On 8 October 2021, Justice Jagot handed down the Federal Court of Australia’s first instance decision in Swiss Re International Se v LCA Marrickville Pty Limited  FCA 1206 (Swiss Re International Se). This decision is the second business interruption test case 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 Insurance Council of Australia, 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.
Reference to exclusion clauses based on the Australian Quarantine Act
The first COVID-19 business interruption test case (HDI Global Speciality SE v Wonkana No 3 & Ors Pty Ltd  NSWCA 296 (Wonkana)) is summarised here. In Wonkana the New South Wales Court of Appeal held that exclusion clauses which exclude loss for “quarantinable diseases” under the (repealed) Australian Quarantine Act 1908 (Cth) (Quarantine Act) do not exclude loss from “listed human diseases” under the Biosecurity Act (Consequential Amendments and Transitional Provisions) Act 2015 (Cth) (Biosecurity Act) (the successor to the Quarantine Act). The NSWCA held that the repeal of the Quarantine Act and the enactment of the Biosecurity Act did not constitute a “subsequent amendment” to the Quarantine Act and, further, that listed diseases could not be read as quarantinable diseases.
In Swiss Re International Se the insurers sought to circumvent the NSWCA decision in Wonkana on the basis that, for the policies governed by Victorian law, section 61A of the Property Law Act 1958 (Vic) (Property Law Act) cured any outdated references to repealed legislation. The Property Law Act provides that:
Where an Act or a provision of an Act is repealed and re-enacted (with or without modification) then, unless the contrary intention expressly appears, any reference in any deed, contract, will, order or other instrument to the repealed Act or provision shall be construed as a reference to the re-enacted Act or provision.
The Federal Court rejected that argument on the basis that s 61A applies only to Acts passed by the Parliament of Victoria. As the Biosecurity Act and Quarantine Act are Commonwealth laws, s 61A did not allow the Court to read references to the repealed Quarantine Act as being references to the Biosecurity Act.
Further, consistent with the NSWCA’s decision in Wonkana, the Court concluded that the Biosecurity Act was not a re-enactment of the Quarantine Act, finding that “while the Biosecurity Act is successor legislation dealing in part with the same subject-matter, it is too different from the Quarantine Act to be anything other than an entirely new enactment” (at ). Accordingly, even if s 61A had applied, it would not have cured the outdated references to the Quarantine Act.
On the other hand, the Court accepted that, had the Property Law Act applied and had the Biosecurity Act been a re-enactment of the Quarantine Act, references in the Victorian policies to declarations of quarantinable diseases under the Quarantine Act could be read as listed human diseases under the Biosecurity Act. Jagot J pointed out that this “somewhat tortured” process of construction reinforced her Honour’s conclusion that the Biosecurity Act is not a re-enactment of the Quarantine Act with modifications.
Approach to causation and treatment of Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors  UKSC 1 (FCA v Arch Insurance)
FCA v Arch Insurance
In our first blog post we addressed the UK Supreme Court’s consideration of the scope of business interruption clauses in FCA v Arch Insurance.
FCA v Arch Insurance considered 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 former covered loss resulting from the 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 a notifiable disease within a prescribed distance from the insured’s premises. The latter 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 UK Supreme Court found that both types of clause were triggered by the national UK lockdown, notwithstanding that the insureds could not prove that the response would have been different but for the occurrence or outbreak of COVID-19 within the prescribed area. In so holding, the UK Supreme Court held that the ‘but for’ test of causation would be over exclusionary in the circumstances and that each instance of COVID-19 in the UK should be given equal weight as a cause of the restrictions imposed in response to the outbreak.
The Federal Court in Swiss Re International Se was asked to answer substantially the same question, based on similar policy terms, but in a dramatically different factual context. While the Court accepted as correct the approach taken by the UK Supreme Court, the differences in circumstances between the Australian and United Kingdom’s contexts resulted in a different outcome.
