The BI Test Cases: Judgment in the Final Test Case. Questions Answered? Case Closed?

Over the last two years, as Australia has grappled with the national health crisis brought about the COVID-19 pandemic, all aspects of society have been impacted by the virus, not least of all the insurance industry.

For the last fifteen months, senior courts in Australia have looked at the application of business interruption policies in the context of economic losses said to flow from the COVID-19 outbreak and a series of government orders, severely curtailing the right of movement throughout the country and leading to the closure of places of business due to such government orders. Businesses across the country suffered significant financial loss due to such matters.

In facing a large number of claims for insureds for losses flowing from business interruption (BI) said to arise due to the emergence of COVID-19 in the community or the threat of COVID-19 being brought in to the country, insurers sought guidance from the courts on two threshold BI policy response issues.

In these matters, two questions essentially were addressed by the courts in a series of important test cases brought by selected insureds against certain insurers, with the actions funded by the Insurance Council of Australia. It was hoped that the answers provided by the Courts would shape insurers response to a huge number of BI claims lodged in the country due to the pandemic. These claims were put on hold pending the outcome and answers to the two threshold questions.

In the Supreme Court of New South Wales, insurers sought an answer from the court on whether exclusion clauses which referred to outdated or repealed legislation rendered the exclusion clause inoperative (the First Test Case).

Thereafter, insurers in a separate action (the Second Test Case) insurers sought guidance from the Federal Court on the application or otherwise of the insuring clause in the context of such BI claims.

It now appears as though these questions have been answered. The first in favour of insureds; the second in favour of insurers.

In the First Test Case, heard on 2 October 2020 and with judgment given on 18 November 2020, five senior judges of the NSW Supreme Court found that any exclusion that referred to repealed legislation was inoperative. In a windfall for insureds, these exclusion clauses were essentially extirpated from the policy wordings.

This issue now appears to be irrevocably settled, as on 25 June 2021, the High Court refused an application for special leave brought by the insurers in the First Test Case.

The Second Test Case, heard at first instance in the Federal Court on 6 to 15 September 2021, looked at the application of BI insuring clauses in the context of government shut down orders and restrictions on travel. In a judgment handed down on 8 October 2022, her Honour Justice Jagot found essentially in favour of insurers, concluding that the insuring clauses did not apply in the context of all save one of the circumstances with which she was dealing.

Not surprisingly, and as anticipated, insureds appealed to the Full Court of the Federal Court on the issue at hand.

The Full Court handed down its judgment earlier this week. While technical in parts, overall, the Full Court substantially agreed with the conclusions reached by Justice Jagot finding that the clauses were not enlivened.

So, is this the end of the matter? Certainly, in relation to the question posed in the First Test Case, concerning certain exclusion clauses. In relation to the Second Test Case, hopefully; although news to hand indicates that insurers are currently considering lodging an application for special leave to the High Court in the case. It seems as though the country’s journey through the application of BI policies to COVID-19 might still have a way to run, even as we now start to emerge from the pandemic.

What follows is a more detailed consideration of each of the three cases, the NSW Supreme Court case, the Federal Court case at first instance and the Full Court of the Federal Court decision.

The First Test Case – Overall View

HDI Global v. Wonkana Pty Ltd (t/as Austin Tourist Park) [2020] NSWCA 296 (the First Test Case)

A decision of the NSW Court of Appeal - Bathurst CJ, Bell P, Meagher JA, Hammerschlag and Ball JJ handed down on 18 November 2020.

As stated above, the First test Case examined the operation of certain exclusion clauses in BI policies.

The insurers’ policies in the first test case:

• covered BI arising from outbreaks of communicable diseases occurring within 20 km of the insured premises, but

• excluded BI arising from “diseases declared to be quarantinable disease under the Quarantine Act 1908 (Cth) and subsequent amendments”. 

The critical dilemma for insurers, however, was, the Quarantine Act no longer existed.  It was replaced on 16 June 2016 by the Biosecurity Act 2015, which did not even refer to a “quarantinable disease” – rather, it was based upon a “listed human disease”. 

Insurers argued before the NSW Supreme Court that the policies should be read to mean or include a “listed human disease” for two reasons.

First, they argued that the Biosecurity Act operated as an amendment to the Quarantine Act. In judgment given on 18 November 2020, the Court disagreed, saying that the words “subsequent amendments” in the exclusions were not ambiguous. They did not anticipate the replacement of – rather than amendments to – the Biosecurity Act.

