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Extended COVID-19 lockdowns throughout 2020-21 saw a revenue collapse for many Australian businesses, leading thousands of business owners to lodge claims against their Business Interruption Insurance policies. 

These claims have largely been denied or placed on hold pending the outcome of a series of test cases running through the courts.

Claimants had cause for optimism after the first test case, lodged in mid-2020 which found that insurers are unable to rely on an outdated Quarantine Act exclusion clause to reject claims for business interruption arising from COVID-19.  Had this threshold issue it gone the other way, the majority of claims would have been defeated.  

The Second Test Case

However, in October 2021, judgement in a number of further business interruption test cases was delivered by the Federal Court of Australia - Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206 (‘the Second Test Case’).

These cases were selected by the insurers and involved a range of different policies held by businesses in various locations around Australia with a mix of business types and policies.

Unfortunately for insured business owners, the court found in favour of the insurers in nine of the ten test cases, and backed many of the key arguments raised by insurance companies.

In summary, the court identified four common types of insuring clauses and policy extensions under which a claim for COVID-19 related business losses could arise:

1)    Hybrid Clause – this type of clause provides cover for loss arising from orders/action of a competent authority closing or restricting access to the premises, but only where those orders/action were made or taken as a result of the outbreak of infectious disease at, or within a specified radius, of the business premises.

2)    Infectious Disease Clause – this type of clause provides cover for loss that arises from either infectious disease, or the outbreak of infectious disease, at the insured premises, or within a specified radius of the insured premises.

3)    Prevention of Access Clause – this type of clause covers loss arising from orders/actions of a competent authority preventing or restricting the access to the insured premises because of damage, or a threat of damage, to property or person (often within a specified radius of the insured premises).

4)    A Catastrophe Clause – this type of clause provides cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding a catastrophe.

In the Second Test Case, the court found that only the Infectious Disease Clause (#2 above) was capable of providing cover in the circumstance of COVID-19 related business losses.

Importantly, this type of insuring clause does not require the order or action of a competent government or authority, but instead just requires that there was an outbreak (or occurrence) of the infectious disease at the premises, or within a particular radius of the premises [depending on the particular policy wording]. It was also highlighted by the court that in order to invoke this type insuring clause, the claimed outbreak must be clearly evidenced to be the cause of the loss claimed in order for the Insured to prove their entitlement. We suspect this may be difficult for many business owners to establish.  

The Latest Appeal

Appeals were brought by five of the ten cases dealt with by the Second Test Case, which were heard by the Full Court of the Federal Court in mid-November 2021. Cross claims were also filed.

On 21 February 2022 the Full Court of the Federal Court handed down its decision which substantially upheld the earlier judgment, with the following notable exceptions:

  • In the event of a successful claim, any JobKeeper payments received by the business would not be considered to reduce the potential quantum payable to the claimant; and
  • Interest payments – interest may be payable in the event of a successful claim and determined that what is a reasonable period of time for an insurer to investigate a claim is a question of fact to be determined objectively by reference to the circumstances of each claim.   
     

While the two above points are positives for consumers whose claims are successful on liability, overall the decisions mean that business owners with the same or similar policy wordings as those covered in the Second Test Cases will have slim chances of substantiating their claims for COVID-19 related business losses. 

Whilst claimants with Infectious Disease Clauses could still have viable claims, they will need to establish a clear link between the loss of trade and the local outbreak.  For example, a travel regional agency whose losses are due to the closure of international flights/cruises terminals are unlikely to link those causes to local outbreaks.  

Special Leave Applications to the High Court

The parties to the Full Court Appeal had 28 days from the Decision date to lodge a Special Leave application seeking leave to appeal the decision to the High Court of Australia. This period expired on 21 March 2022.

Applications for special leave to the High Court of Australia have been filed by two policyholders (Taphouse Townsville Pty Ltd and LCA Marrickville Pty Ltd) and one insurer (IAG) to appeal parts of the recent judgment of the Full Court of the Federal Court of Australia. 

The points of appeal for the policy holders can be briefly summarised as follows:

  • Taphouse Townsville’s appeal aims to deal with whether cover is available under the ‘prevention of access clause’ or the ‘hybrid clause’ in its policy (see point #3 and #1 above); and
  • LCA Marrickville’s appeal aims to deal with whether cover is available under the prevention of access clause or the catastrophe clause in its policy.
     

Both the Federal Court and the Full Federal Court found in favour of the insurers on the above points, determining that policyholders were not entitled to cover under any of these insuring clauses. This will be an important point of appeal to follow as it will determine the prospects of any claims that fall under these types of insuring clauses.

IAG’s appeal is confined to the issue of whether JobKeeper payments are to be taken into account when calculating the amount of insurance payment (if any) is payable to the policy holder.

Off the back of the news that this saga will continue through the Courts, Andrew Hall, CEO of the Insurance Council of Australia, has provided the following comment:

While we understand there is frustration that the matter continues through the courts, we recognise the need for both policyholders and insurers to obtain definitive guidance from the courts as to how relevant business interruption policy wordings are to be interpreted and applied.”

A date for the High Court special leave applications to be heard has not yet been set, but we anticipate this may likely take a few months to occur.

What happens next?

Beyond the Quarantine Act exclusion, it will still be necessary for claimants to prove their entitlement to a claim in line with the other applicable policy terms. This requires an assessment of the individual circumstances of each claim and the wording with the policy.

We are keenly following the case developments so that we can assist deserving businesses to challenge the denial of their business interruption claims and claw back some of the losses they have suffered due to COVID-19 shutdowns.  In the meantime, we encourage any insured businesses impacted by COVID-19 to lodge their claims in order to claim penalty interest for unreasonable delay in case liability is ultimately accepted.

If you would like advice about your claim please contact Maurice Blackburn on 1800 305 568 or by email on IEnquiry@mauriceblackburn.com.au.  

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