Covid-19 Business Interruption Insurance – Insurers Win Appeals in Second ICA Test Case and Star Casino Claim

The Full Court of the Federal Court of Australia (3 judges) has generally confirmed the first instance decisions in the Second ICA Test Case¹ and the Star Casino Claim² – largely agreeing that the insurers are not liable for certain claims arising from COVID-19 related interruptions to business.

The decisions – which may yet be appealed to the High Court – confirm that there are severe limitations on the types of policies which respond to COVID-19 related financial loss and the circumstances in which a policyholder will be able to recover such loss. We have endeavoured to summarise the key issues dealt with by the Full Court and the limited scope that remains for policyholders to claim their loss, but please contact us if you would like advice on what it all means for you.

Our previous updates provide a summary of the first instance decisions being appealed from (the Second ICA Test Case is available here, and the Star Casino Claim is here). A shorter summary of the background to those decisions and the appeals is included at the end of this article.

The Key Findings and What They Mean

The Full Court dismissed the policyholders’ appeals and held that, based on the wording of the coverage and the circumstances of the test cases, insurers were entitled to decline the policyholders’ claims, largely for the same reasons as the primary judges had given. There were two key issues which affected most of the claims:

First, the ‘incongruency issue’ - where a policy contains specific ‘disease’ coverage (including limits on coverage) the Full Court held that it would be “incongruent” to allow a claim under what it held was more general coverage for ‘prevention of access’ or ‘closure by authorities’. That is, although a claim might appear to be available under clauses covering loss arising from the actions taken by authorities in response to COVID-19 (ie lockdowns), no such claim can be made where the policy also contains a specific clause dealing with the extent of cover agreed for diseases. The Full Court held that the policy needs to be read as a whole, and it would be ‘incoherent’ and ‘incongruent’ to read the cover provided by the ‘general’ clause as applicable to the subject matter addressed in another ‘specific’ clause.

Second, in relation the ‘causation issue’, the Full Court made several significant findings. For ‘hybrid’ clauses which are triggered by the closure of premises caused by an outbreak of disease at or within a radius of the premises (ie a local outbreak), the Full Court held that it could not be inferred that the closures (ie the State Government lockdowns) were imposed as a result of the local outbreak. That is, as COVID-19 was not widespread in Australia, it could not be said (unlike in the UK) that each local outbreak was an equally effective cause of the Government’s actions in response, so cover was not triggered. This finding also affects the cover provided by ‘disease’ clauses which cover business interruption caused by a local outbreak.

Favourably for policyholders, where the trigger for coverage is the authority’s response to a ‘risk’ or ‘threat’ of a local outbreak, it might be triggered by measures imposed in response to that risk or threat throughout the State. In such circumstances, the Full Court accepted that the local ‘risk’ or ‘threat’ would be an “equally efficacious” or “proximate” cause of the Government action. The problem for the policyholders in the test cases was that the Full Court held that this cover did not extend to the effects of diseases which were covered by a more specific clause (due to the incongruency finding).

Even where a policy does respond to COVID-19 related business interruption, the Full Court emphasised the need to carefully consider the loss which was caused by the insured peril. While clauses triggered by a local outbreak might respond to losses arising from the wider impact of State Government lockdowns (to the extent the lockdown was caused by the local outbreak), it is necessary to identify the interruption to the business which was actually caused by that lockdown as opposed to other factors.

For example, the one policyholder whose claim was not dismissed, a Victorian travel agent, could succeed if it can establish that the number of COVID-19 cases within 25km of its premises were a sufficient cause of the wider Victorian Government lockdown which interrupted its business. While the Court is prepared to hear further submissions on causation, the evidence was that 90% of sales were for international travel, which would have been lost anyway due to the Commonwealth’s overseas travel ban.   

The Full Court emphasised that only circumstances which the parties would naturally expect to occur concurrently with the insured peril may be disregarded in calculating the loss caused by the insured peril. Since one would not ordinarily expect an overseas travel ban to accompany measures taken in response to a local outbreak of a disease, the two circumstances did not arise from the same fortuity. As such, only 10% of the travel agent’s loss was potentially caused by the insured peril (a local outbreak). A different result might have followed had the business not been so reliant on international travel.

The Remaining Scope for Claims by Policyholders

Although the headline outcomes of the test cases were in favour of the insurers, and it must be conceded appear to knock out a majority of claims, it should be remembered that the policies and the facts of the claims selected as test cases were chosen by the insurers. Not every policy wording has been tested against every business’ circumstances, so there remains some scope for policyholders to pursue a limited category of claims within the guidelines established by the test cases.

For example, if the policy held by the Victorian travel agent had been held by, say, a bar or restaurant in the Melbourne CBD that was reliant on walk-ins not international travellers, then the outcome for the policyholder might have been different.

