Insurers largely succeed in appeal of latest business interruption test cases

• Published date: 01 March 2022
• Law Firm: Gilchrist Connell
• Author: Mr Alex Haslam and Dan Robinson

On 21 February 2022, the Full Federal Court of Australia delivered its judgment in five appeals in the COVID-19 business interruption test cases ¹ At the same time, it also delivered judgment in a further appeal brought by Star Entertainment Group Limited against its business interruption insurer concerning similar business interruption issues .²

We set out below a summary of the outcome and potential implications arising from these judgments. A more detailed summary of each case considered by the judgments is included as an annexure at the end of this note.

Key outcomes

Both judgments generally agreed with and upheld the findings of their respective first instance decisions³, meaning that many COVID-19-related business interruption losses will not be covered by policies underwritten in the Australian market. However, the judgment delivered in the test case appeals did overturn Justice Jagot's first instance findings in two material respects:

• it overturned her Honour's finding that any indemnifiable loss suffered by business would be reduced by any amount of compensation received by way of the Federal Government's JobKeeper payment scheme; and
• it found that, contrary to the decision at first instance interest on claims may be payable under section 57 of the Insurance Contracts Act 1984 (ICA) where the insurer was liable to pay under the relevant policy, notwithstanding that coverage issues remained before the court.

Coverage for business interruption loss

Broadly speaking, these judgments support the view that business interruption cover for COVID-19 related losses will only be available in very narrow circumstances under wordings available in the Australian market in 2020 and 2021.

In the test cases, the Full Court found that indemnity may be available for business interruption losses arising from the effects of the COVID-19 pandemic in only one matter, being the Meridian appeal. In all other appeals, the claims for indemnity were dismissed.

In the Meridian appeal, the Full Court held that, subject to receipt further evidence establishing the loss, part of the claimed loss was capable of constituting loss that was a direct result of an "outbreak of a human infectious or contagious disease" within the radius of the insured premises prescribed by the policy, that loss being the decline in business due to the interference of potential walk in customers on account of restrictions introduced by the Victorian Government. Those restrictions prohibited persons from leaving their ordinary residence, restricted the size of gatherings and restricted specified kinds of businesses from operating.

However, in the Meridian appeal, the Full Court also found that loss caused by a ban on overseas travel and on cruise ships was not covered. Accordingly, even though cover may have been available on the limited basis above, further evidence was required to establish the amount, if any, of indemnifiable business interruption loss.

JobKeeper

The Full Court overturned Justice Jagot's decision that JobKeeper payments were to be taken into account when adjusting any indemnifiable loss.

In light of the comprehensive basis of settlement provisions in the relevant policies, it was held that the JobKeeper payments were not to be taken into account due to the ordinary principle of indemnity. Moreover, the 'sum saved' provisions in the relevant policy did not allow for the JobKeeper payments to be taken into account because the payments were not received "in consequence of" the interruption or interference that resulted from the insured peril (being the outbreak of the disease within the specified radius).

Section 57 Interest

Section 57 of the ICA provides that interest will run on the amount payable under a relevant contract of insurance from the time that it becomes unreasonable for the insurer to withhold payment.

Justice Jagot had found at first instance that, if indemnity were available, interest would not run under section 57 because it was not unreasonable for insurers to await the outcome of the test cases and any appeals were known given the complexity of the coverage issues and the procedure in which the test cases were to be run.

The Full Court overturned this finding and held that the commencement and prosecution of the test cases did not provide a reasonable basis to withhold payments from insureds where they were entitled to indemnity. However, the time at which it becomes unreasonable for an insurer to withhold payment for the purpose of section 57 will still turn on the individual facts of any particular case.

UK position

Generally speaking, the Full Court was not required to cavil with the correctness of the UK Supreme Court decision on FCA v Arch⁴. Instead, the Full Court noted that the underlying factual circumstances that existed in the UK at the relevant time for the purpose of that case were very different from those in Australia at the relevant times (namely 2020 and 2021).

Specifically, the outbreak of COVID-19 in the UK at the relevant time was "widespread", whereas the same could not generally be said for the position in Australia.

Other matters

Some other important matters to note from the Full Court's judgments include:

• upholding Justice Jagot's decision with respect to the application and operation of the 'trends clause' in the Industrial Special Risks Policy under consideration in the LCAM appeal, being generally consistent with the decision in FCA v Arch. Broadly speaking, this provides that the trends clause will not permit an adjustment of the insured's loss where event relied upon to make the adjustment is inherent in the occurrence...