COVID-19 BI test case: Round 2 goes to the insurers
Federal Court Justice Jane Jagot delivered a judgment in the second COVID-19 business interruption test case which was overwhelmingly in favour of the participating insurers. In a judgment running to 373 pages, Justice Jagot considered 11 individual business interruption claims, each with its own policy wording and unique circumstances. Only one of the insuring clauses considered was found to be potentially engaged, and even that claim is unlikely to result in an indemnity payment.
This second test case followed the first COVID-19 BI test case, which focused exclusively on whether an exclusion of any disease declared under the Quarantine Act 1908 was effective in excluding COVID-19 business interruption claims, notwithstanding that it has been replaced by the Biosecurity Act 2015. The New South Wales Court of Appeal found that such exclusions, which rely on the redundant Act, are not engaged by COVID-19 claims. The insurers’ Special Leave Application was subsequently refused by the High Court.
The most crucial issue for determination by Justice Jagot in this second test case was whether, in the various claims considered, the infectious diseases extension was engaged by the relevant circumstances. One of the claims considered was made by the Taphouse Townsville on a CGU Business Insurance Policy. The Taphouse was forced to cease trading as a brewery/restaurant following a Non-Essential Business Closure Direction made by Queensland public authorities on 23 March 2020. That order (and subsequent orders) only permitted the insured to operate as a takeaway business.
The policy has an insuring clause extension which covers business interruption losses caused by any legal authority closing or evacuating all or part of the insured premises as a result of the outbreak of an infectious or contagious human disease occurring within a 20km radius of the insured premises.
Crucially, Justice Jagot determined that the relevant public health orders in each State considered were not made as a result of an outbreak of COVID-19 within the specified radius of the insured premises. Putting it another way, it could not be said that any outbreak of COVID-19 within the specified radius was a proximate, or, indeed, any other kind of cause of the orders.
In Taphouse, Justice Jagot’s focus was on the reason that the Queensland Authorities made the public health orders, which was to protect every person in Queensland from the risks posed by COVID-19. Her Honour found that an action directed at protecting human health across the entire State (such as by closing certain premises across the State), would not ordinarily be taken as a result of an outbreak of contagious disease within a 20km radius of the premises. Justice Jagot applied the same reasoning in relation to every other claim considered with a similar infectious diseases extension.
This crucial finding, that local COVID-19 outbreaks were not a proximate cause of the relevant public health orders, can be contrasted with the approach taken in a United Kingdom test case. There it was held that local outbreaks (along with outbreaks in virtually every part of the UK) were an equally effective and therefore proximate cause of the relevant orders. In distinguishing that judgment, Justice Jagot pointed to the fact that Australia is a much bigger and more sparsely populated country than the UK and that, when these orders were being made in Australia, we had far fewer COVID-19 infections.
The Taphouse, like a number of the test case insureds, also had the benefit of a prevention of access extension which covers business interruption losses caused by any legal authority preventing or restricting access to the insured premises ‘as a result of damage to or threat of damage to property or persons within a 50km radius of the insured premises’.
It was held that this extension does not apply to diseases. Justice Jagot noted that the harm caused by disease doesn’t fall naturally within the concept of ‘damage’, as used in this context. Her Honour also noted that the operation of the policy would otherwise involve profound incongruence and incoherence. For example, the 20km radius imposed on outbreaks in the infectious diseases extension would be extended to 50km in the prevention of access extension. Her Honour also noted, by way of demonstrating the potential incongruity, that Avian Influenza is clearly excluded in the infectious disease extension, but would trigger a claim under the prevention of access extension if it was construed as applying to diseases.
Several other questions of policy construction were resolved against the insurers (without changing the outcome). Justice Jagot held that it is only necessary for there to be one confirmed case of COVID‑19 in the community to establish an ‘outbreak’ in the context of an infectious diseases extension.
It was also held that ‘closure of a premises in whole or part’ requires only that part of the premises is closed off to people who would ordinarily be entitled to enter and remain on that part of the premises. In the case of the Taphouse, the fact that members of the public were not able to enter and remain at the premises to eat and drink as they normally would was sufficient to establish ‘closure’. It did not matter that the insured was entitled to continue operating from the insured premises as a takeaway business. A similarly expansive approach was taken to the construction of the ‘prevention or restriction of access’ extension.
The only claim which potentially engaged cover was Meridian Travel’s claim under a CGU/Steadfast Office Pack wording which covered business interruption losses caused by the outbreak of a human infectious or contagious disease occurring within the 20km radius of the Situation. The important distinction with the typical disease extension is that this one makes no reference to the making of an order by a public authority. It therefore provides significantly broader potential cover because it is only necessary to establish business interruption losses by reason of a local COVID-19 outbreak.
Meridian Travel operated a travel agency from premises in Heidelberg, Victoria. As a result of the international travel ban on 25 March 2020, Meridian’s customers were unable to leave Australia without an exemption. That immediately closed off 90% of Meridian’s revenue. It was accepted that by 30 March 2020 there was an outbreak of COVID-19 within a 20km radius of the insured premises, but no evidence of a prior outbreak.
While the infectious diseases extension was potentially engaged, there was no evidence before the Court that the insured peril (an outbreak within 20km) was a proximate (or any) cause of Meridian’s business interruption losses. Meridian was given leave to produce further evidence on that question, but it will be an uphill battle to establish any of its losses were proximately caused by a local outbreak (as opposed to losses caused by orders made on account of the risks posed by infected travellers entering the country or Australian nationals travelling to foreign hotspots and then returning home).
While none of the policies were found to respond (at least on the available evidence), Justice Jagot went on to consider how any such insured business interruption losses would be quantified under each policy. In doing so, her Honour was mindful of the potential for her judgment on liability to be overturned on appeal.
It was held that by reference to the indemnity principle and (in most cases) the policy wording, payments received from third parties which diminished the insured loss must be taken into account when adjusting the claim. That meant that JobKeeper, Cash Flow Boost and rent relief received by each insured would be accounted for in the loss adjustment. State Government grants paid to insureds were (for the most part) not intended to diminish the loss, and therefore are not to be accounted for.
Justice Jagot also held that there ought to be no adjustment on account of the broader downturn in market conditions caused by COVID-19, given that it has the same underlying cause as the insured peril.
This highly impressive, brave and persuasively reasoned judgment will shortly be tested by the Full Court of the Federal Court, with the appeal hearing set down for November 2021. It is very likely that, whatever the outcome, the appeal will be followed by a Special Leave Application to the High Court.
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