Secondly, insurers argued that references to the Quarantine Act were absurd or obvious mistakes and it was clear that insurers meant to refer to the Biosecurity Act.  Again, they were unsuccessful, although the Appeal Judges came to that view for different reasons:

1. Bathurst CJ and Bell P held that ordinary principles of construction were not sufficiently flexible to allow the court to read the exclusions in a way that was contrary to their natural meaning

2. Meagher JA and Ball J said that the parties clearly had not realised that the Quarantine Act has been replaced by the Biosecurity Act but, the court therefore could not have regard to that fact in construing the exclusions. Therefore, there was no identifiable mistake or absurdity and the court could not correct the parties’ misunderstanding by fixing the language in the exclusions, and

3. Hammerschlag J held that although the repeal of the Quarantine Act meant that there would be no further declarations of “quarantinable diseases”, that did not make the language used in the exclusions absurd.

Insurers sought special leave to appeal, which the High Court refused on 25 June 2021. The question is now well and truly resolved – in favour of insureds.

Therefore, insurers need to seek regular advice about legislative reforms that may impact on legislation referred to in their policies, but that otherwise rarely arises in the insurance context.  The Insurance Council of Australia estimated that up to $10M in claims might be payable despite insurers’ intentions as a consequence of the first test case.

The Second Test Case – Overall View

Swiss Re International Se v LCA Marrickville Pty Ltd (2021) 394 ALR 461 (the Second Test Case – at first instance)

The Second Test Case looked at the application or otherwise of BI insuring clauses in the context of the COVID-19 pandemic and relevant government orders. It was heard over 6 to 15 September 2021 before Justice Jagot, with judgment given on 8 October 2021

The second test case involved nine different policies and four different bases for BI cover as well as a reconsideration of the first test case issue for Victorian risks only.

The different insuring clauses were:

1. Infectious diseases clauses, triggered by either infectious diseases or the outbreak of an infectious disease at or within a specified radius of the premises.

2. Prevention of access clauses, triggered by orders by or the actions of a competent authority preventing or restricting access to insured premises because of damage or a threat of damage to property or persons.

3. Hybrid clauses, triggered by orders by or the actions of a competent authority closing or restricting access to premises, but only when made or taken because of infectious disease or the outbreak of infectious disease within a specified radius of the premises.

4. Catastrophe clauses, triggered by the action of a civil authority during a “conflagration or catastrophe” for the purpose of retarding it.

The main issues were as follows:

1. For the infectious diseases and (the relevant part of) the hybrid clauses, Her Honour found that:

   1. establishing an “outbreak” depended upon the nature of the disease in question. For COVID-19, an “outbreak” included an active (that is, contagious) case within the community outside a controlled setting, such as a hospital or isolation or quarantine). Because COVID-19 is highly contagious, it was not necessary to prove transmission to another person within the area.  Notably, “outbreak” was narrower than “occurrence”, which would have included a single case in a controlled setting, and

   2. the result in a UK test case (The Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] AC 649; [2021] UKSC 1, which largely resulted in success for the policyholders) should not be followed in Australia. The UK has a central government which took action at the national level, it is geographically small and densely populated and it suffered from a wide-spread outbreak. 

      Therefore, in Australia, each and every known case in a State could not be characterised as an effective cause of the State government’s actions.

2. For the prevention of access and (the relevant part of) the hybrid clauses, Her Honour found that:

   1. if some or all of a premise that catered to the public was usually accessible by the public but now could not be accessed by some members of the public, there was a “closure” in whole or in part. “Closure” did not require a physical impediment to access, and it was immaterial that not all persons may be excluded, and

   2. a “competent authority” was an authority authorised to act with an essentially public character by and under a statute, regulation or instrument. The action must have some essentially public character. It did not include persons or bodies operating under a private arrangement such as a contract or body corporate by-laws.

3. For the hybrid clauses, Her Honour found that the policies would not respond unless causation occurred in a particular order. That is, first there was a relevant outbreak of disease which caused secondly a relevant authority to make an order that caused thirdly an interruption to or interference with the insured’s business which directly caused financial loss.  If the closure occurred, or the order was made, before an outbreak in the specified radius, cover was not triggered.

4. Her Honour found the catastrophe clauses were inapplicable to loss arising from an infectious disease.  Given another specific clause in the same policies covering BI arising from infectious disease, it would be incoherent to read the catastrophe clause as providing another form of the same cover.  Further, as a matter of construction, “catastrophe” should be read down by reference to the words “conflagration” and “retarding”, as something involving a physical event akin to a fire.

