The appeals decision
On Monday 21 February, the Full Federal Court effectively dismissed the insured parties’ appeals in the five COVID-19 business interruption Test Case 2 appeals and dismissed the appeal in Star Entertainment Group Limited v Chubb Insurance Australia Ltd. The Full Federal Court substantially agreed with the trial judges’ conclusions that:
- 5 of the 6 insuring clauses examined in these cases were not triggered by losses caused by COVID-19, including government actions directed to restricting the spread of COVID-19; and
- in the 6th claim (Meridian Travel) the disease extension in that policy was triggered, but there, but there were substantial issues as to whether the Insured could satisfy the precondition to cover that its business was interrupted as a result of COVID-19 occurring within a 20 kilometre radius of the insured Situation.
The affected parties may still seek leave to appeal to the High Court and so, despite the unanimous Full Court judgments, the position in this commercially important area is not finally settled. However, it must be noted that the Full Court gave very detailed consideration to the careful judgments of two very experienced trial judges and unanimously agreed with their main conclusions.
Why this development is important
Many Australian businesses held business interruption insurance when COVID-19 manifest in Australia in early 2020. Many continued to hold and renewed that cover throughout the periods of lockdown and other government restrictions.
These appeal decisions are important because they provide guidance on some of the common business interruption insuring clauses in the Australian market and whether they respond to losses caused by COVID-19, including government actions directed to restricting the spread of COVID-19. The outcome of these appeal decisions is that most of the business interruption insuring clauses considered in the underlying cases would not provide cover and the one clause that did offers a very limited cover.
Exactly what is business interruption insurance?
In general terms, business interruption insurance provides insurance cover for reductions in business caused by specified insured triggers during the insured period. Business interruption insurance also usually provides cover for certain costs incurred by insured businesses in minimising such insured losses. Against this, there is a general reduction on any insured claim for ‘savings’ – ie costs which have decreased during the insured period thereby generating a ‘saving’.
Business interruption cover is usually sold as an extension to property damage insurance and most claims historically have been for business interruption that results from insured property damage. However, a practice developed over time of including various additions to cover which had ‘triggers’ other than insured property damage. The insurance industry termed these “non-damage business interruption extensions”. Four separate types of non-damage extension were considered in these cases:
- Disease extension – where the trigger for cover is loss caused by the manifestation of disease at or within a radius of the insured Situation;
- Prevention of access extension or ‘POA’ – where the trigger for cover is loss caused by a government order or authority prohibiting or preventing access to the insured Situation;
- Catastrophe extension – which is often crafted as a POA and triggers in the event of a ‘catastrophe’ and, when it is crafted as a POA, requires the government order or authority to be “during a conflagration or other catastrophe for the purpose of retarding same“; and
- Hybrid extension – where the trigger for cover is loss caused by a combination of disease and POA and/or Catastrophe.
Since the 2002-4 SARS outbreak, most Australian business interruption policies have included terms intended by insurers to exclude cover for losses caused by pandemic. These exclusions were designed and written in various ways. Some exclusions were very clear. Some were not.
It was into this mix of non-damage extensions and potentially unclear exclusions that COVID-19 and the government and customer reactions to COVID-19 came. The result was significant uncertainty.
Exactly what was decided in yesterday’s decision?
Australian insurers, via the Insurance Council of Australia, facilitated:
- Test Case 1 (HDI v. Wankana) which resulted in the Courts rejecting Insurers’ contention that a reference to the Quarantine Act, which had been repealed by the time COVID-19 came around, could be read as a reference to the BioSecurity Act and which had the practical effect of rendering a common exclusion of no effect in regards to COVID-19; and
- Test Case 2 to seek clarity on a number of threshold issues relating to business interruption claims under a range of policy wordings and clauses commonly issued in the Australian market.
Although the Australian Financial Complaints Authority (AFCA) was not directly involved in either test case, the test cases were commenced taking account of AFCA rules which have provision for such test cases on the basis that insurers cover the insured parties’ fees.
Test Case 2 considered 10 different policy wordings and insuring clauses. Separate court cases, which we conveniently collectively call Test Case 2. At trial, the Federal Court rejected all but one claim for cover and it severely caveated the one claim it saw as potentially attracting cover (the Meridian Travel claim). Five of the Test Case 2 claimants appealed, including Meridian Travel which sought to lift the trial Court’s caveats on its claim.
In addition, Star Entertainment brought separate proceedings against its business interruption insurer, Chubb. The Federal Court rejected Star Entertainment’s claim and Star Entertainment appealed.
The Full Federal Court heard the Test Case 2 appeals and the Star Entertainment appeal together and gave separate judgments. However, the judgments were published at the same time and contain strong cross referencing. The Full Court judges have clearly used their best endeavours to generate a set of clear guiding principles so that the litigants and other impacted parties have clarity of position. However, whilst the conclusions at trial and appeal were the same across most material aspects, the reasoning process did vary, particularly in relation to the legal basis for the construction of the Star Entertainment policy wording.
In a short note, it is hard to comprehensively summarise the appeal judgments. However, at a very high level, the Full Federal Court agreed with the conclusions of the trial judges that:
- the triggers in the POA, Hybrid and Catastrophe extensions which were considered in the underlying cases were not enlivened by COVID-19 and the government reactions to COVID-19. As part of the reasoning process, the various Judges essentially found that in situations where it was arguable that the insuring clauses read in isolation could be triggered, when the policies, including exclusions, were read as a whole, the better view was that the clauses were not triggered; and
- on the Meridian Travel disease extension, whilst the cover was triggered the trial and appeal judgment effectively cast doubt on whether an insured could really prove that its loss was due to an “outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation” in circumstances where the various government and other third parties’ responses to COVID-19 were arguably different to any specific “outbreak” at or within 20 kilometres of Meridian’s business.
The appeal judgments also considered some other specific questions and issues – including:
- Do Government support payments such as JobKeeper, operate to reduce any valid business interruption claim – the Full Court held that JobKeeper and 2 other specific support schemes would not;
- Does specific Victorian legislation operate to render a Quarantine Act exclusion effective – the Full Court held it does not; and
- Would losses caused by the general adverse economic effects of COVID-19 (as opposed to any specific losses which triggered cover) result in a reduction in any valid insured claim – essentially because such reductions would have happened anyway? The Full Court held that where the general losses arose out of the same general underlying peril, there would be no reduction because to allow a reduction in those circumstances would make the cover effectively redundant.
Unsure of your position?
This is a complex area and it is important to remember that the appeal judgments relate to 6 specific policy wordings – and policy wordings may differ.
If you would like assistance to understand how these decisions relate to your insurance or your circumstances, please contact us. We are here to help.
This article was written by Andrew Gray, Partner.