COVID-19 and business interruption insurance policies

17 October 2022

The Full Court of the Federal Court of Australia delivered two judgments in cases heard simultaneously relating to the coverage of policyholders for business interruption related to COVID‑19. The Full Court held that in each circumstance, the insurers were not under obligation to indemnify the insureds.

In Issue

  • Both cases considered whether insurers were obliged to indemnify their insureds for loss as a consequence of business interruption or interference caused by government orders and advisories directed at restricting the spread of COVID-19.

The background

These proceedings involve two cases heard on appeal by the Full Court of the Federal Court of Australia. The cases were heard independently at trial, before being heard concurrently on appeal. The Chubb Insurance proceedings involved a claim made by The Star Entertainment Group. The Swiss Re Proceedings constituted a test case in which ten insurers sought a determination as to the proper construction of insurance clauses relating to claims for business interruption within the context of the COVID-19 pandemic.

Following several Public Health Orders which imposed restrictions on movement of persons, the insureds made claims for business interruption. Each of the insurer applicants declined to indemnify their respective insured for such claims.

While the wording of each policy varied, each contained relevant clauses which may be described as: a) “Prevention of Access Clauses”, involving an action of an authority which restricts access to the insured’s premises to avoid damage or harm; b) “Infectious Disease Clauses”, involving the outbreak of an infectious disease directly causing loss; c) “Hybrid Clauses”, involving forced closure or evacuation by an authority as a result of an infectious disease; or d) “Catastrophe Clauses”, involving the action of an authority in a response to a catastrophe which causes loss.

Importantly, these clauses included an element of proximity which required a certain event to either be on the premises of the insured, or within a certain radius of those premises. The claims of each insured party were based on either Prevention of Access, Infection Disease or Hybrid Clauses, with the exception of Star Entertainment and LCA Marrickville who also made a claim under a catastrophe clause.

The decision at trial

The Chubb Insurance Proceedings

Chief Justice Allsop concluded that, due to the specific wording of the insurance policy, a “catastrophe” must be physical in nature and therefore apt to cause physical damage. As such, a pandemic which causes interruption of business cannot be considered a catastrophe within the meaning of the contract.

The court found that COVID-19 is not an insured peril under the policy, and therefore, under the catastrophe clause, indemnity was not available in relation to losses arising from the COVID-19 pandemic

The Swiss Re Proceedings

At trial there were ten insureds responding to ten applications by insurers. Justice Jagot found that, for all insureds except one, the insuring clauses were not enlivened in the relevant circumstances. While these decisions turned to varying extents on the provisions of the policies held by each insured, there were several common factors which informed the decision of Her Honour in each case.

Her Honour distinguished the UK case of FCA v Arch [2021] UKSC 1. In those proceedings, the UK Supreme Court considered that all individual cases of COVID-19 prior to the relevant government measures being taken were equal causes of the loss suffered by the businesses, and therefore an insured merely needed to establish the existence of one sufficiently proximate COVID case to establish causation. This case was distinguished on the basis that Australia, unlike the UK, has a COVID response managed separately by each State (as opposed to nationally), and is a sparsely populated country with a much less widespread outbreak of COVID-19.

Justice Jagot reasoned that a business interruption, for which a claim is made under a Prevention of Access or Hybrid Clause of an insurance policy, can only be covered in circumstances where the orders made by the public authority were due to an outbreak of an infectious disease within the prescribed radius of the insured premises. It would not be enough to say that that infectious disease was present within that radius, or that the public authority’s actions affected the business. It would need to be established that the presence of the disease within the relevant radius was an actual cause of the government’s decision to impose certain restrictions. The Court reasoned similarly regarding Infectious Diseases Clauses, in that the outbreak itself must be present within the required radius.

This reasoning by the Court necessitated a conclusion that the insureds’ reliance only on Prevention of Access, Infectious Disease or Hybrid Clauses would not be indemnified.

Similar to Star Entertainment Group, LCA Marrickville’s claim was also made under a Catastrophe Clause. The court reasoned this claim must also fail for the same reasons as in the Chubb Insurance proceedings. Additionally, Her Honour considered that the Catastrophe Clause could not be used to cover the insured’s claim as a separate clause already dealt with infectious diseases, and it would be important to avoid incoherence within the contract by overlapping the two clauses.

Finally, Her Honour considered that, if damages were to be awarded in such a case, they would need to be adjusted to account for payments received by the insured from the government in relation to the COVID-19 pandemic.

The decision on appeal

The Full Court upheld the decision and reasoning of the Federal Court and dismissed the appeal in the Chubb Insurance proceedings. The court held that insurers were not under obligation to indemnify the appellant.

The Full Court partly allowed the appeal in the Swiss Re proceedings. The court upheld the Federal Court’s decision that the insuring clauses did not apply in the circumstances of each insured (except for one). However, the Full Court overturned the trial judge’s decision that any damages which may have been awarded would be adjusted by JobKeeper and other COVID payouts. The Full Court reasoned that no such adjustment would be appropriate.

Implications for you

These cases offer guidance on the way in which the COVID-19 pandemic (and future outbreaks of infectious diseases, pandemic or otherwise) may be treated by Australian courts regarding insurance policies. The Full Court has adopted the approach of Justice Jagot and distinguished the precedent set in the UK by confirming that not all occurrences of COVID-19 can be considered equally causative of a government’s decision to impose restrictions in response to an outbreak or the pandemic at large.

As such, the wording of any proximity clauses or restrictions in insurance policies will be crucial in establishing whether an insurer may be liable to indemnify their insured for loss of business as a result of a pandemic.

Updated 17 October 2022: On 14 October 2022, the High Court dismissed an application for special leave to appeal in this matter.

Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16

LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17

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