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.
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.
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.
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.
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 of the insured peril itself;
- finding that insurers could not rely on exclusions referring to the Quarantine Act 1908 (Cth) for insurance contracts governed by the law of Victoria on account of section 61A of the Property Law Act 1958 (Vic). If this argument had have been successful, it would have distinguished insurance contracts in Victoria from those in New South Wales, which had already been considered by the New South Wales Court of Appeal in 2020 in the first test case5; and
- as a general observation, these judgments reinforce the ordinary and well-established principles of insurance policy interpretation as a whole, and specifically the principle that contractual provisions should be interpreted according to their natural and ordinary meaning read in the context of the policy as a whole. Further, interpretations that would lead to incongruence, incoherence or commercial absurdity in the contract should be avoided, particularly where a reasonable interpretation is available which would avoid those outcomes.
It remains to be seen whether any party will seek special leave to appeal either of these judgments to the High Court. Ordinarily the parties would file any such application within 28 days of the judgments.
If there are no further appeals (if the High Court refuses leave to appeal), then these judgments will likely provide important guidance to participants in the Australian insurance market as to how any claims for indemnity for business interruption loss resulting from the COVID-19 pandemic, and more generally, are to be assessed and adjusted.
ANNEXURE - SUMMARY OF THE JUDGMENTS
We provide a summary of the key findings in the judgments. It should be noted that many of the issues were common to more than one appeal. Where that is the case, we have summarised the outcome of that issue by reference to only one appeal to avoid unnecessary duplication.
LCAM conducted business as a laser therapy clinic offering services such as laser hair removal, cosmetic injectables, and skin treatments from its premises at Marrickville Metro Shopping Centre in Sydney. In 2020, the New South Wales Government made certain orders which negatively impacted LCAM's business. LCAM advanced a claim on its Industrial Special Risks Policy, which was denied by its insurer.
The key issue in the LCAM appeal was whether provisions in the policy which provided business interruption cover that was in consequence of "the action of a civil authority during a conflagration or other catastrophe for the purpose of retarding same" or "the action of any lawful authority to avoid or diminish risk to life or Damage to property within 5 kilometres of the Situation which prevents or hinders the use of access to the Situation" were triggered by interruption said to be caused by COVID-19.
The Full Court Agreed held that the provisions in the policy were not triggered. That was principally because, when interpreted in the context of the policy as a whole and in accordance with the other principles of insurance contract interpretation in Australia:
- other more specific provisions exclusively provided cover for loss as a result of an outbreak of a notifiable human infectious or contagious disease;
- the provision concerning "conflagration or other catastrophe" was a physical event requiring physical action to be retarded. This did not include a pandemic; and
- to interpret the provisions as providing cover as submitted by LCAM would result in incoherence and incongruity in the terms of the policy, which would not be a reasonable and commercial operation of the contract.
Meridian operated a travel agency in the State of Victoria. It had expertise in arranging cruises, solo travel, tailored independent itineraries, exclusive group tours, and special interest tours for music groups and dance troupes. International travel bookings accounted for approximately 90% of its revenue, of which about 65% was received from international tours and cruises. Domestic travel bookings accounted for the remaining 10%.
There were three events that were raised as having caused Meridian business interruption loss:
- the introduction of a cruise ship ban effective on 15 March 2020 (Cruise Ship Ban);
- the introduction of ban on overseas effective on 25 March 2020 (Overseas Travel Ban); and
- the issuing of a number of directives by the Victorian Government from March 2020 through to February 2021 in all or part of Victoria which, among other things, prohibited persons from leaving the premises where they ordinarily resided other than for specified reasons, restricted the size of gatherings, and restricted specified kinds of businesses from operating (Victorian Government Restrictions)
The key issues in the Meridian appeal were whether:
- the exclusion referring to the Quarantine Act 1908 (Cth) in its business interruption policy applied to exclude cover on the basis that the insured was based in Victoria and section 61A of the Property Law Act 1958 (Vic) applied. If this were the case, then the decision here could be distinguished from the New South Wales Court of Appeal case that considered a similar issue for a New South Wales based insured;6
- the claimed business interruption loss was a direct result of "the outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation"; and
- under general principles of indemnity or the specific 'sum saved' provision in the policy, JobKeeper payments received by Meridian were to be taken into account if Meridian established an entitlement to indemnity.
In summary, the Full Court held that:
- section 61A of the Property Law Act 1958 (Vic) did not apply as contended for by insurers and therefore the Quarantine Act exclusion remained inoperative for this claim;
- subject to further evidence to establish the loss, if any, 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 relevant radius, that loss being the decline in business due to the interference of potential walk in customers on account of the Victorian Government Restrictions;
- however, the Overseas Travel Ban and Cruise Ship Ban were not insured perils and they were separate, uninsured proximate causes of a significant portion of the claimed business interruption loss (having affected 90% of Meridian's business); and
- JobKeeper payments were not be taken into account under the general principle of indemnity having regard to the comprehensive basis of settlement provisions of the policy, and were also not permitted to be taken into account under the 'sum saved' provision in the policy. Specifically, the JobKeeper payments were found not to be made and received "in consequence of" the interruption or interference that resulted from the insured peril (being the outbreak of the disease within the specified radius).