In addition, policyholders who do not have disease cover but do have general cover for prevention of access may still be able to make a claim since they would be unaffected by the conclusions in relation to the ‘incongruency’ issue.  Policies which refer to the concepts like the ‘risk’ or ‘threat’ of disease should also be reviewed carefully. Regrettably, the Full Court wound back the findings of the primary judge and held that cover triggered by the ‘discovery of an organism likely to cause disease at the situation’ required that the organism had to be found at the situation (and not just, as the primary judge had found, that an organism is discovered somewhere, that is likely to cause disease at the situation if not prevented). However, it did endorse the primary judge’s view that policies which were triggered by a government response to a ‘risk’ or ‘threat’ in a local area would be triggered by the State-wide measures imposed in response to what must have been considered a State-wide risk or threat. Although strictly stated in obiter in relation to a prevention of access clause, the Full Court stated:³

“All that needed to be decided was whether the Queensland Government’s directions, which had the effect of imposing the restrictions in the [local area], were made ‘as a result of’ the threat to persons in that locality. Prima facie, the question answers itself. Logically, if there were no threat to the people in that area…, the restrictions would not have been imposed there. It follows that the threat [to persons in the local area] was more than a remote cause of the restrictions and [the coverage clause] is satisfied in that respect”.

Essentially, the Court accepted that general restrictions imposed due to the risk or threat of COVID-19 in the local area, as well as more broadly across the State, would be concurrent causes enabling a claim to be made under this scenario (to the extent that other causes which would not be naturally expected to occur concurrently if the insured peril occurred, like the overseas travel ban, were not a cause of loss).

Why is this outcome different to the UK test case?

First, given the relatively low COVID case numbers in Australia, most losses here were as a result of the Government action, not the disease itself. Consequently, many Australian claims are based on prevention of access and closure/action by authorities’ clauses. But these clauses were found to be inapplicable to the authorities’ response to the pandemic where the policies contained specific disease cover, due to the finding in relation to the incongruency issue.

The UK Supreme Court did not grapple with the incongruency issue in concluding that there was coverage under some of those authority response clauses in the UK FCA test case (FCA v Arch⁴). The incongruency issue isn’t even mentioned in the UK decision.

Second, for hybrid and disease clauses, the causation findings mean that it is necessary to consider whether the local outbreak of the disease (ie proof of the disease at or with 25km of the premises) caused the State Government to take widespread action. Unlike in the UK, this link could not be assumed in Australia. In the UK, COVID-19 was far more prevalent in a far smaller geographic are such that it could be assumed that:

(a) even if there were no cases within a given local area, the same government measures would have been made in relation to that area because of the widespread nature of the outbreak; and

(b) the measures affecting that local area would have been taken if there had been no cases of the disease beyond that area.

As such, the UK Supreme Court determined that the COVID-19 cases occurring within the local area were a concurrent cause of the wider government action. Because the same could not be assumed in Australia, the Full Court held that it was necessary to prove that the relevant government restriction was caused by the local outbreak of the disease. This was held not to be established in any of the circumstances in the test cases.

Aside from the incongruency issue, what remains potentially controversial is that coverage reliant upon there being a government response to an actual local outbreak is likely not triggered, whereas coverage reliant upon there being a government response to the risk or threat in a local area is likely to be triggered by the wider measures imposed in response to the risk or threat across the whole of the State.

Other Findings Potentially of Assistance to Policyholders

While the headline outcomes favoured the insurers, several of the insurers’ cross appeals were dismissed and the Court awarded a few ‘consolation prizes’ to policyholders.

Jobkeeper: Reversing the primary judge’s finding, the Full Court concluded that Jobkeeper payments did not reduce the amount a policyholder could recover if they do otherwise have a claim. First, the business interruption cover contains an agreed methodology for calculating the loss payable, so strict principles of indemnity do not apply. Second, Jobkeeper and other government grants did not in any event constitute a ‘saving’ under the formula as they were based on fulfilling certain financial criteria so were therefore not payments ‘in consequence of’ the insured peril.

Interest on unpaid claims: The Full Court confirmed the general principle that the calculation of interest on unpaid claims begins to run from the time it was unreasonable to have withheld payment, even if the insurer held a bona fide belief (if subsequently proven wrong) that the claim did not have to be paid. Contrary to the primary judge’s decision to depart from that general principle because this was a test case, the Full Court held that the fact that an insurer was litigating a claim as part of a test case does not make any difference if it is ultimately found to be liable on the claim.   

Victorian Property Law Act: Insurers sought to get around the decision in the First ICA Test case (that a Quarantine Act exclusion to a disease clause did not apply) in relation to Victorian law policies by relying on s 61A of the Property Law Act 1958 (Vic) (that deals with references to legislation which is repealed and re-enacted). However, the Full Court confirmed the primary judge’s finding that s 61A does not apply to Federal legislation and in any event the Biosecurity Act was not a re-enactment of the Quarantine Act. This means that Victorian policyholders will be treated the same as everyone else under disease coverage claims.

