COVID-19 business interruption insurance claims: the outcome of the Test Case process

On 14 October 2022, the High Court of Australia dismissed applications made by two policyholders and an insurer for special leave to appeal the decision of the Full Court of the Federal Court in the Second Australian Financial Complaints Authority (AFCA) Test Case: LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17.

The High Court’s decision means that the Full Court’s judgment stands and is the leading authority in Australia on insurance coverage for COVID-19 business interruption losses.

The Full Court’s decision means that policyholders with a “prevention of access”, “hybrid”, or “catastrophe” clause are unlikely to be covered for COVID-19 business interruption losses. Policyholders with a “disease” clause may have cover, depending on the type of business involved and the cause of COVID-19 business losses.

However all policyholders should obtain independent legal advice on the extent of cover available and should not rely on any statements by insurers, their industry body, or other commentators as to whether they may have cover.

The two test cases on business interruption insurance

The test cases were put in place by agreement between certain insurers, the Insurance Council of Australia, and the AFCA to seek to clarify insurance coverage for business losses suffered as a result of COVID-19 and the related government restrictions and orders.

Although the test cases were directed at clarifying coverage for claims or complaints before AFCA (whose jurisdiction is limited to smaller business losses), the outcome of the test cases has implications of all COVID-19 related business interruption claims. In respect of claims before AFCA, AFCA has said that it will be guided by the test case decisions when deciding AFCA claims. For other claims outside of AFCA, the implications of the test cases will depend on the type of COVID-19 related insurance cover held by policyholder and the cause of loss.

The test cases were structured by insurers in two stages:

• The First Test Case – which was to determine if the Quarantine Act exclusion applied to exclude COVID-19 losses; and
• The Second Test Case – which was to determine whether the four main types of insuring clause responded to COVID-19 losses.

First Test Case: the Quarantine Act exclusion

In November 2020, the NSW Court of Appeal handed down its decision in the First AFCA test case: HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296; Clayton Utz acted for the policyholders.

The case concerned whether insurers could rely on exclusions in business interruption policies referring to “diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments” to exclude claims for COVID-19. These exclusions were colloquially referred to as Quarantine Act exclusions, though insurers also described them as “pandemic” exclusions.

The Quarantine Act 1908 (Cth) had been replaced by the Biosecurity Act 2015 (Cth) in 2016. COVID-19 is a “listed human disease” under the Biosecurity Act but is not a “quarantinable disease” under the Quarantine Act. The Court ruled (5-0) in favour of policyholders, meaning that the Quarantine Act exclusion did not apply to COVID-19.

The insurers’ application for special leave to appeal to the High Court was refused on 25 June 2021. This meant that, if COVID-19 related losses were covered under the insuring clause of the policy, insurers could not rely on the Quarantine Act exclusion to refuse to pay the claim.

Second Test Case: other coverage issues for COVID-19 claims

In around February 2021, a second AFCA test case was commenced in the Federal Court. This case concerned various other coverage issues for COVID-19 business interruption claims (such as policy wording interpretation, causation, adjustments, and trends). On 8 October 2021, Justice Jagot delivered her judgment: Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206; Clayton Utz acted for eight of the ten policyholders in the matter.

Justice Jagot’s decision was appealed to the Full Federal Court. On 21 February 2022, it delivered judgment in the appeal: LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17. The Full Court largely upheld the findings of Justice Jagot at first instance; Clayton Utz acted for three of the five policyholders in the appeal.

On 14 October 2022, the High Court refused applications for special leave to appeal the Full Court’s judgment made by two policyholders. The High Court also refused Insurance Australia Limited’s application for special leave (which concerned the Full Court’s findings regarding JobKeeper). This means that the decision of the Full Court stands.

Four business interruption clauses under consideration

There are four types of clauses that were considered in the Second Test Case. At a high level, these clauses are:

1. Disease clauses, which provide cover for interruption caused by the outbreak of a disease within a specified radius of the insured premises (usually 20km);
2. Prevention of access clauses, which provide cover for interruption caused by a legal authority restricting access to the premises as a result of the threat of damage to persons/risk to life within a specified radius of the insured premises (which can range from 5km to 50km);
3. Hybrid clauses, which are a combination of the above two clauses, and provide cover for interruption due to closure of the insured premises by government order as a result of an outbreak within a specified radius of the premises (usually 20km); and
4. Catastrophe clauses, which provide cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding that catastrophe.

The effect of the Second Test Case on business interruption insurance claims

The effect of Justice Jagot’s and the Full Court’s judgments is that:

1. Disease clauses: These clauses will respond where there is an outbreak within the specified radius and that outbreak is a proximate cause of the insured’s loss. An “outbreak” means a single case of COVID-19 in the community (eg. not in a hospital, isolation, etc). It follows that policyholders will be entitled to recover COVID-19 losses under disease clauses if they can establish that an outbreak within the specified radius from their business premises has caused those losses. This is the case even if those losses were also caused by prevention/restriction of access due to government action or response to broader outbreak.
2. Prevention of access clauses: these clauses do not apply to losses caused by prevention of access due to the outbreak of disease, where there is (as is usually the case) a disease clause or hybrid clause in the policy, as those clauses exclusively regulate claims for disease. It follows that policyholders will generally not be able to recover COVID19 related losses under prevention of access clauses.
3. Hybrid clauses: the relevant State Government orders (eg. closing premises, restricting movement, etc.) were made in response to the threat of COVID-19 in the State, rather than as a result of any particular outbreak within the specified radius of the premises. The existence of COVID-19 cases within the relevant radius is not itself relevant – what is relevant is the Government orders themselves and they do not identify that they were made because of COVID-19 within any particular area (as opposed to the general risk of COVID-19 in the State). It follows that policyholders will generally not be able to recover COVID-19 related losses under hybrid clauses.
4. Catastrophe clauses: COVID-19 is not a “catastrophe” within the meaning of the policy before the Full Court, as the words “conflagration or other catastrophe” suggest that the catastrophe must be some physical event similar to a conflagration, and not a disease. It follows, that policyholders will generally not be able to recover COVID19 related losses under catastrophe clauses.
5. JobKeeper: If a policyholder has a claim for COVID-19 related losses (mostly likely under a disease clause) the policyholder generally does not have to credit against those losses any JobKeeper payments received.