COVID Business Interruption test cases conclude as application to appeal is denied

In what is likely to be the final chapter on the subject of the COVID-19 Business Interruption (BI) test cases, the High Court of Australia has denied special leave to appeal the February judgment by the Federal Court regarding the policy wordings in BI policies that may apply to the COVID-19 pandemic.

The judgment of 14 October means that the High Court’s February ruling of four matters in the second BI test case stands as final. There remains the possibility that the fifth matter in the case may return to the Federal Court but that is subject to the policyholder identifying an insurable loss under their policy.

The key determinations in the second test case largely centred on the following points:
  • Prevention of Access Clause – which provided cover where the order or action of a competent authority prevented or restricted access to the Insured premises because of damage or a threat of damage to property or persons;

  • Disease Clause – theses clauses would cover loss that arises from the presence or outbreak of infectious disease at the Insured premises or within a specified radius of the Insured premises;

  • Hybrid Clause – these were a hybrid of the Prevention of Access Clause and Disease Clause, which provided cover for loss where the orders/actions of a competent authority have closed or restricted access to premises, and the orders/actions are made or taken as a result of the presence or outbreak of infectious disease within the specified radius of the Insured premises; and

  • Catastrophe Clause – these clauses would provide cover to a policyholder where they suffer loss resulting from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.

The High Court’s determination signals the end of the COVID-19 insurance industry test cases and is now the standing authority for assessing COVID-19 business interruption claims.

Many COVID-19 related cases have up until now been placed on hold, pending the outcome of the second test case. The market, after some 2 years of litigation, can now work towards concluding those pending matters.

As per comments from Bellrock’s own Claims Director, Mat Holland, the news is not surprising:

“As per our previous commentary on this subject matter, it was our preliminary assessment and ongoing position that losses of this nature were not intended to be covered by Property Insurers. Ultimately, the conclusions reached by the courts were not unexpected”.

Summary of developments in the COVID BI test cases:

Given the complexities of COVID-19 impacts in relation to BI policies, the Insurance Council of Australia (ICA) sought to obtain clear guidance from the Courts to assist in determining how policy wordings should be interpreted and applied by insurers. Two test cases have now been heard to provide a clear determination of key aspects of BI cover as it may relate to COVID-19 impacts.

First test case
  • A significant number of BI policies sought to exclude cover for pandemics via a reference to the Quarantine Act 1908. These exclusions were examined in the first test case, noting that the Quarantine Act was repealed and replaced by the Biosecurity Act 2015

  • The Judgment by the NSW Court of Appeal in 2020 determined that Insurers could not rely on references to the Quarantine Act “and subsequent amendments” in policies to exclude COVID-19 related claims. See our article on this ruling here

  • Insurers submitted an application for special leave to appeal this judgment which was denied by the High Court in June 2021

  • The first test case was ultimately resolved in favour of Policy Holders.
Second test case
  • The most crucial issue in the second test case was if (in the range of claims considered) the infectious diseases extension was engaged by the relevant circumstances attributable to business interruption resulting from COVID-19 related impacts

  • In October 2021, the Federal Court judgment on the second BI test case was delivered concluding that in nine of the ten cases heard, the insuring clauses do not apply thus confirming Insurers are not liable to indemnify policyholders

  • Appeals were filed in respect of five of the ten test case matters

  • In February 2022, the Judgment of the Full Court of the Federal Court of Australia largely upheld the earlier Federal Court Judgment

  • In March 2022 applications for special leave to appeal the High Court ruling were filed by two policyholders and an Insurer resulting in the High Court’s request to hear oral arguments on the applications

  • On 14 October 2022, the High Court ruled to decline the applications for special leave to appeal, and the February judgment stands as final.

What do the outcomes of the test cases mean for policyholders?

Whilst the overriding conclusions reached by the courts did not on the whole present a favourable outcome for many Policyholders, its conclusion does now pave the way and provide a roadmap for the market and many pending matters to move forward towards conclusion.

However, it is fair to say that not every policy wording in the market has been tested against every business’ circumstance. In this regard, there remains some scope for Policyholders to pursue a limited category of claims within the guidelines established by the test cases.

Indeed, in one of the subject test cases involving a Melbourne Travel Agent, it was found that its policy insuring clause applied. However, in this example it was deemed that the losses it sustained were likely caused by the international travel ban, as opposed to local area restrictions.

It is of course always important to remember that each claim needs to be evaluated on its own merits and factual circumstances, in conjunction with the relevant insurance policy wording. This being the case, stakeholders (be it the Policyholder, Broker or Insurer) should always consider matters on a case by case basis.

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