COVID-19 Business Interruption Test Case What do the Full Federal Court findings mean?

Close up of hand holding pen and document

Outcome of the Second Insurance Council of Australia (ICA) Test Case Appeal

The Full Federal Court of Australia delivered judgment in the Second ICA Test Case appeal[i] on 21 February 2022 finding, largely in favour of the insurers. The Court found that the insuring clauses did not cover COVID-19 business interruption (BI) losses in four of the five claims brought by the insureds.

The Full Court stressed the importance of:

  • interpreting policy wordings objectively by reference to what a reasonable person would understand the language to mean in the context of the circumstances and the purpose and object of the policy wordings; and
  • reading policy wordings as a whole.

A summary of the Appeal Judgment together with the full reasons can be found on the Federal Court Website. There is a helpful index to the reasons starting on page 18. (Our earlier article on the Judgment of Jagot J of the Federal Court of 8 October 2021 which was the subject of this appeal can be found here.)

We summarise the main findings of the Full Federal Court’s judgment below:
 

Main findings

If a policy contains a specific clause providing cover for diseases, then it would be ‘incongruent’ or ‘incoherent’ to interpret cover provided by a more general clause as providing cover for a disease which was addressed in a more specific clause.

Hybrid clauses which provide cover when a government or competent authority orders that premises be closed, will not provide cover if the order or closure was made before an outbreak within the specified radius of the premises had occurred.

Hybrid clauses:

  • will be triggered by closure of premises caused by an outbreak of disease at or within a radius of the premises:
  • will not cover losses caused by a government lockdown designed to prevent the spread of COVID-19 when infection rates were relatively low.

Unlike the UK where there were significant case numbers and widespread outbreaks, in Australia, local outbreaks were not the cause of the government’s actions. The Government’s actions were preventative.

In relation to the appeal on the 5th claim involving Meridian Travel, the Full Court agreed with Jagot J that the infectious diseases insuring clause was triggered as there had been an outbreak within the radius of the premises but that Meridian Travel would have to prove causation. That is, evidence would be needed to show that the BI loss was caused by the outbreak as distinct from being caused by the Government’s closure of borders which was not an insured peril. As 90% of the business was international travel, this causal link may be difficult to establish.

Insureds need to identify the cause of BI losses. For cover to exist, that cause needs to be a stated trigger for cover in the insuring clause.

Policies which contain prevention of access cover and do not contain specific disease cover may provide cover, depending upon the wording and the circumstances.

 

Positive findings for insureds

Third Party Payments such as JobKeeper payments do not reduce the amount an insured can recover if the insured has a valid claim. Strict principles of indemnity do not apply. Certain government grants, including job-keeper, do not constitute a saving and were not payments in consequence of an insured peril. 

Interest on unpaid claims runs from the time it was unreasonable for the insurer to have withheld the payment. This is so even if the insurer had formed the view that there was no entitlement to indemnity and that view was later found to be incorrect.

Quarantine Act exclusions/Victorian Property Law Act – The Full Court agreed with Jagot J and the First ICA Test Case that the Quarantine Act (Cth) exclusions do not apply:

  • The Biosecurity Act 2015 (Cth) was not a re-enactment of the Quarantine Act 1908 (Cth);
  • Section 61A of the Property Law Act 1958 (Vic) concerning repealed and re-enacted legislation does not apply to Federal legislation.

(See note below on Certain Underwriters at Lloyd’s of London v Dural 24/7 Pty Ltd [2022] FCA 206 which considered a different but related issue.)

The contra proferentem rule, which provides that ambiguities in insurance contracts are determined against the party who offered or drafted the policy wording, still applies. It is a rule of last resort. 


Outcome of Star Entertainment v Chubb Appeal[i]

The Full Federal Court heard Star’s appeal from the Judgment of Allsop J of 5 August 2021 at the same time as the Second ICA Test Case Appeal (above).  On 21 February 2022, the Full Court:

