COVID-19 Business Interruption Insurance 'Insurers Win Appeals In Second ICA Test Case And Star Casino Claim

• Published date: 28 February 2022
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Coronavirus (COVID-19), Insurance Laws and Products, Trials & Appeals & Compensation, Operational Impacts and Strategy
• Law Firm: Herbert Smith Freehills
• Author: Mr Mark Darwin and Travis Gooding

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've 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 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 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...