The light shines on COVID-19 business interruption claims

Article by Deepanshi Agarwal

In a follow up to our recent series, we provide a summary of the latest judgment in the series reviewing business interruption clauses in insurance policies arising out of COVID-19 claims.

Justice Jagot at the Federal Court of Australia, in a 391-page judgement has provided clarity on issue surrounding the business interruption insurance claims due to the COVID-19 Pandemic.

The judgement in Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206 (Second Test Case) was handed down on 8 October 2021. The case related to insurance claims by nine small businesses across five insurers.

Justice Jagot found for the insurers in eight of the nine claims and provided direction on some significant issues in interpreting the insurance clauses.  

There were four different types of clauses that the Court considered.

1. Hybrid Clauses

A hybrid clause is one where cover is provided for loss that occurs from the orders/ actions of the competent authority restricting access to the business. The orders need to be made as a result of an infectious disease or outbreak of infectious disease within a specified radius of the insured’s premises.

Her Honour found that the competent authority is either the Commonwealth government or the State government, depending on the facts of the case. The uninsured peril for the Commonwealth Government was the existence of COVID 19 cases overseas and the threat this presented to Australians and for the State government it was the existence or the risk of spread of COVID 19 cases across the state as a whole. Both, Commonwealth and State, actions were not due to an outbreak at or around the premises in question.

Thus, in most cases, the causal link between the decision of the competent authority and the infectious disease or the outbreak of the infectious disease will not be met, and the insuring clause will not be enlivened.

The Court found that hybrid clauses depend on the actions of the competent authority. While the reason for the action does need to be due to an infectious disease or outbreak of an infectious disease but the disease does not need to objectively exist before the competent authority takes an action. The parties cannot debate whether the authority was right or wrong about the existence of the disease or the outbreak.

• Prevention of access clauses

A prevention of access clause provides cover for loss from actions of a competent authority preventing or restricting access to the premises due to damage or the threat of damage to property or persons (usually within a specified radius).

Similar to the issue with the hybrid clauses, any policies with a prevention of access clause may also run into the problem of whether the action was taken due to the threat of damage to persons at the premises or within a specified radius of the premises.

• Catastrophe Clause

One of nine cases involved a catastrophe clause, in the specific case the cover was cover for loss resulting from the action of a civil authority during a conflagration or other catastrophe for the purposes of retarding the same.

Her Honour found that although the pandemic would ordinarily be regarded as a catastrophe, it cannot be classified as a catastrophe for the purposes of the insurance policy. The reason for this was the wording of the clause. The operative words of “conflagration or other catastrophe” and “retarding” indicate that the clause relates to physical event. The addition of other catastrophe to conflagration (defined as a “large and destructive fire”) indicates that the other catastrophe needs to be similar to conflagration, i.e., a physical event.

• Infectious disease clause

These clauses provide protection from loss because of either infectious disease or the outbreak of infectious disease at the premises or within a specified radius of the premises.

In the case of NSD133/2021: Insurance Australia v Meridian Travel (one of the nine matters tried in the Second Test Case), the parties conceded that there was an outbreak of COVID-19 within a 20 km radius of the premises of the insured. The causal link in the current case may have been broken when Her Honour found that the losses suffered were not a “direct result” of the infectious disease or an outbreak of one. In that case, the insured was a travel agent, and the Court was unable to make a finding on whether the disease was a proximate or any other kind of cause of the loss of the insured. Her Honour said that this was because she did not know the number of customers that were walk-ins or telephone, or internet based and so could not conclude how much loss had occurred due to the closure of the premises. The other reason was that most of the business of the travel agency was from international travel. This was affected by the overseas travel ban by the Commonwealth government. The Court said that the underlying reason for the overseas travel ban was not the outbreak of COVID-19 within a 20 km radius, rather it was the existence of COVID-19 overseas and the risk that some person might carry it into Australia.

Thus, the clause may be enlivened by the COVID-19 pandemic only if the losses of the insured are a direct result of the infectious disease or the outbreak of the infectious disease at the premises or within a specified radius of the premises.

The Court has given the parties an opportunity to consider their position given the above factors.

Other matters

1. S 61 of the Property Law Act 1958 (Vic)

Insureds in three of the nine cases that formed part of the judgement were businesses in Victoria. The insurers argued that exclusion clauses for quarantinable diseases under the Quarantine Act 1908 (Cth) should be enlivened because the Biosecurity Act 2015 (Cth) was a deemed re-enactment with modifications of the Quarantine Act. COVID-19 was included as a listed human disease under the Biosecurity Act but not a quarantinable disease under the Quarantine Act.

Her Honour did not accept this argument for two reasons. One, on the correct interpretation of the Interpretations of Legislation Act 1984 (Vic), section 61 only applied to Victorian Acts thus precluding the Quarantine Act. Second, the Biosecurity Act was not a re-enactment of the Quarantine Act. Whilst it does deal with some of the same matters, it is too different to be a re-enactment.

• Occurrence and Outbreak

Another factor that impacts the interpretation of these clauses is the meaning of occurrence and outbreak. Her Honour found that the meaning will depend on the wording and the context of the policy however, provided a general idea of the meanings when understood in the context of COVID-19.

Occurrence in terms of COVID-19 would mean a case or event of COVID-19 in any setting, controlled (e.g., hospital, quarantine facility or isolation) or non-controlled. An outbreak on the other hand, would be an “active” case of COVID-19 in the community. Her Honour distinguished this requirement from the need for a confirmed case of COVID-19 in the community. The meaning of active being infectious. This is due to the highly infectious nature and the transmission rates of COVID-19.

• Closure

Her Honour also made comments in relation to closure, including:

• There is a requirement for whole or part of the premises to be closed off to people who would ordinarily be allowed to enter and remain on the premises. This restriction needs to be applied in a common sense way.
• Ordinarily if the policy applies to closure of the premises this will extend to closure of part of the business
• There is no need for a physical impossibility of access to the premises
• The policy clauses will dictate whether the closure needs to be voluntary or ordered.
• Closure of premises is different to closure of business.
• Ordinarily, a restriction on the number of persons allowed to enter or remain on a premises is not closure of the premises.

• Adjustments

Lastly, Her Honour commented on adjustments that may need to be made. If an insured is entitled to an amount under their policy, the loss will need to be adjusted to take into account some types of relief payments. Whether or not the payment needs to be adjusted will depend on the nature of the payment and whether it reduced the insured’s claimable loss. Some examples are the Commonwealth JobKeeper program and rental reductions or relief.