By Louise Cantrill, Partner and Mason Thomas, Lawyer

On 25 June 2021, the High Court of Australia rejected an application for special leave to appeal made by insurers which challenged the NSW Court of Appeal’s judgment in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296. The Court of Appeal decision precluded insurers from relying upon a common business interruption (BI) insurance policy exclusion referring to the repealed Quarantine Act 1908 to deny claims made for losses caused by business interruptions due to government restrictions in response to COVID-19.

While the decision reinforced the Court of Appeal’s judgment in favour of policyholders, the issue of cover for business interruption claims is far from resolved, and a Second Test Case has recently been commenced by the Insurance Council of Australia in the Federal Court of Australia. This Second Test Case seeks to further clarify whether BI policies are triggered and/or whether cover is excluded for COVID related claims.

In this article, we summarise the Australian position on BI claims and examine whether the UK test case can provide some indication as to how the Australian courts will decide this Second Test Case.

The First Test Case

We examined this test case in a previous article which can be found here.

In summary, the NSW Court of Appeal held insurers could not deny claims for losses caused by business interruptions due to COVID-19 by simply relying on an exclusion which excludes “diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.”

The First Test Case is, however, limited in its effect. It assists small-to-medium enterprises with insurance policies featuring the specific exclusion wording as above. For the vast majority of BI claims, however, further clarification is needed before concluding whether coverage is, or is not, available.

The Second Test Case

The Insurance Council of Australia commenced proceedings in the Federal Court of Australia in February this year, which seeks to clarify the meaning of a greater variety of policy wordings including disease definition, proximity of an outbreak to a business, and the impact of government mandates preventing access to business premises, among others.

The anticipated decision of the Second Test Case promises a more definitive guide as to which circumstances would trigger cover under a BI policy.

However, the issue is complicated by the way in which the pandemic has indirectly impacted businesses. Losses sustained by businesses have typically been caused by secondary actions taken by the government. Businesses have been allowed to operate during the pandemic, though under restrictive conditions such as takeaway only conditions for restaurants during lockdown or enforced physical distancing in enclosed spaces.

Further, businesses have also received compensation through Job Keeper which further complicates the degree to which businesses have been impacted due to the pandemic.

The Second Test Case will likely be heard from late August 2021. We expect the Australian judiciary will closely reflect recent English common law on this issue.

English foreshadowing

We consider the UK Supreme Court’s decision in The Financial Conduct Authority v. Arch Insurance (UK) Limited and Others [2021] UKSC 1 provides a useful indication as to how the Australian courts will consider the Second Test Case.

We examined this test case in a previous article which can be found here.

On 15 January 2021, the UK Supreme Court dismissed an appeal from the UK High Court in respect of a test case run by the FCA which sought to clarify whether coverage was triggered for COVID-19 related losses under various standard insurance policy wordings.

The decision can be accessed here.

At first instance, the UK High Court held policyholders were generally entitled to compensation for business disruptions due to the COVID-19 pandemic, despite the various exclusion clauses. In issue on appeal was the proper interpretation of four types of clauses commonly found in many of the relevant policy wordings.

• disease clauses: providing cover for BI losses from the occurrence of a notifiable disease within a specified distance of the business premises;

The UK Supreme Court agreed disease clauses would be triggered in circumstances where at least one case of COVID-19 occurred within the specified geographical area covered by the clause, even if this was not the only cause (or even the main cause) of the shutdown. As such, the UK Supreme Court declined to be constrained by the “but for” test of causation typically used in the law of negligence.

• prevention of access clauses: providing cover for BI losses due to public authority intervention which prevented (or hindered) access to (or use of) the business premises;

The UK Supreme Court agreed an “inability” to use the premises must be shown, rather than mere impairment or hindrance. This may extend to interreference or disruption which did not necessarily cause the business to close but nevertheless caused a material effect on the financial performance of the insured’s business. Adopting this interpretation, this means restaurants who have had to close their dining areas and non-essential stores forced to close during lockdowns may be covered under their policies.

• hybrid clauses: some combination of the main elements of the above two; and
• trends clauses: quantifying BI loss by reference to how the business would have performed if not for the occurrence of the pandemic.

The UK Supreme Court disagreed with the UK High Court’s interpretation of trends clauses, the mechanism to quantify the insured’s financial loss. At first instance, the UK High Court found the clauses should quantify the BI losses by reference to the expected performance of the business if the insured peril did not occur. The UK Supreme Court disagreed, deciding insurers were generally not liable to indemnify for losses which would have arisen regardless of the insured peril. In practice, this may reduce the recoverable loss under the BI policy.

Closing remarks

In our view, these issues are comparable with those which the Second Test Case also seeks clarification. Applying this reasoning, it appears likely the Australian courts will arrive at similar conclusions.

Nevertheless, given the potential size of the losses, it is appropriate for the insurance industry to seek clarity as to the precise scope of circumstances which might be either covered or excluded from a BI policy. We look forward to the next instalment of this process.