Legal analysis: BI test case

‘TESTING’ FOR COVID-19: THE CURRENT SPREAD

As the quest to ascertain the extent to which business interruption losses are covered by insurance continues, it is useful to reflect on the current position, both at home and abroad.

BY CLANCY O’DONOVAN

Senior Associate, DLA Piper Australia

The UK Supreme Court’s judgment in January 2021 was the first non-appealable decision in a test case to be handed down globally – a terminus yet to be reached in Australia. Since delivery of that judgment, the UK Financial Conduct Authority (FCA) has continued to closely monitor insurers’ assessment and resolution of business interruption claims.

In January 2021, the FCA issued a “Dear CEO” letter, directing insurers to reassess and pay valid claims as soon as possible. In March 2021, the FCA published a list of over 400 wordings, held by over 200,000 policyholders, which are considered “in principle, capable of responding to the COVID-19 pandemic”.

This list is accompanied by a ‘policy checker’ developed by the FCA, which small businesses can use to check whether their policy “may cover business interruption losses”, together with guidance as to the types of evidence and methodologies which policyholders may use in support of their claims. The FCA continues to collect and publish data from insurers relating to their acceptance and settlement (including initial or interim payments) of business interruption claims.

In Australia, the extent to which business interruption cover is available for loss flowing from the pandemic continues to be explored via both ‘organised’ test case proceedings and satellite litigation. The ‘Quarantine Act Test Case’, initiated in August 2020 by the Australian Financial Complaints Authority (AFCA) and the Insurance Council of Australia (ICA) was decided in favour of policyholders by the NSW Court of Appeal in November 2020. Insurers’ application for leave to appeal that decision to the High Court is expected to be heard in the next couple of months.

In the meantime, a further test case, dubbed the ‘second test case’, has been commenced in the Federal Court. Also, a product of joint effort by AFCA and the ICA, the second test case presently comprises nine sets of proceedings, issued by five different insurers, seeking declarations relating to the operation of certain policies. Broadly speaking, it is anticipated that the second test case will involve consideration of the three main species of insuring provisions (which were also considered in the FCA Test Case), being: • Disease Clauses’ (which provide cover for business interruption resulting from the occurrence of disease within the vicinity, or a specified radius, of insured premises) • ‘Prevention of Access Clauses’ (which provide cover for business interruption resulting from access to, or use of, insured premises being prevented due to restrictions imposed by, or the action, advice or order(s) of an authority) and • ‘Hybrid Clauses’ (which broadly reflect a blend of the first two types of clauses and respond to business interruption resulting from closure of insured premises due to the occurrence of disease within a vicinity, or a particular radius, of insured premises).

The Federal Court has indicated that it intends to hear the second test case in September this year, with any ensuing appeal to the full court to be heard in November.

In addition to the ‘organised’ test case proceedings presently being conducted, ‘stand alone’ litigation has been commenced, seeking to determine how certain policies respond to business interruption loss sustained by particular insureds.

Earlier this year, it was reported that a ‘Jetts Fitness’ franchisee in Victoria had commenced proceedings, challenging its insurer’s decision to decline indemnity for business interruption loss sustained as a consequence of government-ordered lockdowns in 2020.

Similarly, in August 2020, entities associated with The Star Casino commenced proceedings against their insurers, seeking a declaration of cover. The matter is now part heard.

Furthermore, it was reported in April 2021 that another insurer has commenced Federal Court proceedings against the liquidator of Educational World Travel, seeking a declaration that its policy does not respond to loss sustained by the business as a result of the pandemic.

The proceedings are expected to test the operation and interpretation of exclusion clauses which refer to the Quarantine Act 1908 (Cth), in the context of Victorian law.

Whilst there are a number of different proceedings on foot, advancing simultaneously and at different stages, the current ‘state of play’ places the insurance industry on a trajectory whereby the extent to which cover is available for business interruption loss caused by the pandemic is likely to be substantially clearer by the end of this year, or in the early part of next year.