Taphouse operated a craft beer and restaurant located in Townsville, Queensland. From 23 March 2020 the Queensland State Government promulgated several directions which had the effect of closing, preventing or restricting access to Taphouse's premises. Taphouse sought to claim the resulting business interruption loss.
The key issues in the Taphouse appeal were whether:
- whether cover was available under a provision in the policy that provided indemnity 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 50-kilometre radius of your premises"' where the term "damage" is defined as "accidental physical damage, destruction or loss"; and
- whether Taphouse had established that its loss was caused by "any legal authority closing or evacuating all or part of the premises as a result of. the outbreak of an infectious or contagious human disease occurring within a 20-kilometre radius of your premises."
In summary, the Full Court held that:
- in respect to the first provision relied upon by Taphouse:
- the clause was not triggered because there was no "accidental physical damage, destruction or loss" when that term was properly construed;
- Taphouse's construction of this provision would lead to profound incongruence and incoherence having regard to the contract as a whole, including the specific cover for infectious or contagious disease as provided for by the second provision relied upon by Taphouse;
- in respect of the second provision relied upon by Taphouse:
- contrary to the factual finding of Justice Jagot in the first instance decision, there was on the evidence an "outbreak" of an infectious disease prior to 23 March 2020 (being persons infected with COVID-19 within the community within the relevant radius of Taphouse's premises); and
- however, it was not established that the state-wide restrictions were a "result of" that outbreak. Instead, the state-wide restrictions were most likely caused by the risk of harm to all persons within the State. Accordingly, the second provision was not triggered in respect of Taphouse's claim.
Market Foods appeal
Market Foods conducted business as the operator of cafés, a restaurant and a bar from three sites in Brisbane. On 23 March 2020 the Queensland Chief Health Officer issued a direction which had the effect of requiring two of the businesses to close or restrict their operations to the provision of takeaway orders. On 29 March 2020 a further direction was made which had the effect of compelling clientele of Market Foods' businesses to remain at home save for limited, prescribed purposes. Market Foods sought to claim the resulting business interruption loss under its business interruption insurance policy.
The key issues in the Market Foods appeal were whether the claimed loss was:
- "resulting from Business Interruption to property: (a) of a type insured by this Policy, and (b) at the locations described in points 1. To 8. directly below;
- Public Legal Authority
any legal authority preventing or restricting access to an Insured Location or ordering the evacuation of the public due to damage or a threat of damage to property or persons within 50 kilometres of any Insured Location."
- the term "Business Interruption" was defined to mean "interruption of or interference with Your Business in consequence of Insured Damage that occurs during the Policy Period"; and
- the term "Insured Damage" was defined as "physical loss, destruction or damage occurring during the Policy Period.." that was caused by an insured peril; or
- "resulting from interruption of or interference with the Insured Location in direct consequence of the intervention of a public body authorized to restrict or deny access to the Insured Location directly arising from an occurrence or outbreak at the premises of any of the following:
a) Notifiable Disease, or
- b) the discovery of an organism likely to cause Notifiable Disease;
leading to restriction or denial of the use of the Insured Location on the order or advice of the local health authority or other competent authority"
There was no issue in the appeal that COVID-19 was a "Notifiable Disease" as defined in the policy.
In summary, the Full Court held that:
- the first provision relied upon by Market Foods did not respond because, having regard to the preamble of the provision and the context of the policy as a whole, the cover provided was concerned with "physical loss, destruction or damage to property" (or the threat of such physical loss, destruction or damage to property);
- to construe the first provision as submitted for by Market Foods would result in incoherence and incongruity with the cover provided by the second provision;
- moreover, the contra proferentum principle did not operate to produce a construction that favoured the insured; and
- the second provision also did not respond because there was no evidence suggesting that the Queensland Government directions were made because of an occurrence or outbreak of COVID-19 or the discovery of the SARS-CoV-1 virus at Market Foods' premises.
The business operated by EWT was that of a travel agency which principally arranged outbound tours for Australian secondary school students to international destinations. The business was carried on in Surrey Hills, Victoria where members of the public were able to enter to transact business, although it was not operated as a "walk-in" retail travel agency. EWT also operated its business online through a website. Approximately 80% of EWT's business was arranging tours of the United States for Australian secondary schools.
