HOW DID WE GET HERE?

On 8 October 2021, a single judge of the Federal Court, Justice Jagot, heard arguments on 10 related cases, collectively known as the 2nd Business Interruption (BI) Test Case. That case flowed from the 1st BI test case which determined that an exclusion clause in certain business interruption policies that referred to repealed legislation (“Quarantine Act”) was ineffective.

That 2nd BI test case concerned the application and operation of business interruption or interference clauses in the context of the effects of COVID-19, including Government actions that were taken to control the spread of COVID-19.

In hearing 10 separate parties, Justice Jagot considered 4 different clauses, categorised as:

• hybrid clauses: where a competent authority closes or restricts access to premises, as a result of infectious disease or the outbreak of infectious disease within a specified radius of an insured’s premises;
• infectious disease clauses: which provide cover for losses that arise from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius of the insured’s premises;
• prevention of access clauses: which provide cover where a competent authority prevents or restricts access to the insured's premises because of damage or a threat of damage to property; and
• a catastrophe clause: which provides cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.

‍

Except for 1 of those 10 cases, Meridian Travel v Insurance Australia (Meridian), Justice Jagot determined that, in a nutshell, the insuring clauses did not respond since none of the Government orders were made as a result of the particular presence or outbreak of COVID-19 at theinsured’s actual premises. The other 9 cases were entirely unsuccessful i.e., there was no cover available under the various policies of insurance.

‍

In relation to Meridian, Justice Jagot determined that since:

• there was an infectious disease clause which operates by reference to the outbreak of a human infectious or contagious disease occurring within a 20-kilometre radius of the insured’s premises; and
• the clause did not require that the premises/situation be closed;
• nor did it require that the closure be by order/action of a competent authority resulting from the outbreak of a human infectious or contagious disease occurring within a 20-kilometre radius of the insured’s premises;

‍

the infectious disease clause was therefore available to Meridian if they could prove the business was interrupted or interfered with as a result of COVID-19.

An appeal of Justice Jagot’s decision went to the full Federal Court and was heard on 8 November 2021, concluding 12 November 2021. Leaving aside the hearing of Star Entertainment Group Ltd v Chubb Insurance Australia Ltd, only 5 of the original 10 cases were appealed.

‍Star Entertainment Group Limited v Chubb Insurance AustraliaLtd included a direct reference to the Biosecurity Act 2015 and so the issue was related to policy construction, which is not relevant to the application and operation of business interruption or interference clauses in the context of the effects of COVID-19.

‍

THE 2nd TEST CASE APPEALS

The Full Federal Court delivered judgement on 21 February 2022. The Court largely upheld the decision of Justice Jagot, though for varying reasons. All 5 appeals were dismissed.The Court substantially agreed with the conclusions of Justice. In particular, the Court agreed that in each of the cases (except Meridian), the insuring clauses did not apply. In relation to Meridian, the Court mostly agreed with the conclusions of Justice Jagot. This now means that the Meridian decision is upheld, and the infectious disease clause is available.

‍

NEXT STEPS & IMPLICATIONS FOR BUSINESSES

All parties will now consider the Full Court’s judgement and determine whether to file an application for leave to appeal that decision to the High Court. If the High Court allows that application, then all parties will need to await the decision of the High Court before all issues are finally determined.

If the High Court does not allow an appeal, this legal dispute will come to an end. Those insurers with similar policy wordings to Meridian will likely commence reviewing and settling claims.

However, we expect that insurers with similar wordings to the other 9 cases will treat this decision as a precedent and uphold their decision to deny policyholders’ claims, leaving thousands of Australian businesses with no further avenue to pursue an insurance claim for Covid business interruption losses. While disappointing for insureds, this outcome is not completely unexpected given most policies were not constructed with the intent to include catastrophic perils like pandemics.

We will be closely monitoring the situation and will provide any further updates to our clients.

‍

WITH YOU ALL THE WAY

Faramarz Ostowari

‍Head of Corporate Insurance & Risk Solutions Claims

‍faramarz.ostowari@honan.com.au