Written by Eduard Ferreira, Director
Introduction
On 8 October 2021, the Federal Court gave judgment in the second business interruption insurance test case regarding the COVID pandemic (“Pandemic”).[1]
The court considered 10 different business interruption insurance claims, based on 10 different business interruption insurance policies and businesses, resulting from the Pandemic
In 9 cases, the court decided that the insurer was not liable for the insureds’ business interruption insurance claims. In one case[2] the court was not prepared to make such a decision without additional evidence but expressed doubts about whether the insured could prove its business interruption insurance claim.
The judgment is not good news for insureds. However, the court granted leave to appeal. The appeal is listed for the first week of November 2021. The Federal Court of Appeal’s judgment will likely be further appealed to the High Court.
The judgment is not the end of the road for both insurers and insureds concerning business interruption insurance claims resulting from the Pandemic.
Decision in the first test case concerning business interruption insurance resulting from the Pandemic
In the first test case[3] the court considered clauses in business interruption insurance policies that excluded cover for “diseases declared to be a quarantinable disease under the Quarantine Act 1908 (Cth)”.
In 2016, the Quarantine Act 1908 (Cth) was repealed by the Biosecurity Act 2015 (Cth). Covid-19 was listed as a human disease under the Biosecurity Act 2015 (Cth), and the court had to decide whether the reference to ‘Quarantine Act 1908 (Cth)’ in a policy should be construed as referring to the Biosecurity Act 2015 (Cth). The court decided that a reference to the Quarantine Act could not be construed as referring to the Biosecurity Act. This was good news for insureds because the Quarantine Act exclusion did not apply to the Pandemic or exclude business interruption insurance claims.
Summary of the court’s judgment in the second test case
The court considered business interruption insurance claims relating to 10 different businesses covered by different insurance policies. We consider the different claims below.
1. Swiss Re International v LCA Marrickville Pty Ltd: Swiss Re Vertex Industrial Special Risks Policy
Policy clauses
Marrickville operated a laser therapy clinic. The relevant clause in the policy was:
“9.1.2.1 closure or evacuation of the whole or part of the Situation by order of a competent public authority as a result of an outbreak of a notifiable human infectious or contagious disease or bacterial infection or any discovery of an organism likely to result in the occurrence of a notifiable human infectious or contagious disease … at the Situation but specifically excluding losses arising from or in connection with highly Pathogenic Avian Influenza in Humans or any disease(s) declared to be a listed human disease pursuant to sub-section 42(1) of the Biosecurity Act 2015”.
Court’s decision re business interruption insurance
The court decided that Marrickville could not claim business interruption insurance because:
- Covid 19 was declared a human disease under the Biosecurity Act, and the exclusion in clause 9.1.2.1 applied.
- The public authority did not make the order closing the business because of an outbreak of a notifiable human infectious or contagious disease at or within 5km of the Situation. There was no evidence that persons with Covid-19 within the radius had anything to do with making the orders.
- Section 54(1) of the Insurance Contracts Act did not apply because the director of Human Biosecurity that listed Covid-19 as a human disease did not have a relevant connection to the insured or the policy.
2. Insurance Australia v Meridian Travel: Steadfast Office Pack Policy from CGU Insurance (Meridian Travel Policy)
Policy clauses
Meridian operated a travel agency. The relevant clauses in the policy were:
“2. If the business carried on by you is interrupted or interfered with as a result of [the occurrence of the circumstances set out in clause 8(c)] occurring during the period of insurance…We will…indemnify You in respect of the loss arising from such interruption or interference”.
“8. The occurrence of any of the circumstances set out in this additional benefit shall be deemed to be Damage to Property used by You at the Situation…
(c) The outbreak of a human infectious or contagious disease occurring within a 20km radius of the Situation.
(d) Closure or evacuation of your business by order of a government, public or statutory authority consequent upon:
- The discovery of an organism likely to result in a human infectious or contagious disease at the Situation”.
Court’s decision re business interruption insurance
The court decided that Meridian could not claim business interruption insurance because:
Clause 8(c)
Clause 8(c) requires the outbreak of a human infectious or contagious disease. Unlike clause 8(d), it does not require an order of a government, public or statutory authority. Meridian could claim business interruption insurance based on clause 8(c) because its business was within a 20km radius of identified Covid-19 cases.
However, there was insufficient evidence to infer that the direct cause of the business interruption was an outbreak of Covid-19 within the radius. The evidence did not establish which part of Meridian’s clients were walk-in clients or telephone or internet clients. The walk-in client business was interrupted by the Pandemic, but not the telephone or internet client business. In addition, when the local outbreak occurred, other restrictions such as international travel restrictions, a ban on cruise ships and isolation requirements were already in place. These other restrictions could have caused or contributed to the business interruption losses.