Contra Proferentem: The Full Court confirmed that the contra proferentem rule continued to apply to contracts of insurance as a rule of last resort to be applied ‘where, after ascertaining the literal or grammatical meanings and evaluating them against the text, context and purpose of the contract, there remains ‘real doubt’ as to the correct construction’. The Court also confirmed that the rule could still assist policyholders who had been represented by brokers when obtaining their insurance.

The ‘Adjustments Clause’ (Orient Express Hotels): In the UK test case, the Supreme Court expressly overturned the decision in OEH – which had held that when calculating business interruption loss the correct counterfactual was to consider the results of an ‘undamaged’ business operating in a ‘damaged world’ (ie disregard the insured damage but adjust for everything else). Now, based on the UK Supreme Court decision, concurrent causes arising from the same underlying fortuity that caused the insured peril are also to be disregarded in the counterfactual if they could be naturally expected to occur concurrently with that insured peril. Importantly, the reasoning of the UK Supreme Court was accepted by the parties in the test cases and by the primary judge. While the Full Court proceeded on the assumption that it was correct, it made the point on several occasions that this was because no party challenged it. It did not expressly endorse the UK decision but, consistent with it, the Full Court reiterated the importance of considering what circumstances the parties would naturally expect to occur concurrently with the insured peril in determining what factors should be excluded from the counterfactual (such as, in Australia, the impact of the overseas travel ban).

‘Loss’ in Catastrophe Clause: The Full Court overruled the primary judge’s finding in the Star Casino Claim that the ‘loss’ in the extension for ‘loss resulting from any authority for the purpose of retarding any conflagration or other catastrophe’ had to be ‘physical loss’.  However, the Full Court ultimately upheld the view that the reference to an ‘other catastrophe’ did not apply to COVID-19. Because the term is prefaced by ‘other’ and follows ‘conflagration’, the coverage was limited to other forms of catastrophe like conflagrations, which the Full Court held meant the clause applied only to physical events that can be retarded by physical actions of authorities directed towards restraining or interrupting its progress.

Where to from here?

The parties now have 28 days from the release of the decisions to seek special leave to appeal to the High Court. Given the amounts involved, the policyholders will no doubt be closely considering their options and looking for points that might interest the High Court in granting special leave to appeal.

In the meantime, policyholders with any form of disease cover (without a Biosecurity Act exclusion) should be seeking advice before abandoning or presenting their claim.

Additional Information – Background to the Test Cases so Far

In the First ICA Test case the NSW Court of Appeal unanimously rejected the application of a common exclusion clause insurers sought to rely on to exclude a large number of business interruption claims. Specifically, the Court held that insurers could not re-write the reference in the exclusion to the no longer current Quarantine Act to make it refer to the Biosecurity Act under which COVID-19 was a listed human disease. Our summary of that decision is available here.

At first instance, the Second ICA Test case tested 10 claims chosen by insurers covering a range of policies, facts and issues. 9 of these cases were won by insurers, essentially due to 2 key findings:

• Legal finding - that it would be “incongruent” to read prevention of access extensions – the clauses extending cover for losses arising from the actions taken by authorities to close/prevent/restrict/hinder access to premises - as being applicable to actions in response to diseases where the policy contains another clause specifically extending cover for diseases.
• Factual finding – that while it is possible that there had been a local “outbreak” of the disease within the relevant radius of the insured premises as contemplated by the disease/hybrid extensions, it could not be said on the facts of the test cases before Her Honour that the local outbreak was a “proximate cause” of the government orders interrupting the business or the loss of revenue.

However, despite the outcome in the particular cases, there were a range of further issues which were found in favour of policyholders’ positions. Different outcomes, favourable to policyholders, are possible with only slight differences in the circumstances of the claim. Our detailed summary of the first instance decision is available here.

5 of the 10 cases in the Second ICA Test case were appealed to the Full Federal Court. Specifically, this included:

• a Sydney beauty salon / laser therapy clinic (LCA Marrickville Pty Ltd);
• a Townsville bar and restaurant (The Taphouse Townsville Pty Ltd);
• a café operating across from the Royal Brisbane and Women’s Hospital and other locations (Market Foods Pty Ltd); and
• two Victorian travel agencies (Meridian Travel (Vic) Pty Ltd and Dr Coyne as liquidator of Educational World Travel).

In a separate case, the Star Casino brought a claim based on an extension for “loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe”. The Federal Court held that  the reference to an “other catastrophe” in this context was limited to insured perils capable of causing physical damage. Since COVID-19 was not insured, there was no business interruption cover for the loss arising from the actions taken by authorities to retard it. Our summary of this decision is available here. The Star Casino also appealed to the Full Federal Court, which heard the appeal together with the Second ICA Test case.

Please get in touch with Mark.Darwin@hsf.com or Travis.Gooding@hsf.com if you have any questions about this article.

1. LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17.
2. Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16. 
3. See [535] and also [545]. The relevant POA clause was ‘We will pay for loss that results from an interruption of your business that is caused by any legal authority preventing or restricting access to your premises or ordering the evacuation of the public as a result of damage to or threat of damage to property or persons within a 50km radius of the premises’
4. [2021] AC 649.