  • dismissed Star’s appeal and found in favour of Chubb;
  • examined the application of Memorandum 7 ‘Civil Authority Extension’ to the BI section 2 of the policy which provided an extension of cover for: “.. loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe”;
  • examined the context, sub limits in and language of Memorandum 9 (which extended cover to include loss resulting from any occurrence of a ‘notifiable disease’) and the policy as a whole, and found that Memorandum 7 did not provide cover;
  • agreed with Allsop J that actions taken by authorities to slow the spread of COVID-19 were not covered because the reference to any conflagration or other catastrophe” was intended to be a reference to events or occurrences which were capable of causing physical loss or damage to the property of the insured. That is, the conflagration or catastrophe has to be an “insured peril” in the policy. COVID-19 was not an insured peril. No cover was available under that extension;
  • confirmed that the expression “notifiable disease” in Memorandum 9 excludes diseases listed under the Biosecurity Act 2015 (Cth). COVID-19 is a notifiable disease;
  • found that the scope of Memorandum 7 must be read down to avoid inconsistency with Memorandum 9 which:
    • expresses the full extent of the insurers’ liability for BI losses by reason of the occurrence of human infectious or contagious disease;
    • limits that liability by requiring the occurrence of the disease to be “at the Premises”, by excluding diseases listed under the Biosecurity Act 2015 (Cth) and by providing limits and sub-limits; and
    • sets clear limits on the extent of cover for losses associated with human infectious and human contagious diseases;
  • did not agree with Allsop J’s finding that the “loss” referred to in Memorandum 7 is the physical loss of property, not the loss of use of the property or loss of custom or financial loss. The Full Court held that “loss” in Memorandum 7 includes not only physical loss but also includes loss of use, loss of custom and financial loss.

Certain Underwriters at Lloyd’s of London v Dural 24/7 Pty Ltd [2022] FCA 206

By judgement dated 10 March 2022, Jagot J held that the words “or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908” appearing in clause 7 of the policy ought to be read as “or other listed human diseases under the Biosecurity Act 2015 (Cth)”.

The insured gym franchise had made a claim under a Lloyd’s Sportspack Combined Wording for COVID-19 BI losses on 16 December 2020. Underwriters denied indemnity relying on the exclusion under the Extension of Cover provided in clause 7 Murder Disease and Suicide. Clause 7 provided that certain listed circumstances would be deemed to be Damage to Property including:

“… b. the outbreak of human infectious or contagious disease occurring within a 20 kilometre radius of Your Situation; or
c. closure or evacuation of Your Business by order of a government, public or Statutory Authority consequent upon:
d. the discovery of an organism likely to result in a human infectious or contagious disease at the Situation,
e. vermin or pests at the Situation, or
f. defects in the drains or other sanitary arrangements at the Situation; or…”

Clause 7 then continued:

“Cover under b. and c. under this extension of cover does not apply in respect of Highly Pathogenic Avian Influenza in Humans or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908.”

Jagot J held that subclauses d), e) and f) of Clause 7 were intended to be subclauses of Clause 7. Her Honour found that the Biosecurity Act replaced the Quarantine Act and relied on the words in the conformity clause in Clause 4 under the heading “Information” namely: “References to a statute law also includes all its amendments or replacements”.

Her Honour found that:

  • it is not what each of the parties meant to say, but rather what is the objective meaning to be attributed to the words they have used to express what they have agreed;
  • the precise issue of construction of the conformity clause in this case was not considered in WonkanaSwiss Re or LCA Marrickville;
  • the conformity clause forms part of the policy even though it is on a page headed “Information”. It is an operative provision;
  • provided that the new statute law replaces (in the sense of applies instead of or in the place of) the old statute law, the conformity clause will operate;
  • the reference to “all” and the use of the word “replacement” at large without any qualification indicate that the broad meaning of “replacement” was intended to have effect;
  • the evident object or purpose of the clause is to ensure that references to statute laws in the policy remain current;
  • the question is whether the new statute law is operating instead of or in the place of the old statute law? The old and new statute laws are dealing with substantially the same subject-matter, being the identification of human diseases so as to enable the taking of steps by public officials to control and eradicate the identified disease; and
  • the conformity clause has no temporal limitation: it applies retrospectively and prospectively.

Next steps for insureds

We do not know whether there will be an application for special leave to appeal to the High Court from the Appeal from the Second ICA Test Case.

Assuming there is no appeal, the opportunity for insureds to recover COVID-19 BI from insurers in the Australian jurisdiction is limited. The Full Court’s findings were made on the specific wordings and circumstances in question. Whether you are able to make a claim for COVID-19 related BI losses will depend upon the wording of your policy and the facts and circumstances surrounding your losses.

You should follow the steps we have previously outlined here to confirm the extent of your BI losses and to establish whether you are able to make a claim.

Subject to the wording in question, policies with a conformity clause will allow insurers to rely on exclusions which refer to the Quarantine Act 1908.

If you have suffered COVID-19 related BI losses you should contact your broker to review your position and consider whether to make a claim. You may also consider taking advice from a lawyer who specialises in the area.

 

LCPA 21/120

[i] LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17

[ii] Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16

This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy.  Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”