This is not the beginning of some outré joke but the context for one of the most important insurance decisions of the year.

On 8 October 2021, the Federal Court handed down its long-awaited decision in Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206 (Second Test Case) on business interruption coverage for COVID-19 losses. In a comprehensive judgment spanning some 374 pages and 1,153 paragraphs, Justice Jagot considered various business interruption claims from nine small businesses across four different states.

The Second Test Case follows a number of business interruption cases in Australia including:

• Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCAFC 228 considering a Biosecurity Act 2015(Cth) (Biosecurity Act) exclusion;
• HDI Global Speciality SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 (First Test Case) considering an outdated exclusion clause which referred to the repealed Quarantine Act 1908 (Cth) (Quarantine Act), see our update on the First Test Case here; and
• Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2021] FCA 907, see our update on the case here.

The key issue for determination in the Second Test Case was whether the business interruption policies in question responded to losses suffered as a result of the COVID-19 pandemic. Insurers were successful in all but one case. Due to the significance of the case, an appeal has already been scheduled in for the second week of November. No doubt both insureds and insurers are keen to get some final answers before the year is out.

The protagonists

The small businesses spanned across New South Wales, Victoria, Queensland and South Australia and included a dry cleaner, costume store, gym, dental practice, landlord, beauty salon, café, bar and restaurant company and two travel agencies.

Justice Jagot categorised the clauses under each business interruption policy into four general categories:

1. infectious disease clauses: these clauses provide cover for loss from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius of the insured premises;

2. prevention of access clauses: these clauses provide cover for loss from a competent authority’s order or action that prevents or restricts access to an insured premises because of damage or a threat of damage to property or persons;

3. hybrid clauses: a hybrid of categories one and two, these clauses provide cover for loss from a competent authority’s orders or actions which close or restrict access to a premises as a result of the presence or outbreak of an infectious disease within a specified radius of the insured premises; and

4. catastrophe clause: this clause provides cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of slowing the catastrophe.

 The plot

 In all but one claim (being a travel agency business, Meridian Travel), Justice Jagot found in favour of the insurers, concluding the wording of the business interruption policies did not require the insurers to pay out claims for business interruption losses suffered from the COVID-19 pandemic.

Primarily, the claims failed on the basis that it was not possible for her Honour to conclude that the Commonwealth or State government orders were made as a result of any circumstance at the premises or within a specified radius of the premises, as required by most of the insuring clauses.

The circumstances within the radius in terms of the outbreak or likely occurrence of a disease was not a proximate cause or any other kind of cause of any of the government orders. Her Honour held that proof of cases at the premises/situation or within a radius of the premises/situation does not prove that the orders resulted from an ‘outbreak’ or ‘occurrence’ of COVID-19 at the premises or within the relevant radius because it does not prove the relevant government minister knew of the circumstance when making the order.

In reaching this finding, Justice Jagot distinguished the current Federal Court case from the UK Supreme Court business interruption case last year. While the claims before the Federal Court were not in relation to Commonwealth or State government orders during the latest Delta outbreak, her Honour noted that unlike the United Kingdom, where COVID-19 outbreaks were “so widespread” and virtually everywhere, Australia was a large and sparsely populated country with far fewer COVID-19 cases.

Her Honour also made the following comments:

1. Infectious disease clauses: this clause appeared in Meridian Travel’s policy and was the only clause which her Honour held could potentially provide cover out of the policies considered;

2. Prevention of access clauses: the policies containing this clause all required the prevention of access to occur due to a government order which was made as a result of a circumstance at the premises or within a specified radius of the premises (exact wording varied between policies). It was not possible to conclude this was the case for any of the Commonwealth or state government orders.

3. Hybrid clauses: as these clauses also had a ‘prevention of access’ component, the same issues identified above applied.

4. Catastrophe clause: COVID–19 might ordinarily be a catastrophe, but not in the context of these insurance policies. Also see our update on the Star Entertainment Group Limited v Chubb Insurance Australia Ltd case here.

Furthermore, where a clause of the policy expressly deals with business interruption loss due to a disease and that clause excludes cover for listed human diseases under the Biosecurity Act, it would be an ‘incongruent’ interpretation of the policy to seek to find cover for diseases under another less-constrained section of the policy.

Justice Jagot also considered the meaning of an outbreak and ‘closure or evacuation’ under a hybrid clause. One active COVID-19 case in the community outside of a controlled setting (such as quarantine, isolation or hospital) is sufficient to constitute an outbreak, while ‘closure or evacuation’ of a premise under a hybrid clause does not require access to the whole premises to be physically impossible. Rather, a premises will be deemed to be closed or evacuated where persons who are otherwise entitled to enter and remain on the property ordinarily are prohibited (in whole or part) from doing so. To illustrate this, her Honour provided the example of a business catering to the public. If the public cannot enter or remain on the premises (in whole or part), then the premises may be closed for the purpose of a hybrid clause.

