Case study: COVID-19 Business Interruption test case update
In the last edition of Cover to Cover, we discussed a number of test cases from around the world which have considered whether various business interruption (BI) insurance policies cover losses flowing from the government restrictions imposed in response to COVID-19.
Recently, an eagerly awaited appellate decision has been released by a Full Court of the Federal Court of Australia in LCA Marrickville Pty Ltd v Swiss Re International SE  FCAFC 17, known in Australia as the “second test case”. The second test case comprised 10 small business claims under BI policies issued by six different insurers. These claims were heard by the Federal Court in September 2021, and a decision issued in October 2021. Five of these cases were appealed (and cross-appealed) and the Full Court of the Federal Court has now issued its decision, largely upholding the first instance decision of the Federal Court.
The Court’s decisions
The insurance policies at issue in the second test case differed in wording but were similar in certain key respects. The clauses relevant to the Federal Court’s decisions may be summarised as follows:
- Prevention of Access clauses which provide 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 clauses which cover losses that arise from the presence or outbreak of infectious disease at the insured premises (or within a specified radius of the insured premises).
- Hybrid clauses which are a hybrid of the Prevention of Access and Disease clauses, providing cover where the orders or actions of a competent authority have closed or restricted access to the insured premises, and those orders or actions are taken as a result of the presence or outbreak of infectious disease at the insured premises or within a specified radius of the insured premises.
- Catastrophe clauses which provide cover for loss resulting from the action of a civil authority during a “conflagration or catastrophe”.
The Court held – and the Full Court confirmed – that the Prevention of Access and Hybrid clauses could not provide cover. The Prevention of Access clauses do not apply to diseases and, in relation to the Hybrid clauses, the government orders imposing closures or restrictions on businesses operating were not made because of the presence of COVID-19 at or near the insured premises. Rather, orders had been made because of the threat posed by COVID-19 being introduced to Australia from overseas, and because of the risk of COVID-19 to people across the state as a whole.
However, in relation to one of the insureds, Meridian Travel, the Court held that the Disease Clause could potentially provide cover for losses flowing from restrictions imposed to address the COVID-19 pandemic. That clause did not require any action to have been taken by an authority to close or restrict access to the insured business. However, the Court noted, the insured would still need to show that there had been an identified case of COVID-19 at the premises (or within a specified radius of the insured premises) and that that particular case – not other cases or the risk of other cases – caused their loss. The Full Court’s decision gives the parties to this case the opportunity to consider their respective positions, and the insured may pursue its claim before the trial judge.
The Court further held – and the Full Court agreed – that COVID-19 was not a “catastrophe” for the purposes of the BI policies. The meaning of the word “catastrophe” was linked to “conflagration” and, the Court said, that “conflagration” ordinarily means a physical event requiring action to slow its progression. A pandemic was not a catastrophe similar to a conflagration.
Implications for New Zealand
The Full Court’s decision gives insurers increased certainty as to how BI policies are likely to be interpreted in New Zealand, as the lockdowns imposed by the New Zealand Government were, as in Australia, introduced in response to the threat posed by COVID-19 being introduced to the country from overseas and the threat of COVID-19 across regions. Insureds may have cover under Disease clauses, however causation issues may arise in individual cases.
While the second test case provides some guidance for how BI policies may be interpreted, insurers who wish to clearly exclude cover for pandemics in the future (or provide cover in particular circumstances) will need to also take into account the approach that has been taken in other countries – particularly the United Kingdom.
We discussed the approach of the English Supreme Court in The Financial Conduct Authority v Arch Insurance (UK) Ltd and others in issue 22 of Cover to Cover. In Arch Insurance, insurers had rejected BI claims on the basis that losses suffered as a result of Government-imposed closures were not proximately caused by an insured peril, such as a case of the disease within the defined radius of the insured premises. The Supreme Court held that cover could be available under Prevention of Access, Disease and Hybrid clauses where the insured could show that Government-imposed lockdowns were caused in part by an insured peril (i.e. a case of the disease within a defined radius of the insured premises) even though they were also a result of uninsured causes (i.e. cases of the disease across the country as a whole). England’s Government had, the Supreme Court noted, introduced lockdowns in response to a widespread national outbreak – including cases within a defined radius of the insured premises, leading the Supreme Court to reach very different conclusions on policy interpretation than in Australia. Arch Insurance should, therefore, be considered in any review of BI policy wordings, as the guidance in that case may be more relevant depending on the circumstances of any future pandemic.