The Full Court of the Federal Court of Australia have handed down their decision in the appeal of the second COVID-19 business interruption test case with findings largely in favour of insurers.
The case considered the application and operation of various insurance policies in the context of COVID-19 and its effect on businesses. The case involved ten separate policyholders with insurance policies each containing business interruption protection.
The four main types of clauses considered by the Court were:
- Infectious disease clauses, which cover losses arising from infectious diseases at insured premises or within a specified radius of the premises.
- Prevention of access clauses, which cover losses arising from orders/actions of a competent authority preventing or restricting access to insured premises due to damage or threat of damage to property or persons.
- Hybrid clauses, being a combination of the above clauses, which cover losses arising from orders/actions of a competent authority preventing or restricting access to insured premises due to the presence or outbreak of infectious disease within a specified radius of the premises.
- Catastrophe clauses, which cover losses arising due to the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.
Federal Court Judgment
At first instance, the Court found that nine out of the ten claims considered were not covered by the relevant insurance policy in the context of COVID-19 business interruption.
Justice Jagot’s findings in relation to the above clauses was as follows.
Infectious disease clauses
Infectious disease clauses were held to be the only clause capable of providing cover in relation to COVID-19 claims. This is because, the Federal and State Government orders requiring the closure of premises were not made as a result of any circumstances at the premises or within the specified radius of the premises. Rather, the orders merely applied to the premises. These clauses can respond because the causal requirement is the outbreak of an infectious disease occurring within a specified radius of the premises which causes business to be interrupted and losses to arise.
However, the Court noted that these clauses would only respond in limited circumstances, as business losses must be as a direct result of the proximate outbreak. A business which receives revenue from online or telephone sales, for example, may not meet the causal requirement to enliven the clause.
Prevention of access clauses and hybrid clauses
Prevention of access clauses and hybrid clauses require a causal link between the order requiring closure of the premises, and the presence or outbreak of COVID-19 at or within the radius of the premises. As the relevant government orders were made in response to the existence and risk of COVID-19 generally, it was held that they were no causal links that enlivened such clauses.
Catastrophe clauses were found not apply to diseases or a pandemic, but rather, to physical events.
Full Court of Federal Court Judgment (Appeal)
Appeals were filed in respect of five of the ten test case matters by the policyholders.
The Full Court dismissed the appeal, largely upholding the findings of the primary judge. Out of the five matters considered on appeal, four policyholders were held to not be entitled to any insurance coverage for their business interruption claim.
The Full Court overturned the following findings of the primary judge:
Government support payments
Justice Jagot held that government support payments could be deducted from the payout of any valid business interruption claim. The Full Court overturned this conclusion, holding that government support payments such as JobKeeper would not reduce the indemnity amount to be paid to an insured in the case of a valid claim.
Section 57 of the Insurance Contracts Act
The Full Court held that where an insurer has denied a claim, but the insured is ultimately found to be entitled to payment, this does not give rise to a necessary inference that it became unreasonable from that date for the insurer to withhold payment. Each case is to be determined on its specific facts and circumstances on a case-by-case basis.
The Courts have determined that prevention of access, hybrid, and catastrophe extension clauses in business interruption insurance policies are not enlivened by the effects and government restrictions related to COVID-19. Infectious disease extension clauses may be enlivened in relation to COVID-19 impacts, but it will be determined on a case-by-case basis and will depend on the specific circumstances and facts of each matter.
If you hold an insurance policy which may respond to losses suffered as a result of the COVID-19 pandemic, or your claim with respect to COVID-19 business interruption has been denied, contact us for advice on your options.