au/wp-content/uploads/2022/02/ICA-judgment-summary-Appeal-25.2.22518939261.1.pdf

Terzon, Emilia, “Insurance companies overwhelmingly win crucial test case on COVID payouts”, ABC News (online, 8 October 2021)https://www.abc.net.au/news/2021-10-08/insurance-test-case-second-outcome-small-busines/100525568

Terzon, Emilia, “‘Further blow’ for small businesses awaiting insurance payouts for COVID-related losses”, ABC News (online, 22 February 2022)https://www.abc.net.au/news/2022-02-22/insurance-liquidation-qbe-business-losses-covid/100849684

 

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