Lawyers Court
LegalFebruary 28, 2022

Insurance - Business interrupted by COVID-19? Take two

Background

In Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206; (2021) 21 ANZ Insurance Cases ¶62-291 (Second COVID-19 Test Cases), the Federal Court of Australia (Jagot J) determined that, in nine of ten “test” cases considered, the applicable policy of business interruption insurance did not respond to losses which the claimants attributed to the COVID-19 pandemic.

Five claimants whose claims were considered in the Second COVID-19 Test Cases appealed to the Full Court of the Federal Court of Australia. Cross-appeals were also filed.

The key issue on appeal was whether or not the Full Court agreed with Jagot J's determinations that the policies of business interruption insurance considered did not respond, on the available evidence, to the losses claimed by the five claimants.

The Full Court also considered as an aside:

  • whether or not third party payments had to be taken into account in determining the quantum of any benefits payable
  • whether or not s 61A of the Property Law Act (Vic) is relevant to interpreting the applicable policies of business interruption insurance, and
  • the operation of s 57 of the Insurance Contracts Act 1984 (Cth).

Appeal decision

The Full Court, comprising Derrington and Colvin JJ (with Moshinsky J concurring), agreed with Jagot J's findings that the insuring clauses did not apply with the exception of Meridian Travel.

In particular:

  • The Full Court held: "No party before either her Honour or this Court sought to critically analyse the decision or suggested any error in the majority’s reasoning or conclusions [in Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors [2021] UKSC 1 (Arch Insurance)]. In those circumstances, it is not necessary to reach any view as to its correctness": at [113]. The Full Court proceeded to state later on in the judgment that "this discussion is founded upon a number of assumptions, including the applicability of the causation principles applied in [Arch Insurance]. The engagement with the parties’ submissions should not be taken as an acceptance or adoption of those principles": at [549].
  • The Full Court held: "… [T]he critical development of their Lordships was the adoption of a causal analysis in respect of the effect of an insured peril which limited the impact of other competing causes. They reasoned … that when the elements of a composite insured peril occur, they originate from the same cause — in this case, the COVID-19 pandemic — and it is entirely predictable that, even if those elements had not combined to cause indemnifiable loss, they would individually have had a similar detrimental impact on the business. It would be wrong … to treat those other detrimental effects as diminishing cover under the policy because, although they are not themselves covered, they are matters arising from the same “underlying fortuity” which the parties would naturally have expected to occur concurrently with the insured peril. In that sense, they were not a separate and distinct risk": at [122]. The Full Court described this as the "underlying fortuity" principle.
  • The Full Federal Court summarised the decisions in Arch Insurance and Jagot J's judgment. Their Honours noted, but did not comment on, Jagot J's determination that:
    • "the Commonwealth government’s actions were not caused by the same underlying fortuity as the insured perils in the respective policies. It acted to prevent the entry of COVID-19 into the country and was motivated by the existence of the spread of the disease overseas and the threat presented to Australia by uncontrolled entry of international travellers": at [138]
    • "it was the existence of COVID-19 cases in the State (known) and the associated threat or risk of COVID-19 to persons (from cases both known and unknown) across the State as a whole, which were the causes of State government action. It could not be concluded that any State Government action “was caused by, or resulted from, or was in consequence of, the existence of any case of COVID-19 at the location or within area required by the insuring provisions"… [The State governments] acted because they were aware that some cases existed in certain locations, albeit not every location, and that there was a risk to all persons across the State. That risk extended to the location or areas identified in the several insuring clauses".
  • The Full Court accepted Jagot J's conclusion that the term "outbreak" of COVID-19, subject to the terms of a particular policy, "only required a case of active (that is infectious) COVID-19 in the community, in the sense that it occurs in a non-controlled environment, where potential transmission may occur": at [143] and [154].
  • The Full Court accepted Jagot J's conclusion that "… it can generally be accepted that when a clause provides for a relevant authority to have acted on the basis that a relevant fact (eg an outbreak or an occurrence) existed, there is no requirement for the insured to prove the authority was correct in its assessment that the fact did exist": at [161]. The Full Court also accepted Jagot J's conclusion that the authority's reasons for a decision "… would be objectively determined by what the authority did, what it said about it at the time, and the contemporaneous circumstances known by, or inferred to be known by, the authority at the time…": at [168].