Clause 8(d)
Clause 8(d) did not apply because the business premises, not the business, were closed because of Covid-19. Meridian’s employees continued to work from home, and the travel ban, and lockdown curtailed but did not close the business.
3. Insurance Australia v Taphouse: CGU Business Insurance Policy
Policy clauses
Taphouse operated a craft beer bar and restaurant business. The relevant policy clauses were:
“8. We will pay for loss that results from an interruption of your business that is caused by:
- any legal authority closing or evacuating all or part of the premises as a result of:
- the outbreak of an infectious or contagious human disease occurring within a 20km radius of your premises…”.
Court’s decision re business interruption insurance
The court decided that Taphouse could not claim business interruption insurance because the direction closing Taphouse was not made because of an outbreak within 20km of its premises. There was no evidence that the Chief Health Officer knew about or made the direction because of cases within the 20km radius.
4. Allianz v Mayberg: Allianz Business Pack Insurance Policy
Policy clauses
Mayberg operated dry-cleaning businesses from four separate premises. The relevant policy clauses were:
“6. Murder, suicide, and infectious disease
We will pay for loss of income that results from an interruption of Your Business that is caused by:
- any legal authority closing or evacuating all or part of the premises as a result of:
- the outbreak of an infectious or contagious human disease occurring within a 20km radius of Your Premises…
Prevention of Access by a Public Authority
We will pay for loss of income that results from an Interruption of Your Business that is caused by a legal authority preventing or restricting access to Your Premises or ordering the evacuation of the public as a result of Damage to or a threat of Damage to property or persons within a 50km radius of Your Premises…”.
Court’s decision re business interruption insurance
The court decided that Mayberg could not claim business interruption insurance because:
Clause 6
As a dry-cleaning business Mayberg was always permitted to operate and its premises were never closed or evacuated due to the Pandemic.
There was no evidence that the directions by the Chief Health Officer resulted from an outbreak within a 20km radius of Mayberg’s premises. The directions were made because of the situation in the whole of Queensland.
“Prevention of access clause”
The “threat of Damage” did not include a threat of harm to humans from Covid-19.
The home confinement restrictions did not prevent access to Mayberg’s premises. Home confinement measures restricted people from leaving their homes, not from visiting Mayberg’s business.
Access to one of Mayberg’s stores was prevented or restricted by the social distancing requirements. However, there was no evidence that but for the social distancing requirements, more customers would have entered the premises for services.
5. Allianz v Visintin: The Allianz Business Pack Policy
Policy clauses
Visintin operated a business selling costumes and related goods to clients in the performing arts industry. Their business was in the CBD and relied in part on foot traffic. The relevant policy clauses were:
“4. Infectious disease etc.
We will also pay You for interruption or interference with Your Business due to closure or evacuation of the whole or part of the Premises during the Period of Insurance:
- as a result of the outbreak of a notifiable human infectious or contagious disease occurring within a 20km radius of the Premises.
“Prevention of Access”
We will cover You for interruption of Your Business that is caused by or results from damage in the vicinity of the Premises which shall prevent or hinder the use or access to the Premises ….
We will cover You for interruption to Your Business that is caused by an order of any legal authority which prevents or restricts access to the Premises provided that the order result from threat of damage to property or persons within 50-kilometer radius of the Premises…”
Court’s decision re business interruption insurance
The court decided that Visintin could not claim business interruption insurance because:
Clause 4(b)
The clause requires the outbreak of Covid-19 within a 20km radius and not the action of any authority. Clause 4(b) covers a voluntary decision to close the Premises due to a Covid-19 outbreak.
Reduced opening hours, operation by appointment only, a prohibition on walk in customers and social distance requirements did not cause Visintin’s premises to close.
Even if there was closure, there was no evidence that a Covid-19 outbreak within the 20km radius caused the closure. Further, the cause of any closure would be the effect of Government directions on Visintin’s customers and not a Covid-19 outbreak.
“Prevention of access clause”
This clause does not apply to business interruption insurance caused by disease. Clause 4(b) specifically deals with damage caused by disease. If this clause applied to business interruption insurance caused by a disease, there would be conflicting provisions regarding business interruption insurance claims between this clause and clause 4(b), which could not have been the parties’ intention. Further, any access prevention did not apply to Visintin’s premises but to its clients’ premises.
6. Chubb v Waldeck: Chubb Business Pack Policy
Policy clauses
Waldeck leased a premises to a coffee shop. Due to the Pandemic, Waldeck was required to provide rent relief to the coffee shop between April and October 2020. The relevant policy clauses were:
“Cover is extended for loss resulting from interruption of or interference with the Insured Location in direct consequence of the intervention of a public body authorised to restrict or deny access to the Insured Location directly arising from an occurrence or outbreak at the premises of any of the following:
- Notifiable Disease, or
- The discovery of an organism likely to cause Notifiable Disease,
leading to restriction or denial of the use of the Insured Location under order or advice of the local health authority or other competent authority”.
