The sequel to the business interruption second test case is now here. On Monday, the Full Federal Court handed down its decision in the second business interruption test case appeal.  The decision is an appeal from the judgment of Justice Jagot in relation to various business interruption insurance claims. The Full Federal Court also handed down its decision in the appeal of the Star case, Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2021] FCA 907, at the same time.

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The appeal case largely upholds the decision of Justice Jagot that the primary cause of any loss was government action in response to the wider Covid-19 crisis rather than the outbreak of Covid-19 at any particular premises or within a particular geographical area. The appeal was allowed in part, mainly in relation to adjustment for government payments and the payment of interest under s57 of the Insurance Contracts Act 1984 (Cth).

A special leave application has now been made to the High Court.

What was the appeal all about?

In the appeal, LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17, the Full Federal Court considered the construction of various business interruption insurance policies and whether they responded to losses sustained by a number of small businesses.  The initial case dealt with ten small businesses and was conducted with the co‑operation of insurers and the Australian Financial Complaints Authority.  The appeal considers a subset of these cases delving into detail in relation to five of the ten initial cases.

The appeals were allowed in part, however insurers were largely successful in terms of the overall outcome.  Similarly to the decision at first instance, the UK Supreme Court decision in FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1 was noted and influential; however the Full Court commented that caution should be adopted when reviewing it because of the significantly different experiences of COVID‑19 in the UK compared to Australia.

The main protagonists

The appeal considered 4 types of clauses being:

  • infectious disease clauses, which cover loss from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius;
  • prevention of access clauses, which cover loss from a competent authority’s order or action that prevents or restricts access to an insured premises because of damage or threat of damage to property. A radius may or may not apply;
  • hybrid clauses, these are a hybrid of categories 1 and 2 and provide cover for loss from a competent authority’s orders or actions which close or restrict access to premises as a result of the presence or outbreak of an infectious disease within a specified radius; and
  • catastrophe clauses, which provide cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of slowing the catastrophe.

The appeal considered more closely the prevention of access, hybrid and catastrophe clauses. At first instance, the infectious disease clause was the only clause found to potentially respond (to Meridian Travel’s claim) and this was upheld on appeal. In relation to the hybrid and prevention of access clauses, the Full Federal Court found the insuring clauses were not enlivened because the government orders did not meet the requirements of the policy. The Full Federal Court also agreed that COVID-19 was not a ‘catastrophe’ within the meaning of the policies.

The appeal provides further guidance on how prevention of access and hybrid clauses should be interpreted.

The prevention of access clause was dealt with in depth in the Education World Travel claim within the appeal.  Education World Travel had attempted to argue that the prevention of access clause was enlivened because of Victorian workplace closure directions.  These directions had required employers to close certain businesses from 6 August to 9 November 2020.  While the Full Court agreed that the Victorian workplace closure orders had the potential to meet the requirements of the prevention of access clause, Education World Travel did not demonstrate that the closure of its premises was because of those directions.  This was because Education World Travel had already closed its businesses at the end of March 2020 due to the overseas travel ban.  The Full Court held that it would be necessary for Education World Travel to show that the closure of its premises was because of the Victorian workplace directions and not because of the overseas travel ban.  Education World Travel had not discharged this burden of proof.

An example of a hybrid clause was the Meridian Travel claim within the appeal.  Meridian, a travel agency, had sought to argue that the hybrid clause responded because of a closure of the business by order of the relevant authority.  Meridian argued that the overseas travel ban closed its business because international travel accounted for approximately 90% of its business. However, the Full Federal Court agreed with the primary judge that cover under the hybrid clause was not available.  This was because the directions did not operate to require the closure of Meridian’s business, rather the restrictions led to the practical consequence that Australians could not make use of Meridian’s business to book international travel.  Furthermore, the Commonwealth Government actions were not consequent upon “the discovery of an organism likely to result in a human infectious or contagious disease of the situation”, as required by the insuring clause.

The impact of trends clauses and government payments

Trends clauses

The appeal also dealt with whether certain adjustments to be made to the business interruption loss calculations due to certain events having the same character or “underlying fortuity” as the insured peril.  The concept of “underlying fortuity” was utilised in the FCA v Arch case. The Court seemed to agree with FCA v Arch and the primary judgment in adopting this test, and not utilising the ‘but for’ approach in the case of Orient-Express Hotels Ltd v Assicurazioni Generali SA [2010] Lloyd’s Rep IR 531, which the UK Supreme Court held was wrongly decided.

In the appeal, Meridian Travel sought to argue the primary judge erred in concluding that the overseas travel ban and the cruise ship ban did not involve the same “underlying fortuity” as the insured peril, being the outbreak of COVID‑19 within 20 km of Meridian’s premises.  This was significant because, if the overseas travel ban and cruise ship ban involved the same “underlying fortuity”, they would not be taken into account in the adjustment of the business interruption losses.  Accordingly, losses resulting from those bans could potentially be paid.

However because the primary judge found that the overseas travel ban and the cruise ship ban did not involve the same “underlying fortuity” as the insured peril, the bans had to be taken into account. The Full Court ultimately agreed with the primary judge.  The reasoning was that Commonwealth Government actions in implementing the overseas travel ban and cruise ship ban were motivated by a desire to control the importation of COVID‑19 to the country.  This was in contrast to the insured peril which was an outbreak of COVID‑19 in the relevant area within Australia.

In other words, the Full Federal Court contrasted the Commonwealth Government actions which prevented Australians from leaving Australia and cruise ships from arriving into the country on one hand, with public health orders which prevented citizens from interacting with each other within the country on the other hand. The motivation for the first was the presence of disease overseas and the potential for importing cases, while for the latter the motivation was to minimise domestic transmission.

Government payments

The Full Court arrived at a different answer in relation to government payments.  At first instance, Justice Jagot had held that certain Australian Government payments had to be taken into account when calculating the amount of business interruption loss. In particular, JobKeeper payments were to be taken into account and reduce the amount ultimately payable by the insurers.  However the Full Court took a different view.  It held that JobKeeper payments were not a payment “in consequence of the interruption of interference” and Job Keeper was paid based on a financial test, not whether there was an outbreak nearby.  On this basis, JobKeeper payments were not to be taken into account when calculating the amount of business interruption loss sustained by the insureds.  The Full Court did not alter the position of the primary judge in relation to other payments such as the Federal COVID‑19 Consumer Travel Support Program payments or the Victorian Government’s Support Fund payments.

Interest payments

Although only relevant to LCA Marrickville’s claim within the appeal, the Full Court also departed from the primary judgment in ruling that interest was potentially payable under s 57 of the Insurance Contracts Act 1984 (Cth)At first instance, Justice Jagot had held it was not unreasonable to withhold payment of the claim until the outcome of the test case and any subsequent appeal. The Full Court held that interest is payable from an earlier point in time, although the period for which interest is payable in this particular case is subject to further submissions from the parties.

What next?

An application for special leave to appeal the decision has been filed in the High Court. If special leave is granted, the matter will proceed to a hearing in the High Court with no further avenues of appeal. In the meantime, by upholding the decision of the primary judge in relation to most of the issues, we now have substantive guidance on how these policies might respond, and this is of use to both policyholders and insurers, subject to any appeal.  The Full Court also suggests that interest may be payable for claims and this could be costly for insurers, although statistics show that fewer than expected claims have been lodged to date. It is also worth noting the decisions were largely dependent on the specific facts faced by each of the insured customers, the timing of certain restrictions and the spread of COVID‑19 within a certain area.  Each case must still be assessed on its merits.