Business Interruption Insurance Test Cases

With recent lockdowns, there has been increased interest in the availability of business interruption insurance (BI) in the context of the COVID-19 pandemic, particularly for small businesses.

In an effort to clarify the position for policyholders and the insurance industry alike, the Insurance Council of Australia (ICA) and Australian Financial Complaints Authority (AFCA) supported two test cases, first heard in the Supreme Court of NSW and the Federal Court of Australia.

First Test Case

The first test case was generally concerned with BI policies with exclusion clauses that relied upon the Quarantine Act, to deny cover for pandemics. The Quarantine Act was repealed in 2016 and replaced by the Biosecurity Act. The first test case, heard in the NSW Court of Appeal, found in favour of policyholders and in June 2021 the High Court of Australia denied the insurers’ application for special leave to appeal.

As such, the High Court’s decision means insurers cannot rely upon references to the Quarantine Act to deny liability for BI claims under the same policy terms considered in the first test case. Despite being made in the NSW Court of appeal, this decision is relevant to all Australian claims.

Second Test Case

The second test case was concerned with the interpretation of policy wordings around the meaning of disease, the proximity of the outbreak to the insured business, the impact of government orders, and other common policy wordings.

The second test case involved 10 small business claims from a variety of industries and locations under policies from six insurers including Allianz, Insurance Australia, Chubb, Guild and QBE. The BI policies will often include the following:

• Hybrid clauses: provide cover for loss from orders/actions of a competent authority closing or restricting access to premises, but only where those orders/actions are made or taken as a result of infectious disease or the outbreak of infectious disease within a specified radius of the insured premises.
• Infectious disease clauses: provide cover for loss that arises from either infectious diseases or the outbreak of an infectious disease at the insured premises or within a specified radius of the insured premises.
• Prevention of access clauses: provide cover for loss from orders/actions of a competent authority preventing or restricting access to insured premises because of damage or a threat of damage to property or persons (often within a specified radius of the insured premises).
• Catastrophe clause: provides cover for loss resulting from the action of a civil authority during a catastrophe for the purpose of controlling the catastrophe.

In nine of the ten claims, the insuring clauses were found not to provide cover such that the insurers are not liable to cover the policyholders. In a single case, the court concluded that the ‘infectious disease’ insuring clause applied. However, there are other substantial issues as to whether the policyholder could prove that it is entitled to cover. The parties to the second test case were given an opportunity to consider their respective positions in relation to any appeal.

Each claim is determined on its own facts and interpretation of the particular policy wording, which can be complex.

AFCA and insurers, including those who were not directly involved in the test cases, have agreed to follow the court’s reasoning in the determination of BI claims. We will continue to monitor any appeals from the decision in the second test case. We anticipate that clear guidance (possibly from the Full Federal Court or the High Court) will be required, so that decisions can be made by insurers and AFCA that are consistent in respect of BI claims.

If you would like assistance in determining whether your BI policy provides cover in the context of COVID-19, or managing a related dispute, contact the Commercial Litigation & Disputes team at Antunes Lawyers on (02) 9962 0499.