Court’s decision re business interruption insurance
The court decided that Waldeck could not claim business interruption insurance because:
- There was no evidence that any public authority intervened because of a Covid-19 occurrence or outbreak at the premises.
- Waldeck’s loss did not result from a restriction or denial of the use of the Insured Location by order of a competent authority. The Rent Relief Regulations caused Waldeck’s loss and did not amount to an order of a competent authority restricting or denying the use of the Insured Location.
7. Chubb v Market Foods
Policy clauses
Market Foods operated three hospitality venues in Brisbane. The relevant policy provisions were:
Extension B:
Cover under section 2 is extended to include loss resulting from business interruption to property:
- Denial of Access
damage to any property within 50km of any Insured Location, which will prevent or hinder the access to or use of the Insured Location…
3) Property in a commercial complex
property in any commercial complex of which the Insured Location forms a part or in which the Insured Location is contained which results in cessation or diminution of your trade or normal business operation due to a falling way of potential custom.
4) Public Authority
any legal authority preventing or restricting access to an Insured Location or ordering the evacuation of the public due to damage, or threat of damage to property or persons within 50km of any Insured Location.
Extension C: non damage
- Infectious Disease, Murder and Closure Extension
Cover is extended for loss resulting from interruption of or interference with the Insured Location in direct consequence of the intervention of a public body authorised to restrict or deny access to the Insured Location directly arising from an occurrence or outbreak at the premises of any of the following:
- Notifiable disease, or
- the discovery of an organism likely to cause notifiable disease,
leading to the restriction or denial of the use of the Insured Location under order or advice of the local health authority or other competent authority”.
Court’s decision re business interruption insurance
The court decided that Market Foods could not claim business interruption insurance because:
Extension B
Extension B applies to business interruption insurance claims caused by damage to property other than the property of Market Foods. For this reason, extension B does not provide cover for business interruption insurance because disease does not involve physical loss, destruction or damage to property of somebody other than Market Foods.
Further, if Extension B could apply to a disease, it would render the exclusion of diseases in Section 1 and the cover for Notifiable Diseases in Extension C meaningless, which could not have been the parties’ intention. The parties intended that Extension C exclusively regulates diseases.
Extension C
There was no dispute that Covid-19 was a notifiable disease, and that the Queensland Government’s directions led to a restriction or denial of the use of Market Foods’ premises as required by the policy.
However, there was no evidence that the directions were made because of an occurrence or outbreak at Market Foods’ premises, as required by Extension C.
8. Guild v Gym Franchises: Fitness Centre Business Insurance Policy
Policy clauses
Gym Franchises operated a gym and fitness business. The relevant policy clauses were:
“Prevention of access”
We will cover You for Your inability to trade or otherwise conduct Your Business at the Business Premises in whole or in part during the Period of Cover caused by:
- the intervention of any lawful authority resulting from threat of damage to property in the immediate vicinity of the Business Premise which prevents access to or hinders the use of the Business Premises;
Provided that:
(c) the closure or evacuation of the whole or part of the Business Premise by order of a competent government or statutory authority arising directly or indirectly from:
- human infectious or contagious diseases or the discovery of an organism likely to result in human infectious or contagious disease at the Business Premises.”
Court’s decision re business interruption insurance
The court decided that Gym Franchises could not claim business interruption insurance because:
Clauses (a) and (b)
The court rejected the business interruption insurance claim for the same reasons that it rejected Market Foods’s claim under Extension B in the Market Foods Policy.
Clause (c)
The direction that non-essential businesses needed to close between 23 March 2020 and 1 June 2020 amounted to a “closure” of Gym Franchises’ business. Restricting the number of people allowed on the premises did not amount to a closure of the business.
However, the restrictions did not arise directly or indirectly from human infectious or contagious diseases at the Business Premises. There was no evidence that the Chief Health Officer considered a person with COVID-19 at the Business Premises, and there was no evidence that there was such a person at the Business Premises.
For these reasons, the orders that closed Gym Franchises’ business did not arise directly or indirectly from human infectious or contagious diseases at the Business Premises as required by clause (c).
9. Guild v Dr Michael: Dentist Business Insurance Policy
Policy Clauses
Dr Michael practiced as a dentist. The relevant provisions of his policy were:
“Prevention of Access”
We will Cover You for Your inability to trade or otherwise conduct Your Business at the Business Premises in whole or in part during the Period of Cover caused by:
(c) The closure or evacuation of the whole or part of the Business Premises by order of a competent government or statutory authority arising directly or indirectly from:
- human infectious or contagious diseases or the discovery of an organism likely to result in human infectious or contagious disease at the Business Premise.
