On 8 October 2021, the Federal Court of Australia determined its first instance decision in the second Australian business interruption insurance test case. The decision in Swiss Re International Se v LCA Marrickville Pty Limited  FCA 1206 (Second Test Case) provided legal guidance in determining whether business interruption insurance policies provide cover to businesses for losses related to COVID-19.
The first business insurance test case in 2020 addressed concerns regarding whether a specific clause in business interruption insurance policies would exclude COVID-19 associated losses (First Test Case). The court ruled in favour of the policyholder impacted by COVID-19, rather than the insurance party.
The High Court of Australia refused leave to appeal the First Test Case on the 25 June 2021, which has resulted in the Second Test Case being expedited through the Federal Court in order for the issues to be addressed and provide initial guidance to policyholders and insurers. If you’re interested in an analysis of the First Test Case, our article from July 2021 can be found here.
Second Test Case Determination
The Second Test Case involved nine separate policyholders, each asserting that their commercial insurance policy contained a business interruption coverage section. The majority of the policyholders operated across industries impacted economically by the impact of COVID-19 and Government mandated restrictions in Australia. These sectors include gyms, cafes, restaurants, health, travel and hospitality. Each policyholder was impacted by the pandemic, each with its own distinct adversities. For example, cafes recorded losses where foot traffic had diminished, whereas travel agencies recorded losses where international travel bans were enforced.
The Federal Court recognised the idiosyncrasies of each specific policyholder’s business and acknowledged that no two policyholders will experience the same identical conditions. However, it was observed that the insurance policies being examined, although similar, contrasted in key areas. The Court determined that the insuring provisions of each policy could be categorised into four classifications under which claims for COVID-19 business interruption losses could arise. These four types are;
Prevention of Access Clause – these clauses would offer cover where the order or action of a capable authority inhibited or limited access to an insured premises because of damage or threat of damage to property or persons.
Disease Clause – these clauses would cover loss that arises from the presence or outbreak of infectious diseases at the insured premises or within a specified radius of the insured premises.
Hybrid Clause – this clause refers to a combination of the prevention of access clause and the disease clause. This clause provides cover for loss as a result of the presence of an outbreak of an infectious disease where orders or actions by a capable authority have closed or restricted access to premises.
Catastrophe Clause – these clauses would provide cover to a policyholder where they endure loss resulting from the action of a civil authority during a catastrophe for the purpose of hindering the catastrophe.
The Court determined that only the Disease Clause was capable of providing cover in the circumstances. The other three clauses could not be relied on as the closure regulations from Federal and State Governments were not established as a result of disease, damage or threat at, or in close proximity to the insureds’ locations. Further, the court determined that COVID-19 was not a ‘catastrophe’ in the context of the specific insurance policies being assessed. Consequently, insurance covers were not accessible to the policyholders under these clauses.
The Court acknowledged in the case of one particular policyholder, Meridian Travel, that there could be cover for policies where there is an identified case of COVID-19 at the premises and that case of COVID-19 causes loss. However, the Court noted that in these particular circumstances, the policyholder would have to demonstrate the cause of their loss was a result of (purely) the presence of COVID-19 and not other factors such as international travel bans.
Essentially, the Second Test Case identified that in many cases, policyholders will not be entitled to coverage under the Prevention of Access Clause, Hybrid Clause, or Catastrophe Clause (except in very specific circumstances). Even where a policyholder can identify specific circumstances (such as the actual presence of COVID-19 or an order directly made to that particular policyholder to shut their business premises) they will still have several matters to establish, such as:
loss resulting from the particular matters;
the absence of an exclusion that would preclude cover; and
proof that loss has not otherwise been compensated (e.g. via JobKeeper).
Despite the Federal Court’s comprehensive analysis and thorough decision, the determination is listed for appeal. Notwithstanding, even if the policyholders succeed on appeal, there are numerous factual and incidental obstacles for them to address before coverage is available on their policy.
If you are a business owner and have a query relating to any of the information in this article, or you would like to speak with a member of either our business law or dispute resolution teams at Harwood Andrews with respect to your own policy, please don’t hesitate to get in touch.
T: 03 5226 8572
Prepared with the assistance of India Smith, research assistant