The Australian context and causation
In the UK, the relevant policies were triggered by instances of COVID-19 within a 25 mile radius of the insured’s premises. That area covered the majority of the affected population centers. Further, the UK outbreak was widespread and the UK response was expressly a response to the nationwide outbreak. In contrast, in Australia the COVID-19 lockdowns were implemented far earlier in the outbreak, when there were only a handful of cases. The lockdowns and restrictions were implemented with a view to protecting against the risk of an outbreak as much as in response to the outbreak itself. Further, the prescribed area in the Australian policies (ranging from the premises itself up to an area within a radius of 50km from the premises) covered only a fraction of the relevant State and only part of the population centers of the relevant State. Importantly, the widespread outbreak in the UK and the (relatively) large proportion of the country covered by the “insured area” in the UK policies enabled the UK Supreme Court to conclude that “to infer that each and every case (both inside and outside the area) was an equally effective cause of the actions of the UK Government is rational” (at ). In contrast, the Federal Court in Swiss Re International Se held that it could not be assumed that each and every known case of COVID-19 in a State was an equally effective cause of the relevant State Government’s action (at ). While the Court accepted that, to the extent that the State Government’s actions were taken in response to the threat and risk of COVID-19 across the State where the threat in each area was an equally effective cause of that action, that assumption could not be made in respect of occurrences or outbreaks of COVID-19 at particular locations within the State.
The Court reasoned that an “occurrence” of COVID-19 comprised the existence of COVID-19 in any setting (including hotel quarantine, isolation or a hospital setting) and an “outbreak” comprised the existence of COVID-19 in an uncontrolled setting (at ). Against that background, the Court’s refusal to infer that each occurrence or outbreak of COVID-19 was an equal contributor or an equal cause of the lockdowns reflected the reality of the situation that in many instances lockdowns were only imposed when contact tracing identified transmissions with unknown origin.
Relevant governmental authority
A further material difference between the Australian and the UK response was the relevant governmental authority with power to impose restrictions. While the UK Government was responsible for the UK national response, Australia did not have a ‘national response’. Instead, each State was responsible for the public health orders imposed in the jurisdiction. This distinction is apparent from the different effect of the pronouncements of the UK and Australian Commonwealth Governments.
The UK Supreme Court in FCA v Arch Insurance held that the insureds in that case could rely on announcements by the UK Prime Minister on the basis that they were characterised as a “clear, mandatory instruction given on behalf of the UK Government” and therefore were considered a “restriction imposed” regardless of whether they could be legally enforced (at ).
In contrast, the Court in Swiss Re International Se noted that statements made by the Prime Minister following National Cabinet meetings did not constitute relevant “directions” for the purpose of hybrid and prevention of access clauses in circumstances where the power to impose the relevant restrictions vested with the States and not the Commonwealth Government.
Accordingly, announcements by the Australian Prime Minister regarding the cancellation of elective surgeries could not be regarded as announcements of a competent statutory authority because the announced measures were outside the power of the Commonwealth. While those announcements reflected the agreement reached at National Cabinet, under the Australian Constitution the relevant power and authority is vested in the States and Territories and there is no evidence that the States made those announcements (at ).
The Federal Court endorsed the approach taken by the UK Supreme Court in FCA v Arch Insurance of abandoning the Orient-Express Principle (addressed here). The Court concluded that as the underlying cause of the restrictions imposed in each State were the actual (known and unknown) cases of COVID-19 in the State and the risk of further transmission within the State as a whole, the State-wide lockdown was part of the insured peril and, consistent with FCA v Arch Insurance, the insured’s loss was to be measured by comparison of the actual financial position and the position it would have been in but for that State’s lockdown (at  to ). In contrast, the Court held that the insureds could not recover losses flowing from the national border closures imposed by the Commonwealth Government. The Court found that the underlying cause of the Commonwealth Government actions, namely the presence of COVID-19 overseas and the risk of bringing COVID-19 into any part of Australia, was not part of the insured peril and therefore the insureds could not claim for loss arising from the Commonwealth Government actions.
The Court’s finding (at ) that the insured’s loss must be reduced by the amount of any JobKeeper payments they received was also consistent with the UK Supreme Court’s rejection of the Orient-Express Principle.
The business interruption clauses in Issue
The insuring clauses which were the subject of the decision in Swiss Re International Se comprised the following categories with clauses applying to a variety of businesses in different jurisdictions (at ):
A summary of each businesses’ policy wording is set out in the Reasons for Judgment at .
As noted above, the hybrid clauses cover 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 an infectious disease or the outbreak of an infectious disease within a specified radius of the insured premises.
One of the key issues before the Court was whether the restrictions could have been said to have been caused by an outbreak or discovery of an organism likely to result in the occurrence of COVID-19, notwithstanding the fact that these were State-wide orders based on a number of known and unknown instances of COVID-19 cases. The Court held that it was not sufficient for the insureds to demonstrate (1) that there was COVID-19 within the relevant area, and (2) that there was a business closure. Rather, the existence of COVID-19 needed to be shown to have motivated the relevant public authority to make the public health order. Whether there was an outbreak within the radius was not relevant; it was the subjective belief and intention of the Minister (or other authorised person) which was the relevant trigger which had to be demonstrated by the insureds to obtain cover. Further, that intention could only be derived from the order and the explanatory memorandum and could not be proven by epidemiological or other extraneous evidence (at ).
