New Decision: Second business interruption test case

New Decision: Second business interruption test case

For more information

Second business interruption test case

A new decision provides more guidance in Australia around whether business interruption insurance policies cover businesses for losses related to COVID-19.

On 8 October 2021, the Federal Court of Australia handed down its first instance decision in the second Australian business interruption insurance test case, Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206 (Second Test Case). The decision is the latest judicial guidance in Australia around whether certain business interruption insurance policies provide cover to businesses for losses arising from Novel Coronavirus SARS-CoV-2 (COVID-19).

After the First Test Case, which addressed whether a specific exclusion in business interruption insurance policies would exclude COVID-19-related losses, the market identified a number of outstanding questions in those policies which required legal guidance. In the Second Test Case, Justice Jagot in the Federal Court addressed those issues in detail.

In short, the Court identified four types of insuring clause (and policy extensions) under which claims for COVID-19 business interruption losses could arise. Only one of those clauses – the ‘Disease Clause’ – could entitle a business to activate its policy according to the Second Test Case. As to the other three, the Court found that closure or restriction orders from the Commonwealth or State Governments were not made as a result of disease, damage or threat at or near the insureds’ premises.

As such, cover was not available to the insureds under those clauses. It also found that COVID-19 was not a ‘catastrophe’ in the context of the particular insurance policies examined, so that clause also would not provide cover to the insureds.

Following this decision, many policyholders are still asking the question ‘will my policy respond?’

The answer remains that it will depend on the policy in question, coupled with the particular facts giving rise to a claim.

The outcome in this decision is on appeal, and we will be reporting further on developments following the appeal.

An overview of the Second Test Case

Justice Jagot in the Federal Court of Australia was asked to revisit the origin of the policyholders and the insurance policies in question. The Second Test Case involved nine separate policyholders, each having been issued a commercial insurance policy containing a business interruption coverage section.

Most of the policyholders operated across sectors most affected financially by the presence of the COVID-19 pandemic in Australia. Those included gyms, cafes, restaurants, health, travel and hospitality industries. While all policyholders noted they had been affected by the pandemic, each industry type faced its own unique difficulties. Cafes, for instances, recorded losses where foot traffic was reduced. Travel agencies recorded losses where international travel bans had been imposed.

The Federal Court took note of the idiosyncrasies of each policyholder’s business and issued the timely reminder that no two policyholders will experience the same identical factual circumstances.

It also noted that the insurance policies in question – although similar – differed in some ways from one another.

The insuring provisions of each policy could, however, be categorised as one of four types:

  • Prevention of Access Clause — these clauses would provide cover where the order or action of a competent authority prevented or restricted access to insured premises because of damage or a threat of damage to property or persons (often within a specified radius of the insured premises);
  • Disease Clause — these clauses would cover loss that arises from the presence or outbreak of infectious disease at the insured premises or within a specified radius of the insured premises;
  • Hybrid Clause — these were a hybrid of the first two, providing cover for loss where the orders/actions of a competent authority have closed or restricted access to premises, and the orders/actions are made or taken as a result of the presence or outbreak of infectious disease within a specified radius of the insured premises;
  • Catastrophe Clause — these clauses would provide cover to a policyholder where they suffer loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.

The Court found that only the Disease Clause was capable of providing cover in the circumstances. None of the Hybrid, Prevention of Access, or Catastrophe Clauses would trigger in respect of COVID-19 for several reasons.

The primary reason, however, was that none of the orders of the Commonwealth or State Governments were made as a result of the particular presence or outbreak of COVID-19 at the relevant policyholder’s premises. The same was said for other peak ‘authorities’ such as the Dental Council of NSW (though some bodies were not authorities, such as the Australian Dental Association).

The Court identified – 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, in those circumstances it would also be up to the particular policyholder to show that the cause of their loss was the sheer presence of COVID-19 and not some other cause such as an international travel ban.

In short, the Second Test Case identified that in many cases, policyholders would not be entitled to coverage under the Hybrid, Prevention of Access, or Catastrophe Clauses save for in very specific circumstances. Where they 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 then have several further matters to establish, including: their loss resulted from that particular matter, there is no exclusion that would preclude cover, and their loss has not been otherwise compensated – eg. by way of JobKeeper or JobSeeker payments.

Contact HDL to discuss how this may effect you

The Federal Court’s decision is listed for appeal.

It is important that before a policyholder gets to the question of whether their claim is excluded under the policy, they must specifically address whether they have a claim in the first place.

A policyholder should carefully consider its operative insuring clause. They should seek advice from their broker or legal team about whether the facts and circumstances in their case will trigger the particular policy in the first place.

No policyholder or policy will be the same in all respects, and if cover does trigger prima facie, the policyholder should then assess any exclusion clauses applicable to their policy.

Contact HDL for further information.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact HDL.  Further detailed information on the second business interruption test case federal court decision can be read here.

HDL news, updates and publications may contain links to non-HDL websites that are created and controlled by other organisations. We claim no responsibility for the content of any linked website, or any link contained therein. The inclusion of any link does not imply endorsement by HDL, as we have no responsibility for information referenced in material owned and controlled by other parties. HDL strongly encourages you to review any separate terms of use and privacy policies governing use of these third party websites and resources.

Find this article helpful? Click on one of the links below to share the content.

Share on linkedin
Share on facebook
Share on twitter
Share on email