As the Full Court accepted much of Jagot J's decision, their Honours did not disturb Jagot J's findings regarding specific claims and policy wordings. The schedule below summarises Jagot J's views on the four categories of insuring clauses considered in the Second COVID-19 Test Cases.

The Full Court also did not disturb Jagot J's decisions regarding:

  • the term "Act" in the Property Law Act does not refer to Commonwealth Acts, and so s 61A of the Property Law Act is not relevant to interpreting the applicable policies of business interruption insurance, and
  • findings that third party payments were not to be taken into account when determining the quantum of any benefits payable under the policies.

As the policies did not respond, on the available evidence, to the losses claimed by the five claimants, their Honours did not consider it necessary to answer from when interest would commence to accrue.

Key takeaways of Appeal decision

The Full Court's decision is a welcome confirmation of the approach to be taken in considering how policies of business interruption insurance may respond to COVID-19.

While providing further clarity, the Full Court's decision appears to leave open:

  • dissenting from the court's approach taken in the UK Supreme Court's decision in Arch Insurance, given that their Honours stated on multiple occasions that they were not commenting on the UK Supreme Court's decision in Arch Insurance (as they were not asked to), and
  • a different decision should COVID-19 become more widespread in Australia (for example, following the spread of the Delta and Omicron variants).

It is open to one or more of the unsuccessful claimants to apply for special leave to appeal to the High Court.

Schedule

 Category of clause and example(s)  Jagot J's view
 Hybrid clause
"… 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 … [or] within a 5 kilometer [sic] radius of the Situation… 
 
Jagot J was unwilling to infer that orders made as a result of the risk of harm posed by COVID-19 were due to the outbreak, or risk of outbreak, of COVID-19 within an insured premises (as opposed to the State or Territory generally). In addition, her Honour considered that whether or not a business was "closed" "… is to be resolved by reference to the terms of the order understood in the context of the nature of the premises and the business being conducted on the premises."
 Hybrid clause
"… 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 Premises… "
 
 Infectious disease clause
"… 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[:] … The outbreak of a human infectious or contagious disease occurring within a 20
kilometre radius of the Situation…"
 
 The parties agreed that there was an outbreak of COVID-19 within a 20-kilometre radius of the insured premises. Her Honour considered that the infectious disease clause applied. However, her Honour considered that there was insufficient evidence to establish that COVID-19 was the proximate cause of the insured's loss. The insured was provided an opportunity to consider its position.
 Prevention of access clause 
"… preventing or restricting access to your premises or ordering the evacuation of the public caused by any legal authority… as a result of damage to or threat of damage to property or persons within a 50-kilometre radius of your premises…"
 
 Similar to her views on 'hybrid clauses', Jagot J was unwilling to infer that "damage… or threat of damage" referred to in the clause extended to COVID-19 in Australia. The "threat of damage", as Jagot J put it, is not concerned with a disease such as COVID-19 but with a threat that could "…physically damage a building as well as a person."
 Catastrophe clause
"… the Insurer will indemnify the Insured in
accordance with the provisions of Clause
10 (Basis of Settlement) against loss resulting from the interruption of or interference with the Business, provided the interruption or interference is in consequence of… the action of a civil authority during a conflagration or other
catastrophe for the purpose of retarding same…"
 
 Jagot J construed the words "conflagration or other catastrophe " as requiring "… a physical event [which requires] a physical action to be retarded". Her Honour did not consider COVID-19 was a "conflagration or other catastrophe".
 

LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17; (2022) 22 ANZ Insurance Cases ¶62-307

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