Court’s decision re business interruption insurance
Clause(c) requires that the closure or evacuation of the Business Premises be by order of a competent government or statutory authority. Dr Michael closed his business because of recommendations or updates from the Australian Dental Association (“ADA”) and the Dental Board of Australia (“DBA”).
The “restrictions” imposed by the ADA and DBA did not constitute “orders”. The actions of ADA and DBA remained at the level of recommendations, guidelines, and advice. It was not mandatory orders that dentists had to comply with. Consequently, Dr Michael’s premise was not closed by order of a competent authority.
Further, on the evidence, Dr Michael’s premises never closed. The recommendations and guidelines by the ADA and DBA prevented Dr Michael from carrying out certain kinds of treatments on patients but did not amount to closure of his business.
In the last instance, the court said, for the same reasons as in the Gym Franchises case, that the order (if there was an order) did not arise from a human infectious or contagious disease at the Business Premises.
10. QBE v Education Work Travel Pty Ltd (“EWT”): QBE Business Pack Insurance Policy.
Policy clauses
EWT operated a travel agency that arranged overseas tours for Secondary School students. The relevant policy clauses were:
“Prevention of Access”
The indemnity under this section is extended to include interruption or interference with your business in consequence of:
- closure or evacuation of all or part of the premise by order of a competent government, public or statutory authority as a result of a human infectious or contagious disease….
Which shall prevent or hinder the use of your building or access thereto, or results in a cessation or diminution of trade, due to temporary falling away of potential customers.”
Court’s decision re business interruption insurance
Clause 3(c) of the QBE policy required the closure or evacuation of the premises by an order resulting from a disease.
EWT voluntarily closed its premises in March 2020 because of the impact on the business by the Overseas Travel Ban. The Overseas Travel Ban did not order EWT to close its business or premises.
The Victorian Workplace Closure directions required EWT to close its business between 6 August and 9 November 2020. However, EWT voluntarily closed long before these directions. For these reasons neither the Overseas Travel Ban nor the Victorian Workplace Closure directions were orders that caused the closure of the premises.
As a result, the business was not closed or evacuated by an order and for that reason, EWT cannot succeed with a business interruption insurance claim.
Other findings made by the court
Causation
The court made important findings concerning causation. The court preferred the reasoning in Financial Conduct Authority v Arch Insurance (UK) Limited [2020] EWHC 2448 (Comm) above the reasoning in Orient-Express Hotels Limited v Assicurazioni Generali (SA) [2010] Lloyd’s Rep IR 531.
In the Orient-Express case, a hotel claimed business interruption insurance due to damage caused to the hotel by hurricanes in New Orleans. Due to widespread damage in New Orleans because of the hurricanes, the hotel’s business would have been interrupted in any event, even if it suffered no damage. The court used the “but for” test to decide that the damage to the hotel was not the proximate cause of the business interruption loss.
In the UK Financial Conduct Authority case, the policies were triggered by the outbreak of COVID-19 within a 25-mile radius from the business premises. The insurers argued that even if there was no outbreak within the radius, the business would, in any event, have been interrupted by the national COVID-19 outbreak in the UK. The UK Supreme Court held that the “but for” test could not be applied in such a case. The proximate cause was COVID-19, and the fact that there were uninsured perils (national outbreaks) and insured perils (local outbreaks), did not prevent the insured from recovering business interruption insurance. The question was whether the cause of the insured and uninsured perils was the same. If the cause was the same the but for test cannot be applied.
Matters to considered if business interruption insurance was payable
The court decided that if it were wrong, and business interruption insurance can be claimed, the following payments would reduce any loss suffered by the insured:
- Any JobKeeper payments received by the insured.
- Relief on franchise fees granted by the franchisor to the insured.
- Any rental reductions or abatements granted to the insured.
The following payments would not reduce any loss suffered by the insured:
- Any Federal COVID-19 Consumer Travel Support Program Payments to the insured.
- Any Victorian Government Support Fund Payments to the insured.
- Any similar Commonwealth or State grants in the nature of act of mercy payments to the insured.
The court decided that if business interruption insurance could be claimed, interest under section 57 of the Insurance Contracts Act would not be payable because it would not have been unreasonable for the insurers to withhold payment until it was finally determined that they were liable to pay business interruption insurance.
Conclusion
The judgment consists of 356 pages and 1151 paragraphs. The above summary is not intended to be a comprehensive summary of all the court’s findings.
The court’s findings depended upon the specific facts of the cases and may not be applicable to other cases that appear to be similar. Legal advice should be obtained relating to the specific facts of a particular case before making any decisions.
You are welcome to contact us if you have any specific queries or need legal advice.
[1] Swiss RE International SE v LCA Marrickville Pty Ltd (second COVID-19 insurance test cases) [2021] FCA 1206 (“Judgment”)
[2] Insurance Australia Limited v Meridian Travel (VIC) Pty Ltd NSD 133 of 2021
[3] HDI Global Speciality SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296