The following events impacted negatively on EWT's business:
- the introduction of the Overseas Travel Ban;
- the Victorian Government's first "Stay at Home" direction, which came into effect at around the same time as the Overseas Travel Ban. The Stay at Home direction imposed lockdowns in Victoria in the period of 30 March 2020 to 31 May 2020;
- the introduction of the Stay Safe direction on 31 May 2020 which replaced the Stay at Home direction, which provided that a person may only leave their residence to attend work where it was not reasonably practicable for them to work from home. It was extended from time to time until 5 August 2020; and
- the Victorian Government Closure Directions issued on 5 August 2020 which had the effect of requiring the owners and controllers of EWT's premises to prevent persons from attending that premises. These directions were not lifted until 9 November 2020.
EWT made two claims on its business interruption insurance policy. The first was a claim for the period from the initial closure of the premises on 31 March 2020 to 5 August 2020. That claim was said to be consequent upon the impact of the making of the Overseas Travel Ban. The second was in the period from 6 August 2020 until 9 November 2020 when the Victorian Government's Victorian Workplace Closure Directions were in place.
The key issue in the EWT appeal was whether the loss claimed fell within the scope of the relevant insuring provision, which extended indemnity to include:
"interruption or interference with your business in consequence of:
c) closure or evacuation of all or part of the premises by order of a competent government, public or statutory authority as a result of a human infectious or contagious diseases [sic].
which shall prevent or hinder the use of your building or access thereto, or results in a cessation or diminution of trade due to temporary falling away of potential customers"
In summary, the Full Court held that the insuring provision was:
- not triggered in respect of the claim for the period between 31 March 2020 and 5 August 2020 because the premises of EWT was not closed "by order" of a relevant authority. In this respect the Full Court agreed with Justice Jagot's interpretation of the words "by order" in this provision as meaning "required by" the relevant order, as opposed to merely caused by in a practical sense (where closure or evacuation was not required); and
- also not triggered in the period from 6 August 2020 until 9 November 2020 when in fact the closure of the premises was mandated "by order" (and "required by") the Victorian Government Closure Directions. That was because, at the time the Victorian Government Directions were issued, the premises was already closed and the Victorian Government Directions therefore did not cause the closure.
STAR ENTERTAINMENT APPEAL
In the Star Entertainment Appeal, the Full Court upheld the first instance judgment of Chief Justice James Allsop, which found that Star Entertainment was not entitled to recoup losses from business interruption caused by COVID-19 restrictions.
The Star Group conducted casinos in Sydney, Brisbane and the Gold Coast and conducted associated hotel, food and beverage, and retail businesses at various sites. The Star Group brought a claim for indemnity under an 'Industrial Special Risks Policy' for its business interruption loss as a consequence of the governmental restrictions in 2020 in response to COVID-19 on travel into and within Australia and congregation of people in Australia, including the closure of the various premises of the Star Group by government order.
The policy in issue provided indemnity for "loss resulting from. interruption or interference" that was in consequence of "Damage". The term "Damage" was principally defined as "any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically loss, destroyed or damaged by any cause or event" not excluded.
While the term "Damage" was concerned principally with 'physical' loss, destruction or damage, Memorandum 7 to the policy extended the definition to include "loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or catastrophe".
The key issue was whether the business interruption loss claimed by the Star Group resulted or was caused by the peril insured against in Memorandum 7 on its proper interpretation.
The insurer argued that Memorandum 7 did not provide such indemnity. In support of its position, it relied on Memorandum 9, which also extended cover by amending the definition of "Damage" to include limited perils relating to Notifiable Diseases. Cover under Memorandum 9 was significantly sub-limited and there was an express carve-out for Quarantinable disease listed in the Biosecurity Act 2015, which included COVID-19.
Upholding Allsop CJ's decision at first instance, the Full Court held that, consistent with the applicable principles of insurance contact interpretation in Australia:
- Memorandum 9 expressed the full extent of the liability of the insurers under the policy in respect of the subject matter it addressed, being business interruption loss by reason of the occurrence of human infectious or contagious disease;
- to the extent that Memorandum 7 might be said to encompass action taken by a lawfully constituted authority to confine the spread of a disease such as COVID-19 on the basis that it is a 'conflagration or other catastrophe', the scope of Memorandum 7 should be read down so as to avoid inconsistency with the language of Memorandum 9; and
- further, and in any event, in the context of this policy, the use of the word 'catastrophe' in Memorandum 7 referred to a physical phenomenon the course of which may be affected by physical action in the same way that a conflagration may be so affected. It did not encompass actions by an authority to prevent or restrict the spread of a human disease such as COVID-19.
1 LCA Marrickville Pty Limited v Swiss Re International SE  FCAFC 17.
2 Star Entertainment Group Limited v Chubb Insurance Australia Ltd  FCAFC 16.
3 Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases)  FCA 1206; Star Entertainment Group Limited v Chubb Insurance Australia Ltd  FCA 907.
4 Financial Conduct Authority v Arch Insurance (UK) Ltd  AC 649.
5 HDI Global Speciality SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634.
6 HDI Global Speciality SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.