On 25 June 2021, the High Court rejected an application brought by the Insurance Council of Australia (ICA) for special leave to appeal against the New South Wales Court of Appeal decision in HDI Global Specialty SE v Wonkana No 3 & Ors Pty Ltd  NSWCA 296 (HDI Global Specialty).
This decision marks the end of the first in a series of test cases brought to clarify the application of business interruption policy wording to the consequences of the COVID-19 pandemic. This series of test cases is important because it will address the extent to which the losses caused by COVID-19 lockdowns are covered by business interruption policies in Australia. Insurers have committed to applying the reasoning of the final judgments of these test cases when assessing claims brought by policy holders. Similarly, the ICA, the Australian Financial Complaints Authority (AFCA) and participating insurers have agreed that AFCA will follow the reasoning of the final judgments of these test cases when assessing complaints.
Summary of NSWCA decision
The decision in HDI Global Specialty concerned the wording of a business interruption policy issued by HDI and held by a tourist park business. The policy included a “Disease Benefit Clause” which provided cover in the event of interruptions caused by certain infectious diseases. However, “diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments” were excluded from the policy.
The Australian Quarantine Act 1908 (Cth) (Quarantine Act) was repealed in 2015 by the Biosecurity (Consequential Amendments and Transitional Provisions) Act 2015 (Cth) (Biosecurity Act). The Biosecurity Act does not provide for declarations of quarantinable diseases and instead refers to “listed human diseases”. On 18 March 2020 COVID-19 was declared a “listed human disease” under the Biosecurity Act, but no declaration of a “quarantinable disease” was made under the repealed Australian Quarantine Act. The insurers refused the business interruption claims made by the defendants for the loss caused by COVID-19, arguing that the wording of the Disease Benefit Clause should be construed as excluding diseases “determined to be listed human diseases under the Biosecurity Act 2015 (Cth)”, notwithstanding that they were not quarantinable diseases under the Australian Quarantine Act.
The New South Wales Court of Appeal unanimously concluded that the Disease Benefit Clause could not be construed in a way that extended the exclusion to diseases listed under the Biosecurity Act. The Court of Appeal reasoned that the repeal of the Quarantine Act and the enactment of the Biosecurity Act did not constitute a “subsequent amendment” to the Quarantine Act. The Court also held that the wording of the clause did not meet the criteria for rectification as a “mistake”.
As participating insurers have committed to applying the reasoning of the final judgment when assessing claims the decision has obvious implications for any policy that refers to the Quarantine Act. However, it has been reported that only a small number of policies contain this error such that only a few claims will be paid out as a consequence of the High Court’s ruling.
Nonetheless, the ruling serves as a timely reminder to policy holders and insurers to regularly review, and update as appropriate, the wording of insurance policies for references to repealed legislation.
Business interruption and the proximate cause of the loss
A second test case is currently before the Federal Court concerning issues including the meaning of policy wording around disease definition, the proximity of COVID-19 outbreaks and the impact of government measures.
At first instance the case is being heard by Justice Jagot, with the hearing scheduled for 6 September 2021 to 15 September 2021. It has been reported that the outcome of this case could see insurers ordered to pay out billions of dollars in business interruption claims.
Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors  UKSC 1
A related issue has recently been considered by the UK Supreme Court in the decision of Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors  UKSC 1 (Financial Conduct Authority v Arch Insurance). In that case, the Financial Conduct Authority sought declarations regarding the application of “hybrid” and “prevention of access” clauses to losses flowing from the restrictions imposed by the UK Government in response to the COVID-19 outbreak in the UK. The “prevention of access” clauses covered loss resulting from prevention of access to the insured’s business premises due to government action in response to a health emergency. The “hybrid” clauses covered loss resulting from closure, restriction of access or inability to access the insured’s business premises due to the occurrence of a notifiable disease or an outbreak of disease in the area.
One of the policies under consideration stated that the insurer would indemnify the policy holder for “interruption or interference with the Business during the Indemnity Period following (a) any occurrence of a Notifiable Disease with a radius of 25 miles of the premises” (at ). It was an agreed fact that at least one case of COVID-19 occurred within the 25 mile radius of the theoretical insured’s premises. One of the issues before the Court was whether a single occurrence of COVID-19 within the prescribed area was sufficient to trigger the policy. The insurers argued that the policy would not be triggered because in the hypothetical scenario, it could not be proved that the COVID-19 case(s) within the 25 miles of the premises was or were a cause of the associated business interruption loss. The Court accepted that the Government’s response to the COVID-19 pandemic, and the associated lockdown, was a national response and that it was not caused by any one particular case, in the sense that the Government still would have ordered the nationwide lockdown even if there were no COVID-19 cases in the prescribed area. Accordingly, on the hypothetical scenario, a single COVID-19 case in the 25 mile radius was not a cause of a lockdown in the sense that the lockdown would not have happened ‘but for’ that case however it was causative in the sense that all of the cases of COVID-19 across the UK cumulatively resulted in the restrictions and the associated business interruption (at ).
