Insurance policies

COVID-19 insurance and business interruption

The Full Court of the Federal Court of Australia has delivered two judgments in concurrently heard cases relating to policyholder cover for COVID‑19-related business interruption. The Full Court found that in every circumstance, insurers were not required to indemnify policyholders.

In question

  • Both cases considered whether insurers were required to compensate their policyholders for losses resulting from business interruption or interference caused by government orders and advisories aimed at limiting the spread of COVID-19.

The background

These proceedings concern two cases heard on appeal by the Full Court of the Federal Court of Australia. The cases were heard independently at first instance, before being heard simultaneously on appeal. the Chubb Insurance The proceedings involved a complaint filed by The Star Entertainment Group. the Swiss Re The proceeding was a test case in which ten insurers were seeking to determine the proper interpretation of insurance clauses relating to business interruption claims in the context of the COVID-19 pandemic.

Following several public health orders imposing restrictions on the movement of people, policyholders filed claims for business interruption. Each of the insurance plaintiffs refused to indemnify their respective insured for such claims.

Although the wording of each policy varied, each contained relevant clauses which may be described as follows: (a) “no entry clauses”, involving action by an authority which restricts access to the premises of the insured to avoid damage or harm; b) “Infectious disease clauses”, implying the occurrence of an infectious disease directly causing losses; c) “Hybrid clauses”, involving forced closure or evacuation by an authority due to an infectious disease; or d) “Catastrophe Clauses”, involving action by an authority in response to a disaster which causes loss.

Importantly, these clauses included a proximity element which required a certain event to take place either at the insured’s premises or within a certain radius of those premises. Each insured party’s claims were based on either access prevention or infectious 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 Procedure

Chief Justice Allsop found that due to the specific wording of the insurance policy, a “catastrophe” must be physical in nature and therefore likely to cause physical harm. As such, a pandemic leading to an interruption of activity cannot be considered as a disaster 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 respect of losses arising from the COVID-19 pandemic

The Swiss Re procedure

At trial, ten policyholders responded to ten requests from insurers. Justice Jagot concluded that, for all but one of the insureds, the insurance clauses were not endorsed in the relevant circumstances. While these decisions to varying degrees dealt with the provisions of the policies held by each insured, there were several common factors that informed His Honor’s decision in each case.

His Honor singled out the British case for CAF vs. Arch [2021] UKSC 1. In these proceedings, the UK Supreme Court held that all individual cases of COVID-19 before the relevant government action was taken were equal causes of the loss suffered by the businesses, and therefore that an insured simply had to establish the existence of a case of COVID close enough to establish causation. This case was singled out on the basis that Australia, unlike the UK, has a separately managed COVID response by each state (as opposed to nationwide), and is a sparsely populated country with an outbreak of COVID- 19 much less common.

Jagot J held that a business interruption, for which a claim is made under a no access clause or a hybrid clause of an insurance policy, can only be covered in circumstances where orders issued by public authority were due to an outbreak of an infectious disease. within the prescribed radius of the insured premises. It would not suffice to say that this infectious disease was present in this radius, or that the actions of the public authority affected the company. It would have to be established that the presence of the disease within the relevant radius was a real because of the government’s decision to impose certain restrictions. The Court reasoned similarly with respect to the infectious disease clauses, in that the epidemic itself must be present within the required radius.

This reasoning by the Court necessitated the conclusion that policyholders’ reliance solely on access prevention, infectious disease or hybrid clauses would not be compensated.

Similar to Star Entertainment Group, LCA Marrickville’s claim was also made under a catastrophe clause. The court held that this claim must also fail for the same reasons as in the case Chubb Insurance procedure. Furthermore, His Honor considered that the Catastrophe Clause could not be used to cover the insured’s claim as a separate clause already dealing with infectious diseases, and it would be important to avoid any inconsistency within the contract by overlapping both clauses.

Finally, His Honor considered that if damages were to be awarded in such a case, they should be adjusted to take into account the payments received by government policyholders in connection with the COVID-19 pandemic.

The decision on appeal

The Full Court upheld the Federal Court’s decision and reasoning and dismissed the appeal Chubb Insurance procedure. The court held that the insurers were not obliged to indemnify the appellant.

The Full Court partially allowed the appeal in the Swiss Re procedure. The court upheld the decision of the Federal Court that the insurance clauses did not apply to the situation of each insured (except one). However, the Full Court reversed the trial judge’s ruling that any damages that might have been awarded would be adjusted by JobKeeper and other COVID payments. The Full Court considered that such an adjustment would not be appropriate.

Consequences for you

These cases offer insights into how the COVID-19 pandemic (and future infectious disease, pandemic or other outbreaks) may be handled by Australian courts with respect to insurance policies. The Full Court adopted Justice Jagot’s approach and distinguished the precedent set in the UK by confirming that not all occurrences of COVID-19 can be considered equally responsible for a government’s decision to impose restrictions. in response to an outbreak or the pandemic as a whole. .

Thus, the wording of any proximity clauses or restrictions in insurance policies will be crucial in determining whether an insurer may be required to compensate its insured in the event of a loss of business following a pandemic.

The article was written by medical examiner Katrina Matias.

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

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