Thinking | 22 February 2022

Second COVID BI test case: Full Court win for BI insurers

By Matt McDonald and Chris Forder

The Full Court of the Federal Court has unanimously upheld the primary judgment in favour of the participating insurers in the second COVID-19 business interruption test case.

Of the 11 individual business interruption claims considered by Justice Jagot at first instance, only five were the subject of appeals and cross-appeals to the Full Court. Each of these had its own policy wording and unique circumstances. Only one of the insuring clauses considered was found by the Full Court to be potentially engaged, and even that claim is unlikely to result in an indemnity payment.

The first COVID 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the Quarantine Act 1908 was effective in excluding COVID-19 business interruption claims, notwithstanding that it has been replaced by the Biosecurity Act 2015.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 the Full Court 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, the Full Court upheld the first instance finding 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 each insured premises.

In Taphouse, the 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. The Full Court upheld the finding that an action directed at protecting human health across the entire State (such as by closing certain business 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. The Full Court upheld the same reasoning in relation to every other claim considered with a similar infectious diseases extension.

This crucial finding, that the relevant public health orders were not made as a result of an outbreak of COVID-19 within the specified radius of the insured premises, can be contrasted with the approach taken in the United Kingdom COVID 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, the Full Court agreed with Justice Jagot’s analysis 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’.

The Full Court upheld the primary judgment that this extension does not apply to diseases. The Full Court agreed that the harm caused by disease doesn’t fall naturally within the concept of ‘damage’, as used in this context or as defined in the policy. It was also held 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. It was 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.

The Full Court fully embraced the importance of reading a contract of insurance as a whole when construing individual clauses with a view to giving the various insuring clauses a consistent and congruent operation.

Several other questions of policy construction were resolved against the insurers (without changing the outcome). The Full Court upheld the finding 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.

The Full Court agreed with the primary judge that 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 cover because it is only necessary to establish business interruption losses by reason of a local COVID-19 outbreak, and not necessary to establish that the public health orders were made because of a local 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. The Full Court held that the international travel ban was not motivated by the outbreak of COVID within Victoria but rather by the risks posed by infected travellers entering the country or Australian nationals travelling to foreign hotspots and then returning home. It follows that losses caused by the travel ban were not the result of the insured peril.

Meridian was given leave by the primary judge to produce further evidence on that question, but had not done so when the appeal was considered by the Full Court. It will be an uphill battle for Meridian to establish any of its losses were proximately caused by a local outbreak (as opposed to losses caused by the international travel ban).

While none of the policies were found to respond (at least on the available evidence), the Full Court went on to consider how any such insured business interruption losses would be quantified under each policy.

The Full Court overturned some subsidiary elements of Justice Jagot’s decision on the quantification machinery in each policy. In the context of the Meridian claim it was held that JobKeeper payments are not to be taken into account as savings upon the correct application of the basis of settlement clause.

The Full Court also came to a different position in relation to interest under section 57 of the Insurance Contracts Act 1984, which was resolved against the insurers. In practice, this finding means that any denied COVID BI claims which turn out to be covered based on the two test cases, will most likely also attract section 57 from the date of the denial.

Justice Jagot’s highly impressive, brave and persuasively reasoned primary judgment has passed its first test in the Full Court with flying colours. All the key findings have been upheld in the insurers’ favour, with only a couple of subsidiary issues being overturned in favour of the insureds. This judgment will now almost certainly be the subject of an application for Special Leave to the High Court.

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Matt McDonald

Matt is an experienced insurance lawyer acting for leading insurers, specialising in public and product liability.

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