Insurers and COVID-19: Another Blow for Small Business

Ten small businesses were the subject of proceedings related to business interruption flowing from the various Government mandates relating to COVID-19 disease control.

The Insured’s relied on Business Interruption (BI) policies that they claimed interfered with their business directly or indirectly. The businesses claimed that the loss arose directly or indirectly from the closure or evacuation of the premises ordered by relevant competent public authorities.

The insuring BI provisions under scrutiny were:

  1. Disease clauses;
  2. Prevention of Access clauses;
  3. Hybrid clauses; and
  4. Catastrophe clauses.

To protect their interests, the Insurers relied on an exclusion clause, which referred to the repealed Quarantine Act 1908 (Cth) and/or other endorsements that refer solely to the Biosecurity Act 2016 (Cth).  The key question proposed was whether the above hybrid and disease clauses were activated by the pandemic response of Federal and State Governments. The aim of the judgment was to clarify the meaning of policy wordings around disease definition; COVID-19 outbreak proximity; the impact of various forms of government mandate; and other common policy wording matters.

Regarding the access to Hybrid Clauses, the Court found that the ‘business closure’ or ‘business restriction’ orders mandated by both Commonwealth and State Governments, were not made because of disease, damage or threat at or near the premises of the Insured. This meant that policyholders could not claim indemnity from the Insurer, as the loss (or business interruption) could not be causally linked to the outbreak of COVID-19. Further, in the case of Disease Clauses, the Biosecurity Act exclusion was always operative and excludes cover in respect to COVID-19. Further, that any references to the Quarantine Act exclude cover as well, as COVID-19 was not listed as a quarantinable disease under the Act.

With respect the ‘catastrophe’ clause, her Honour found that COVID-19 was not a ‘catastrophe’ as defined by the Insurer; however, the Disease clause was applicable in the circumstances. Of the ten test cases, Meriden Travel was the only business to successfully invoke the Infectious Disease Clause, but would struggle to assert the right to be indemnified for the loss by the Insurer.

What we can see is that the Court is sharpening a focus on orthodox and strict interpretations of the agreed terms within these contracts. Proximity has become a major player in BI policy wordings with many insurers updating and refining their wordings to clarify, succinctly, the interpretation of their intent to cover loss triggered by these clauses, making recovery by the policyholder limited.

Her Honour also addressed the importance of monetary stimulus such as Commonwealth JobSeeker payments, relief on franchise fees granted by a franchisor, and rental reductions or abatements granted by a lessor which reduced the overall loss experienced by the Insured.

The initial Test Case focused on the applicability of a legacy exclusion clause referring to the repealed Quarantine Act 1908 (Cth) and concluded that subsequent amendments were not sufficient to exclude claims for COVID-19. Her Honour made it clear that references to the repealed act could not be replaced by references to the Biosecurity Act, as COVID-19 was not listed as a quarantinable disease under the repealed Act.

The Second Test Case retreated to a basic interpretation of exclusion clauses: whether the said insuring clause could provide cover to policy holders for losses relating directly to COVID-19. As the First Test Case is on appeal, the law is favouring the interpretation apportioned in the Second Test Case. It is still unclear whether the entirety of the circumstances relied on in the Second Test Case will apply to the first with her Honour making specific mention that each case would be factually different.

It is unknown whether the insureds will seek leave to appeal to the High Court of Australia, however, the Full Court of the Federal Court of Australia has since reversed two elements of her Honour’s decision in the February 2022 case CA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17. Their honours found that:

  1. JobKeeper payments should not be considered when assessing loss; and
  2. Interest payments are to be calculated on a different basis.

What we do know, is that in this tumultuous situation, it is the job of insurers and brokers to communicate effectively the key wordings of their policies. The clarity will be instrumental as to how Insurers can move forward.

The content of this article is intended to provide a general guide to the subject matter. Specific advice should be sought about your specific circumstances.

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