In this article, lawyer Sarah Sherman reviews two recent test cases which shed light on business interruption coverage during the COVID-19 pandemic, with the latest case being a significant win for the insurance industry.

First test case

The first test case required the NSW Court of Appeal to consider whether the exclusions to coverage which referenced diseases declared under the now repealed Quarantine Act could be extended to cover diseases under the Biosecurity Act. The Court found in favour of the policyholders, not allowing the insurers to rely on the exclusions.

Second test case

In the second test case, the Federal Court of Australia was asked to consider claims by nine separate policyholders, most of which operated across the sectors financially impacted by the pandemic, such as gyms, hospitality businesses and travel agents. Each business had different policies and circumstances which led to their losses.

The Court examined four different categories of insuring provisions as follows:

1. Prevention of access clause – cover was provided where the order of a competent authority prevented or restricted access to a premises because of damage or threat of damage to the property or persons. These clauses often had a specified radius from the premises which applied.
2. Disease clause – these clauses provided coverage where there was loss from an outbreak or presence of an infectious disease at or within a specified radius of the insured premises.
3. Hybrid clause – these types of clauses combined the first two and provided cover for loss where orders of a competent authority, made as a result of the presence or outbreak of an infectious disease within a specified radius, closed or restricted access to premises.
4. Catastrophe clause – the final type of clause provided cover where loss was suffered due to action by a civil authority to impede a catastrophe.

The Court said only the disease clause could provide cover in the circumstances of the COVID-19 pandemic, but it is dependent on the individual facts and circumstances.

The primary reason only the disease clause would apply was because the Commonwealth and State government orders were made as a result of the general pandemic, rather than any particular presence or outbreak at, or near, the relevant policyholder’s premises.

One policyholder, a travel agent, succeeded in having the disease clause applied as the policy provided for coverage where there was an outbreak within a 20 kilometre radius of the premises. However, the Court made it clear the travel agent would have difficulty proving the loss was a result of the outbreak, as opposed to the international travel ban.

The Judge said even if she was incorrect and the clauses were applicable in the circumstances, the loss suffered by the businesses would be reduced by any amount received either by way of JobKeeper payments and rental reductions or abatements received from their landlords.

This is a significant win for the insurance industry, which stood to pay out billions in claims had the Court ruled in favour of policyholders.

The Court, recognising the significance of the judgment, took the proactive step of listing appeals of the case to the Full Court for hearing from 8 November to 16 November 2021. This has now been heard and judgment reserved.