Business interruption insurance and the COVID-19 pandemic: The case law so far

Background

Hundreds of thousands of Australian businesses hold insurance policies that include business interruption cover (‘BII’). This allows insured parties to lodge a claim if their business is interrupted by a listed event. Most such triggers are localised disasters that could disrupt trading: electrical faults, fires, gastro outbreaks etc.

However, many BII policies include cover where the interruption was caused by an infectious disease, or the response of a public authority to that disease.

This became a live issue during the peak of the COVID-19 pandemic in 2020-21. Over this period, Australian businesses suffered billions of dollars in lost revenue, which was usually only partially defrayed by JobKeeper and similar assistance programs.

Subject to their policy wording, it appeared that many insured businesses could rely on BII clauses to recover losses arising from an outbreak of COVID-19 near their premises, or the response of a public authority to such an outbreak. Conversely, the handful of insurers that underwrite the bulk of general insurance policies in Australia found themselves with a vast and largely unfunded potential liability on their books.

The exclusion clause issue

Many insurers sought to exclude pandemic-type events from BII cover, by excluding cover for any diseases which were defined as a ‘quarantinable disease’ under the Quarantine Act 1908 (Cth).

The problem, which seems to have been picked up during early 2020 (likely to the abject terror of the insurers’ in-house counsel), is that the Quarantine Act was repealed in 2016.

While some policies had been updated to provide for a similar exclusion for ‘listed human diseases’ under the Biosecurity Act 2015 (Cth), which included COVID-19, many thousands of policies issued after 2016 still referred to the Quarantine Act.

What were the ‘test cases’?

The test cases covered a representative sample of BII clauses in policies issued by the largest general insurers in Australia. There was considerable variety in the wording of such clauses, as well as the surrounding policies, making this exercise far from straightforward.

The nomenclature of ‘test cases’ comes from the Australian Financial Complaints Authority (‘AFCA’), a dispute resolution body whose membership includes insurance companies. Under its rules, on an application by a member firm, AFCA can authorise a complaint to be treated as a ‘test case’, allowing the firm to bring court proceedings to resolve a question of law. Related complaints will then typically be put on hold until the test case is decided.

While it was not bound to use the test case mechanism in managing the multiple BII-related proceedings, the Federal Court evidently found it helpful to do so. As such, while the Second Test Case was on-foot, the Court stayed several representative proceedings that had been brought on behalf of insured businesses.

The outcome of the test cases

The First Test Case (HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296) addressed the exclusion clause issue. The New South Wales Court of Appeal held that: (a) COVID-19 was not a quarantinable disease within the meaning of the Quarantine Act; and (b) exclusion clauses which referred to the repealed Act were therefore ineffective.

The Second Test Case comprised a Federal Court decision (Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206), a Full Court appeal which largely upheld the trial decision (LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17), and an unsuccessful application for special leave in the High Court.

The Second Test Case included at least three of the largest general insurers in Australia as applicants (Allianz, IAG and QBE) and addressed a more comprehensive set of issues than the First Test Case, including whether any of the identified types of BII clauses covered COVID-19, and how loss was to be calculated.

The Court’s key findings were:

1. Of the four types of BII clause considered, only ‘infectious disease clauses’, which provided cover for losses arising directly from infectious disease outbreaks at or near the insured premises, were held to provide cover for COVID-19 in the facts before the Court.
2. However, as the only business in the proceedings with an ‘infectious disease clause’ in its policy was a travel agency, the main cause of its loss was not any nearby outbreak of COVID-19, but rather, travel restrictions imposed on the national level. Such losses were not covered.
3. Other types of BII clauses, which, broadly speaking, covered losses arising from government actions to close or restrict access to premises, were held not to provide cover on the facts before the Court. This was due primarily to the respondents failing to prove a causal relationship between individual outbreaks of COVID-19 at or near the insured premises, and national or state-wide restrictions.
4. The insurers were unable to rely on s 61A of the Property Law Act 1961 (Vic), to the effect that references to the repealed Quarantine Act ought to be read as references to the new Biosecurity Act.
5. While Jagot J held at first instance that JobKeeper payments ought to be deducted from any amount payable to insured parties under BII clauses, the Full Court held to the contrary.

Broader lessons

The following can be gleaned from the BII test cases:

1. Where a legal or factual issue causes a flurry of litigation, it may be useful (particularly for defendants) to seek that a proceeding be treated as a ‘test case’. Conversely, the risk of being stayed for months pending the outcome of a test case is something that litigants need to be wary of.
2. In certain circumstances, prospective defendants may be able to pre-empt plaintiffs by seeking declaratory relief. Instead of waiting to be sued, the insurers in the Second Test Case were able to partly define the terms of the litigation themselves, and ensure that representative proceedings brought against them were temporarily stayed.
3. It is vitally important that standard form contracts are kept up-to-date with legislative changes. Although the insurers had something of a lucky escape, the Quarantine Act debacle could have exposed them to billions in unplanned liabilities.  

[Disclosure: Before coming to the Bar, the author worked on two BII-related representative proceedings, Cody Gemtec Retail Pty Ltd v Lloyds Australia Ltd NSD637/2021 and Strand Fitness Pty Ltd & Ors v QBE Insurance (Australia) Ltd NSD638/2021. The views expressed in this article are his own.]