Insurers lose High Court appeal over COVID-19 Business Interruption payouts

Following our previous articles of 16 September 2020 and 19 November 2020, it was outlined that the Insurance Council of Australia (ICA) lost its test case aimed at clarifying whether business interruption losses resultant from the pandemic would be covered under policies. The ICA subsequently appealed this judgment, and on Friday 25 June 2021 the High Court of Australia denied the appeal, upholding its original decision.

Andrew Hall, Chief Executive of the ICA commented “While we are disappointed, this decision on the first test case provides us with certainty”.

It is estimated that around 250,000 policies were in place when COVID-19 hit in 2020, which could cover businesses for interruption to trade arising from the Pandemic with the potential for claims reaching $10 billion.

In summary, the NSW Court of Appeal found and upheld that exclusions in business interruption insurance policies, which refer to the Quarantine Act 1908 (Cth) are to be strictly interpreted as excluding cover only for those diseases declared to be quarantinable at the time the Act was repealed in 2016.

However, it is also important to highlight that the extent to which an individual policy will respond is also dependent on the facts of that claim, the specific policy wording and whether the requirements that trigger cover under that policy wording (including any endorsements or extensions) have been met, in addition to the applicability of any exclusions. There are also “other” coverage issues that need to be resolved in order to determine whether there is business interruption cover relating to COVID-19.

These “other” coverage issues are currently the subject of a second test case in the Federal Court of Australia (Second Test Case). The request for a second test case arose following a request from a number of Insurers to AFCA in relation to providing guidance on the covering provisions found in many Business Interruption policies. AFCA agreed that under its Rules, a second test case could be submitted to a relevant court to consider these issues. On 24 February 2021, insurers lodged this test case in the Federal Court.

Whilst the first test case considered whether reference in a policy to a disease declared a quarantinable disease under the Quarantine Act 1908 (now repealed) could be taken as reference to a human infectious disease under the Biosecurity Act 2015. The second test case will provide guidance on the application and interpretation of coverage triggers and associated matters such as the definition of disease, the proximity of an outbreak to a business and prevention of access and closure of premises due to government orders.

The Second Test Case is set down for hearing in September with a published judgement anticipated in October 2021.

In response to the recent NSW Court of Appeal decision, a number of Insurers have been quick to release updates to its Policyholders and the broking community, advising that they will not be in a position to immediately finalise claims made for COVID-19 related business interruption losses until the outcome of the second test case and the resulting legal precedents are clear.

The Team at Bellrock is available to assist you with any queries or advice regarding Business Interruption insurance or related claims.