Second Covid test case in Australia favours insurers

Swiss Re International SE v LCA Marrickville Pty Limited [2021] FCA 1206

Background

On 8 October 2021, the Federal Court of Australia handed down its decision on the second test case in Australia on business interruption response to COVID-19-related claims.  Unlike the first test case,[1] the decision largely went the insurers’ way.  Crucially, it also reached a very different conclusion from that reached by the United Kingdom Supreme Court in FCA v Arch UKSC Arch[2] in that country’s test case.

The decision

The Court considered ten claims under policies by six insurers.  In respect of nine claims the Court concluded that the insuring clauses did not apply, so there was no cover under the policies.  In one of the cases, Jagot J concluded that cover might potentially be available but, on the evidence, he could not be sure that the loss was caused by the COVID-19 outbreak.

Like the Court in FCA v Arch, the Federal Court considered various types of clauses, namely:

• Prevention of access clause: cover is provided 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.
• Hybrid clause: cover is provided for loss from orders/actions of a competent authority closing or restricting access to premises as a result of an outbreak of an infectious disease within a specified radius of the insured premises.
• Catastrophe clause: cover is provided for loss arising from the action of a civil authority during a catastrophe for the purpose of retarding the catastrophe.
• Disease clause: cover is provided for loss arising from either infectious diseases or the outbreak of an infectious disease at the insured premises.

Distinguishing UK from Australia

The Federal Court distinguished the reasoning in FCA v Arch on the different societal conditions which existed in Australia, compared with the United Kingdom.  It took into account that COVID-19 was widespread in the United Kingdom.  The United Kingdom is densely populated.  If the clause in the policy refers to a radius of 25 miles from the business premises, this will be an area of a little under 2,000 square miles.  The whole of England can be covered by 20 such circles.[3]  Each and every case, both inside and outside the 25km area was an equally effective cause of the UK government’s actions.[4]

In contrast, Australia has a federal system of government.  Australia is large and, in many areas, sparsely populated.  The occurrence of COVID-19 infections was not widespread.  Given the lack of widespread community spread, it cannot be concluded that “each and every known case of COVID-19 in any location in a State was an equally effective cause of the State Government’s actions”.[5]

Causation

In respect of the Commonwealth Government actions, the uninsured peril was the existence of COVID-19 cases overseas and the threat this presented to Australia by reason of persons returning, including returning Australian residents.  In respect of the State actions, the cause of the State Government actions was the existence of COVID-19 cases in the State (known) and the associated risk of COVID-19 to persons from cases both known and unknown across the State as a whole.

Thus, the Court held that on the basis of the facts it has not been possible to conclude that any State Government action was caused by, resulted from, or was in consequence of the existence of any case of COVID-19 at the location or within the area required by the insuring provisions.

Application to specific clauses

The Court found that only the Disease Clause was capable of providing cover, where it was satisfied on the particular facts.  None of the other clauses were satisfied in any of the claims under consideration.  The primary reason was that neither the Commonwealth or the State action resulted from the particular presence or outbreak of COVID-19 at the policyholder’s premises.  Rather, the actions were made in response to the existence and risk of COVID-19 in the State generally.  Therefore, there was insufficient causal link between the cause of the orders and the circumstances at or within the specified radius of the premises.

Hybrid clauses

The Court made it clear that the hybrid clause required that the orders related to closure of premises. In some cases, the relevant government order was an overseas travel ban which did not require the closure of premises.  The Court held that the hybrid clause did not apply as the closure of premises was the policyholder’s decision in response to the effect of the travel ban on the business. It further clarified that the “order” had to impose a requirement for closure, in the required sense of a mandatory obligation as opposed to conveying a choice, recommendation or expectation of compliance.

Meaning of ‘closure’

The Court considered various issues, including the meaning of “closure” which extended to closure of a part of the premises from entry by persons who would otherwise ordinarily be entitled to enter and remain on the whole or that part of the premises.  “Closure” did not require physical impossibility of access to the whole or part of the premises, nor did it require that each and every person be prohibited from entering and remaining on the premises.  Rather, it required that persons who would otherwise be entitled to do so, not be able to do so.  Ordinarily, a restriction on the number of people who may enter and remain on premises at any one time does not involve closure of premises although it does involve prevention, restriction, or hindrance of access to the premises.[6]

Meaning of ‘outbreak’

As to the meaning of “outbreak”, the Court stated this required more than an “occurrence” of COVID-19.  It found that there could be an “outbreak” of COVID-19 within a specified area if there was an active (and contagious) case of COVID-19 within the community that was not in a controlled setting (such as a hospital, isolation or quarantine), given the highly contagious nature of COVID-19.[7]

Catastrophe clauses

The Court also held that these clauses did not apply.  These require the authority’s actions to be “during a conflagration or other catastrophe for the purpose of retarding same”.   The Court found that while a pandemic was a “catastrophe” in its ordinary sense, the phrase as a whole – including the words “conflagration” and “retarding” – suggest that the “other catastrophe” needs to be of a kind similar to a conflagration and involve a physical event.

Disease clauses

This was the only clause which the Court considered was capable of providing cover.  The clause operated by reference to the outbreak of an infectious disease occurring within a 20-kilometre radius.  It did not require the closure of premises or any government order to trigger the clause.  Given there was an outbreak of COVID-19 within 20 kilometres of the premises by 30 March 2020, the disease clause potentially was available to provide cover.[8]

However, the Court stated that the key issue was whether the outbreak was the proximate cause of the policyholder’s loss.  The policyholder in this claim was a travel agent.  If the proximate (if not sole) cause of the policyholder’s loss was the government’s travel ban and the ban of cruise ships visiting Australia, then the cover is not satisfied.  Without further evidence, the Court could not infer that the outbreak of COVID-19 was the proximate cause of the insured loss.[9]

Reducing losses from JobKeeper payments and rental reductions

The Court also considered the payments that should be taken into account as savings to the business, reducing the amount payable by the insurer.[10]  It considered that the insured’s losses were necessarily reduced by JobKeeper payments (which were compensatory in nature) and rental reductions.[11]  However, any governmental grants were in the nature of mercy payments and so would not reduce the insured’s loss.[12]

Comment (Philippa Fee)

As noted above, the Federal Court distinguished the United Kingdom test case of FCA v Arch on the basis of Australia’s different societal and political environment from the United Kingdom.

While New Zealand – like the United Kingdom – is a geographically small country with a unitary system of government, in other (and more crucial) respects New Zealand’s context is more akin to that of Australia.  Like Australia, New Zealand has not suffered a widespread outbreak of COVID-19.  Our government’s actions were aimed at preventing the virus entering New Zealand.  Until very recently, it was successful in preventing a widespread community outbreak.

The Federal Court based its decision on what was the proximate cause of the business closures.  It found that the government’s actions ordering closure did not result from the existence of COVID-19 at the location or within the area required by the insuring provisions.  Instead, the government’s actions were because of the fear or threat of COVID-19 spreading.  This analysis appears equally apt to New Zealand.

An appeal on this decision is currently underway, with judgment expected in December 2021.   Undoubtedly the Australian insurance industry will be keenly awaiting the outcome of the appeal.