The explanatory memorandum in each case identified not only (unspecified) known cases of COVID-19 but also the risk of an outbreak and the risk of unknown cases as the motivation for the restrictions imposed by the relevant orders. For the reasons set out above, the Court held that given the relatively small area covered by the insuring clauses, it was not open to the Court to infer from this statement that all instances of COVID-19 were equal and effective causes of the order.
The Court added that given that an “outbreak” comprised the presence of COVID-19 in an uncontrolled setting, proving that the residential address of a person with COVID-19 was within the specified area was insufficient to demonstrate an outbreak (at ). Rather, the insureds would need to demonstrate that the health orders were motivated by the presence of a person with COVID-19 capable of communicating the disease to another person within the specified area. In other words, there needed to be exposure sites in the relevant area. The residential address of individuals with COVID-19 was irrelevant.
Prevention of access clause
The various prevention of access clauses that were considered by the Court provided that the insureds would be indemnified for any loss caused by “an action by an authority to avoid or diminish risk to life within 5 kilometres of the Situation which prevents or hinders the use of or access to the Situation whether any property of the Insured shall be the subject of Damage or not” (at ).
In each case the Court held that, in the context of the other clauses in the policy, the prevention of access clause was not capable of applying to actions of an authority in response to a disease.
However, the Court noted that if the prevention of access clause was capable of applying to actions of an authority in response to a disease, the public health order closing businesses would have triggered the policies (at ). The outcome for prevention of access clauses was different to that needed in respect of the hybrid clauses, because the latter required that the relevant orders be made in response to an actual outbreak or occurrence of COVID-19 in the prescribed area, whereas the former required only that the restrictions be imposed in response to a risk of an outbreak in the relevant area. The Court was willing to assume that the risk of an outbreak in each part of the State was an equal cause of the restrictions. However, mere recommendations urging people to stay home could not trigger the policy (see ).
The LGA Marrickville policy also included a catastrophe clause which provided cover for actions of a civil authority implemented for the purpose of retarding a conflagration or other catastrophe (at ). The Court concluded that in the broader context of the policies the outbreak of COVID-19 was not an “other catastrophe”. The Court held that while, in the ordinary sense a pandemic, is a “catastrophe”, the linking of the words “conflagration” and “or other catastrophe” indicated that the “catastrophe” contemplated by the clause must be of a kind similar to conflagration, that is physical damage or apt to create physical damage (at  to ).
The Meridian Travel policy contained a disease clause which provided that “the occurrence of any of the circumstances set out in this Additional Benefit shall be deemed to be Damage to Property used by You at the Situation… (c) The outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation” (at ).
The Court accepted that the disease clause operated to deem an outbreak of COVID-19 within a 20 kilometre radius of the insured’s premises to be “Damage” to the insured’s Property. As a result (and in contrast to the position in respect of the hybrid clauses), Meridian Travel did not need to establish that an occurrence of COVID-19 caused the lockdown (in and of itself) to satisfy the clause.
Given that Meridian Travel’s premises were within a 20 kilometre radius of most of Melbourne’s CBD, the Court accepted that COVID-19 was present within 20 kilometres of Meridian Travel’s premises from 30 March 2020 to at least the beginning of February 2021 and that this constituted Damage triggering the policy (at  and ).
However, the Court held that Meridian Travel had failed to demonstrate that the interruption to its business was caused by the damage (being the local COVID-19 cases). 90% of Meridian Travel’s business was international travel, of which “a, if not sole” proximate cause of Meridian Travel’s loss of revenue was the overseas travel ban. As discussed earlier, the overseas travel ban was a Commonwealth Government action in response to the (uninsured) peril of cases of COVID-19 outside of Australia. The local cause of COVID-19 only impacted on 10% of Meridian Travel’s business which relied on domestic travel.
The Court was unable to infer that the outbreak of COVID-19 occurring within a 20 kilometre radius of the premises was a proximate or any other kind of cause of any of Meridian Travel’s business interruption loss on the current state of evidence (at ).
Leave to appeal has been granted and so we await the next chapter in the ongoing fallout from COVID-19.
 Whilst AHPRA, the Dental Council and the Dental Board of Australia were competent authorities within the meaning of the relevant policy, none of them made any orders requiring the closure or evacuation of any premises or requiring the cancellation of elective surgeries (and in the case of AHRPA the Court found it did not have the power to do so) (at ).