ANALYSIS

‘TESTING’ FOR COVID-19: THE STATE OF PLAY

As we move into the new year, the COVID-19 pandemic continues to present socioeconomic challenges on a global scale. This is true in relation to the extent to which losses sustained by businesses as a result of the pandemic – and the associated government action to contain it – qualify for cover under policies of business interruption insurance.

BY CLANCY O’DONOVAN

Senior Associate, DLA Piper Australia

At this time, it is useful to reflect on the attempts from last year (many of which are ongoing) to ascertain the availability of business interruption cover and what 2021 is likely to bring in this regard.

The first business interruption test case was commenced in June 2020 in the UK, by its financial services regulator: the Financial Conduct Authority (FCA). The decision delivered by the High Court of Justice in London on 15 September 2020 was, in some respects, a ‘mixed bag’, with the FCA (on behalf of policyholders) achieving success on certain points and insurers succeeding on others. By way of broad example (acknowledging the difficulty of attempting to summarise a judgment which ran for over 160 pages), policyholders generally fared better on so-called ‘Disease Clauses’, which provide cover for business interruption arising from disease occurring in a particular area. The Court found that cover may be available, provided it could be established that there had been at least one case of COVID-19 in the prescribed area. On the other hand, the Court construed so-called ‘Prevention of Access Clauses’ – which provide cover in circumstances where access to insured property has been restricted or hindered by the action of authorities in response to an emergency in a particular area – relatively narrowly. The Court found that these clauses provided a localised form of cover, enlivened by action of an authority in response to localised outbreaks of COVID-19, not the pandemic at large.

On 2 November 2020, the UK Supreme Court granted leave for six of the eight insurers involved in the test case to appeal the High Court’s judgment. The appeal hearing proceeded over the course of four days in November 2020 and it has recently been announced that the Supreme Court’s decision will be handed down on 15 January 2021.

Turning our sights on Australia, the ‘Quarantine Act Test Case’ – commenced in August 2020 at the instance of the Insurance Council of Australia and the Australian Financial Complaints Authority – concerned the application of exclusions for loss resulting from diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) “and subsequent amendments”. On 18 November 2020, the NSW Court of Appeal delivered its decision in favour of policyholders, effectively finding that such exclusions do not capture loss resulting from COVID-19. On 16 December 2020, the insurers involved in the ‘Quarantine Act Test Case’ filed an application for leave to appeal to the High Court of Australia. A determination of this application is expected in the first quarter of 2021. It has also been reported that a further business interruption test case is presently being considered. On 19 November 2020, the ICA announced it anticipated the proposed second test case would explore “outstanding policy matters, including proximity and prevention of access”, with a view to obtaining judicial guidance on such matters as quickly as possible.

In addition to the above test cases, ‘stand alone’ litigation has also proceeded in the Federal Court of Australia in relation to the availability of business interruption cover. In Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance, the Full Federal Court considered the application of an exclusion for claims arising from a “biosecurity emergency” declared under the Biosecurity Act 2015 (Cth). Although the Court granted the relief sought by the policyholder in that case, it stressed that its construction of the relevant exclusion was closer to the interpretation advanced by the insurer.

Meanwhile, proceedings commenced by The Star Casino against its insurers are ongoing in the Federal Court. A key issue in that case is whether the pandemic is a “conflagration or other catastrophe” for the purpose of enlivening business interruption cover under The Star’s insurance policy.

Whilst significant steps have been taken to obtain clarity in relation to the availability of business interruption cover for loss caused by the pandemic, these efforts are on-going and in many cases there is still a way to go. Resolution of ongoing test case appeals (both at home and abroad), foreshadowed further test case action and other satellite litigation is eagerly anticipated by the insurance industry and the wider business community alike. These decisions will play an important role in determining both the extent to which loss caused by the pandemic is to be borne by insurers and whether further litigation, including class action litigation, in relation to business interruption insurance, is likely to be a fixture of the Australian legal landscape in years to come.