5. General causation issues:

   1. the only test case in which the policyholder proved that the insuring clause was triggered involved an infectious diseases clause and a concession by the insurer that there was an outbreak within 20 kilometres of the insured’s Melbourne premises.  However, Her Honour noted that the insured, which was a travel agent, would have great difficulty proving that its BI loss was caused by the outbreak. 90% of its business involved international travel, so the most likely cause was the Federal Government’s closure of Australian borders, which was not an insured peril

   2. in the other test cases, Her Honour noted that even if she was wrong, and the insuring clauses were triggered, the loss should be reduced by reference to JobKeeper payments as well as rental reductions, which mitigated the loss. However, government “mercy” lump sum payments would not be considered in the same way, and

   3. Her Honour agreed that insurers did not have to make adjustments for matters that did not involve damage as defined by their policies, such as changes in consumer attitudes that might themselves have been a consequence of the pandemic.

6. Insurers did not have to pay interest since a nominal date on which they should have paid any relevant claims. It was not unreasonable for them to await the outcome of the test cases, which were managed expeditiously.

7. Finally, the insurers who ran a similar argument to those in the first test case failed. They relied upon the Victorian Property Law Act which provided that references in contracts to Acts that were repealed and re-enacted should be construed to refer to the re-enactment.  Her Honour was not persuaded that the Biosecurity Act was a re-enactment of the Quarantine Act because the latter was a Federal Act that involved a very different procedural mechanism to the former.

While the first instance judgment clearly settled the question asked on the application of the BI insuring clause, the parties agreed that the case would be appealed, irrespective of its outcome.

An appeal to the Full Court of the Federal Court was held over 8 to 12 November 2021. While judgment was anticipated before the end of 2021, the Full Court only this week gave judgment – substantially agreeing with the first instance decision.

LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17 (the Second Test Case - on appeal)

Decision of the Full Court of the Federal Court – Moshinsky J, Derrington J, Colvin J; judgment given 21 February 2022.

The appeals for the second test case were brought by five insureds – LCA Marrickville, Meridian Travel, the Taphouse Townsville, Market Foods, and the liquidator of Educational World Travel.

For all five proceedings, the Full Court substantially agreed with the conclusions of Justice Jagot in the first instance. That is, that in all cases other than Meridian Travel, the insuring clauses did not apply.

The Full Court differed from Justice Jagot’s decision in the following ways:

1. With regard to issue E (ii) of the first instance judgment, the decision reached by the Full Court differed to Justice Jagot’s. The full court found that should the insured be covered under the insuring clause, the amount the insured can recover is not diminished by third party payments such as JobKeeper and JobSeeker payments.  

2. The decision of the Full Court was also different to that of Justice Jagot’s in the first instance with regard to issue H of the first instance decision. Whilst Justice Jagot found that insurers were not required to pay interest, the Full Court found that in the event that the insurer is liable to indemnify the insured, they are also liable to pay interest.

Be that as it may, the Full Court, substantially agreed with the first instance decision of the Second Test Case – finding in favour of insurers.

Conclusion: Case Closed? Questions Answered?

The two test cases have been on foot for some not insignificant period of time. While rightly categorised as “test cases” and essentially brought by the Insurance Council of Australia, a large number of actual insureds have sat behind the issue and their long outstanding claims have been on hold while the questions progressed through the courts. Is this now the end of the matter? Can the industry now do what is its core business – paying legitimate claims, especially to those who have been waiting a not inconsiderable period of time.

It would seem beyond doubt that the first issue is now answered in favour of insureds – any exclusion that refers to repealed legislation will be inoperative. The High Court has refused special leave on this, leaving the decision of the NSW Supreme Court as good law.

Is this the case with the Second Test Case? Is the question now answered in a definitive way? Perhaps not.

While the Full Court of the Federal Court substantially agreed with the findings at first instance, it appears as though insureds are currently considering an application to seek special leave to appeal on the case to the High Court.

Whether any such application will be made and whether leave is granted, and the appeal heard, cannot currently be answered. It seems as though the BI test case journey is not quite at an end – even at a time as the country begins to emerge in to what is, hopefully, a post COVID world.

Watch this space – and hopefully not for long.

If you would like any further information, please contact Partner Mark Doepel.