Relying on the Queen’s Bench decision of Orient-Express Hotels Ltd v Assicurazioni General Spa (UK) (t/a Generali Global Risk)  1 C.L.C 847 (Orient-Express), the insurers argued that the policy holders could not prove that the restrictions would not have been imposed ‘but for’ the localised cases (the insured peril). That decision, and its application to the Australian test case are addressed below.
Orient Express Principle
The Orient-Express Hotel was damaged by Hurricane Katrina and closed for repairs. It re-opened before the repairs were complete and suffered ongoing loss of patronage due to both the physical damage to the premises and the broader effects of the hurricane to the hotel industry. The Orient-Express Hotel claimed for physical damage and business interruption. Justice Hamblen, sitting on the Queen’s Bench held that (at ):
“…the clause is concerned only with the damage, not with the causes of the damage. What is covered are business interruption losses caused by damage, not business interruption losses caused by damage or ‘other damage which resulted from the same cause’”.
In other words, the Orient-Express Hotel could not claim for the loss of business which would have arisen in any case from the hurricane. Rather, it was limited to claiming business interruption resulting from its claim for damage to its own premises with the counter factual being an “undamaged hotel in a damaged city.” This was referred to as the Orient-Express Principle.
Decision in Financial Conduct Authority v Arch Insurance
In Financial Conduct Authority v Arch Insurance, the UK Supreme Court (Lord Hamblen and Lord Leggatt delivering a joint judgment, with Lord Reed concurring and Lord Briggs and Lord Hodge delivering a separate but ultimately agreeing joint judgment) overruled the decision in Orient-Express, concluding that the “but for test” of causation was not appropriate in circumstances where the insured peril had a series of concurrent causes and none of which taken in isolation were necessary or sufficient to give rise to the insured peril. The Court held that “it was realistic to analyse the situation as one in which all the cases of illness from COVID-19 were equal causes of the imposition of national measures” (at ) and that “there was nothing in principle or in the concept of causation which precluded an insured peril that in combination with many other similar uninsured events brought about a loss with a sufficient degree of inevitability from being regarded as a cause, indeed as a proximate cause, of the loss, even if the occurrence of the insured peril was neither necessary or sufficient to bring about the loss by itself” (at ). The Court held that it is sufficient that a single case within the radius was taken into consideration by the Government in imposing restrictions, and each instance of COVID-19 should be given equal weight as a cause to the imposition of the restrictions.
The Court also held that the measure of the insured’s loss was to be assessed by comparison to the position the insured would have been in if there was no COVID-19 pandemic. The policies under consideration in both Orient-Express and Financial Conduct Authority v Arch contained “trends clauses” which provided for adjustments (to the amount paid by the insurer) to be made to provide for the trend of the Business and for variations in or special circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred (at ). As noted above in Orient-Express the Court construed the trends clause as requiring a comparison between the insured’s actual position with the position the insured would have been in had the premise not suffered the insured damage but all other factors (including the destruction of the rest of the city by Hurricane Katrina) remained the same. The UK Supreme Court on the other hand held that the appropriate comparison was with the position the insured would have been in if their premise had not been closed and the underlying national COVID-19 lockdown had not occurred. In doing so, the Court abandoned the “undamaged building in a damaged city” approach taken in Orient-Express and, invoking Jackson J’s statement in McGrath v Kristensen (1950) 340 US 162, 177, held that the Court would ““gracefully and good naturedly” surrender “former views to a better considered position”” (at ).
The Australian response to COVID-19 has been markedly different to that of the UK. In particular, restrictions have been imposed based on far lower infection rates with restrictions applying across geographical areas much larger than the affected area. It will be interesting to see how the Federal Court addresses the issue of causation and considers the UK case law. Given the approach to causation in Australia since March v Stramare (1991) 171 CLR 506 we would expect the Federal Court to take a similar approach to causation and trends clauses as was taken by the UK Supreme Court in Financial Conduct Authority v Arch rather than the artificial approach adopted in Orient-Express. Either way, the decision in the Federal Court and any Appellate Court (in the event of an appeal) is likely to have a significant impact on insured’s rights under business interruption clauses in Australia.
Whilst the High Court’s rejection of the ICA’s application for special leave brought an end to one test case, it is clear that insurers will continue to protect their interests through aggressive litigation. COVID-19 stands to be with us for a while yet and as such, the insurance industry will be looking to minimise its ongoing exposure. Moreover, there is the potential for class action claims to be brought in the future.
Policy holders should continue to collect documentation to protect their interests and familiarise themselves with the wording of their business interruption policy.