Business interruption claims & payouts rejected by insurers

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 at the time.

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had cause for optimism after the first test case, lodged in mid-2020 which found that insurers are unable to rely on an outdated Quarantine Act exclusion clause to reject claims for business interruption arising from COVID-19.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 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.  

Appeal to the Full Court of the Federal Court

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 amount payable to the claimant; and
• Interest may be payable in the event of an accepted 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 looking at the circumstances of each claim.   

While the two above points are positives for consumers whose claims have been accepted, 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 regional travel agency whose losses are due to the closure of international flights/cruises terminals are unlikely to link their losses to local outbreaks.   

Special Leave Applications to the High Court

Two policyholders (Taphouse Townsville Pty Ltd and LCA Marrickville Pty Ltd) and one insurer (IAG) applied to the High Court of Australia for special leave to appeal the Full Federal Court’s decision. 

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

• Taphouse Townsville’s appeal concerned the question of whether cover was available under the ‘prevention of access clause’ or the ‘hybrid clause’ in its policy (see point #1 and #3 above); and
• LCA Marrickville’s appeal concerned the question of whether cover was 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.

IAG’s appeal was confined to the issue of whether or not JobKeeper payments were to be taken into account when calculating the amount of any benefits payable to the policy holder.

On Friday, 14 October 2022, the High Court refused the parties’ special leave application. This decision effectively brings a close to the Test Cases on these issues and the judgment of the Full Court of the Federal Court stands.

In a release published by the Insurance Council of Australia on 14 October 2022, it is said that:

‘Insurance Council members, including those not directly involved in the court proceedings, have committed to applying the principles of the courts’ final rulings in the test cases and efficiently to all business interruption claims.’ 

Key points to consider for business interruption claims

Business interruption insurance claims can be crucial for small businesses facing unforeseen events like COVID-19. Based on the above test cases, some considerations to make are:

1. Even if your policy contains a Quarantine Act exclusion which cannot be relied on by the insurer to deny your claim, in order to qualify for any COVID-related business interruption benefits, you will still need to satisfy other applicable policy terms. The insurer will need to consider the individual circumstances of your claim and the specific wording within your policy.
   
2. If your policy contains an Infectious Disease Clause, you could have a viable claim if you can establish a clear link between the loss of trade in your business and a local outbreak. 
3. If you received JobKeeper during the lockdowns, these payments should not be subtracted from any business interruption insurance payout you receive.
4. If you win your claim you can argue an entitlement to penalty interest and, depending on the policy wording, possibly consequential losses caused by an overturned denial.  This could be significant where the business failed or had an extended trading halt due to an incorrect decline by the insurer.
   

What happens next?

We have keenly followed these case developments so that we can assist deserving businesses challenge the denial of their business interruption claims and claw back some of the losses they have suffered due to COVID-19 shutdowns. 

These test cases provide the applicable principles that must now be applied by insurers when assessing a claim for Business Interruption losses caused by COVID-19.

We encourage any insured businesses impacted by COVID-19 to lodge your claims with your insurer or, if you already had your claim declined, to contact your insurer to request a review decision taking the test case results and any other supportive new evidence into account.

We're here to help with business interruption claims

If your business interruption insurance claim has been denied, we are here to assist you. Our experienced team understands the challenges that small businesses encounter and can help you with business insurance claims. If you would like advice about your potential claim or the position taken by your insurer about your claim, please contact Maurice Blackburn on 1800 305 568 or by email on IEnquiry@mauriceblackburn.com.au. There is no charge for an initial consultation and we will generally act in these matters on a “No Win, No Fee” basis.