Given this was a test case, her Honour concluded by noting how claims under business interruption policies should be adjusted to account for loss. By reference to general principles on contracts of indemnity and specific policy wordings, Justice Jagot made a distinction between the Commonwealth Government’s JobKeeper payments, franchise relief and rent relief received, and other Commonwealth and State government grants. Her Honour noted that the former payments and relief were intended to reduce the insured’s loss, and any claim under a business interruption policy for loss should be adjusted to account for this fact, while the latter government grants were mostly intended as an “act of grace payment”.

Travel agent flies solo

The Federal Court then considered the wording of the infectious diseases clause under Meridian Travel’s business interruption policy. The wording was unique, in that coverage was enlivened where business interruption losses were caused by the outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation (as defined in the policy). There was no requirement for an action or order by an authority to trigger coverage, unlike many of the other policies before the Court.

It was accepted that by 30 March 2020, a COVID-19 outbreak had occurred within a 20 kilometre radius of Meridian Travel’s premises in inner Melbourne. However, Justice Jagot noted that Meridian Travel faced a significant evidentiary barrier in proving its losses were the direct result of a localised COVID-19 outbreak within this radius, and not due to the Commonwealth Government’s actions of severely restricting international travel during the pandemic. Revenue from international travel constituted approximately 90% of Meridian Travel’s revenue. The insurer and Meridian Travel have been ordered to confer as to whether further directions should be made before the heading of any appeal.

Exclusion clauses examined again

During the proceedings, the Federal Court considered exclusion clauses which referred to the now repealed Quarantine Act. In relation to those claims governed by Victorian law, the insurers argued that s 61A of the Victorian Property Law Act 1958 (Vic) had the effect of substituting reference to the Biosecurity Act for the Quarantine Act. Section 61A provides that where an Act is “repealed and re-enacted (with or without modifications)”, references in contracts to the repealed Act will be taken as referring to the new Act.

Justice Jagot rejected the insurers’ argument on two grounds. Firstly, the meaning of an “Act” under s 61A of the Victorian Property Law Act is confined to Victorian Acts and does not extend to an Act of the Commonwealth. On the second ground, Justice Jagot found that the Biosecurity Act was too different to be a re-enactment (with modifications) of the Quarantine Act.

Section 54 to the rescue?

Finally, one of the small businesses sought to rely on s 54(1) of the Insurance Contracts Act 1984 (Cth) to have relief from the policy exclusion for ‘listed human diseases’ under the Biosecurity Act. Under this provision, an insurer cannot refuse an insured’s claim on the basis of certain acts by the insured or ‘some other person’ unless the act is capable of causing the loss or other circumstances apply. The insured’s argument was that the Director of Human Biosecurity had ‘acted’ by declaring COVID-19 as a ‘listed human disease’ under the Biosecurity Act, such that the insurer now had a basis to refuse cover.

Justice Jagot also rejected this argument. Her Honour noted that the act of the Director of Human Biosecurity declaring COVID-19 as a ‘listed human disease’ was not an act of ‘some other person’ for the purpose of 54(1) of the Insurance Contracts Act 1984 (Cth) as the Director had no relevant connection with the insurer, the insured, or the policy.

The story continues…

This is unlikely the last word on business interruption insurance and pandemic related losses in Australia. We await the result of the appeal to the Full Federal Court. A decision is expected to be handed down by the end of the year.

Given the significance of the matters in dispute, it is possible that special leave to the High Court will be sought, which if granted, may mean uncertainty in relation to business interruption claims will linger until 2022. This is despite other jurisdictions, such as the United Kingdom, resolving similar issues in January this year.

Epilogue

Justice Jagot made some interesting observations on some of the terms commonly used in Australian business interruption insurance policies. In the below, ‘premises’ includes a description of a ‘situation’.

These observations are:

1. ‘closure’ in the context of ‘closure or evacuation’ of premises/a situation extends to closure of a part of the premises. It is different from prevention, restriction or hindrance of access to the premises;

2. neither ‘closure’ nor prevention, restriction or hindrance of access require a ‘physical impossibility’ to access the whole or part of the premises;

3. a restriction on the number of people who can enter and stay inside the premises is not ‘closure’ or prevention, restriction or hindrance of access;

4. ‘closure’ does not require that each and every person is prohibited from entering the whole or part of the premises. It simply requires that those who are usually allowed to do so are no longer allowed to do so;

5. if a closure must be ‘by order’ of an authority, the closure must be required or compelled by the order, not just caused by the order;

6. a ‘competent’ authority is one which is competent to take the action mentioned in the insuring clause;

7. the facts of the case will determine whether there is a ‘closure’ that is required;

8. a distinction is made between a ‘public authority’ or ‘statutory authority’, and an authority, body or person authorised to take action by way of a private arrangement, such as by way of contract or body corporate by-laws;

9. an ‘outbreak’ of a disease takes its meaning from the nature of the disease. For COVID-19, there can be an ‘outbreak’ in a specified area if there are contagious cases of COVID-19 within the community that are not in isolation;

10. an organism is ‘discovered’ upon finding or ascertaining it; and

11. the wording of the policy determines whether the organism must be at the premises.