The Federal Court has handed down its ruling in the second test case concerning whether insurance policies for "business interruption or interference" (BII) cover COVID-19 related loss, including any loss of trade caused by government restrictions.

Justice Jagot ordered in favour of Allianz, Chubb, Guild, Insurance Australia, QBE and Swiss Re preferring a narrow interpretation of the policy terms, requiring a direct connection between the COVID-19 outbreaks, the business premises and government restrictions causing a loss of trade.

The Court's narrow interpretation means the anticipated flood of litigation against BII insurers is unlikely. A business will not be indemnified unless it can prove COVID-19, or any organism related to COVID-19, at its premises or within a specified radius of the premises was the cause of the government action that resulted in BII.

The Federal Court also took the chance to confirm any exclusions in BII policies for quarantinable diseases under the previous Quarantine Act 1908 (Cth) (Quarantine Act) do not apply as COVID-19 is not such a disease. This clarification is important as insurers considered appealing against the first test case (see our previous alert here) where it was ruled insurers could not rely on exclusion clauses referring to the Quarantine Act to avoid payouts as these exclusions were of no effect because the Quarantine Act was repealed and replaced with the Biosecurity Act 2015 (Cth).

Although the circumstances in which businesses can claim BII compensation was narrowed, all parties were granted permissions to appeal the decision.

If any compensation is payable under a BII policy for COVID-19 related loss, such compensation must be reduced by any previously received relief (e.g. lower rent) as ultimately, such relief will have lessened the cost of interruption or interference to the business.

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