Finding in favour of insurers, the Full Federal Court substantially upheld the first instance decision in the COVID-19 BI Test Case.
On 21 February 2022, the Full Court of the Federal Court of Australia delivered judgment on appeal in LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAC 17 ("Second Australian BI Test Case").
The appeals were brought by five insureds (LCA Marrickville, Meridian Travel, the Taphouse Townsville, Market Foods, and the liquidator of Educational World Travel) from a judgment of Justice Jagot handed down on 8 October 2021.
At first instance, there were 10 proceedings/test cases concerning the operation of business interruption insurance policies in the context of the effects of COVID-19, including government actions which were taken to control the spread of COVID-19. Other than in the Meridian Travel test case, Justice Jagot concluded that the insuring clauses did not apply in the circumstances of each case.
In the Meridian Travel test case, Justice Jagot held that the infectious disease clause applied. Unlike the equivalent policy provisions considered in the other cases, the Meridian Travel infectious disease clause did not require that the insured premises be closed, or that the closure be by order/action of a competent authority resulting from the outbreak of a human infectious or contagious disease occurring within a specified radius of the premises.
However, Justice Jagot also held that there were substantial issues as to whether Meridian Travel could prove (as required by the policy wording) that its business was interrupted or interfered with as a result of outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation. Meridian Travel and the insurer (Insurance Australia Limited) were given the opportunity to consider their positions in light of the reasons at first instance.
A more detailed analysis of the first instance judgment can be found in our December 2021 bulletin here.
On appeal, the Full Court of the Federal Court of Australia substantially agreed with the conclusions of Justice Jagot in each of the five proceedings. In particular, the Full Court agreed that in each of the cases other than Meridian Travel, the insuring clauses did not apply. In relation to Meridian Travel, the Full Court substantially agreed with the conclusions of Justice Jagot.
The Full Court diverged from the first instance judgment with respect to two main points:
- Adjustments to be made with respect to certain types of third party payments received by policyholders; and
- Application of interest under section 57 of the Insurance Contracts Act 1984 (Cth) (ICA).
The first instance judgment held, by reference to the indemnity principle, that, in the event an insurer was liable to provide indemnity under a policy, third party payments (including government grants and subsidies) targeted at mitigating the policyholder's indemnifiable loss (e.g. JobKeeper, rent relief) should be taken into account when adjusting the claims.
On appeal, the Full Court held that no adjustment should be made as the third party payments do not satisfy the causal requirement of the "sum saved" provision in the relevant policies. The court held that in light of the detailed policy provisions, including basis of settlement provisions, "there is simply no room for general principles applicable to contracts of indemnity to operate".
Section 57 of the ICA provides that an insurer is liable to pay interest on amounts payable under a policy from the date upon which it was unreasonable for the insurer to have withheld payment. At first instance, Justice Jagot determined that, to the extent any of the policyholders involved in the Second Australian BI Test Case were entitled to indemnity, interest under section 57 would not apply to any such payment because it was not unreasonable for the insurers to await the outcome of the test case (including any final determination on appeal) before paying the claim.
The Full Court took a different view and held that the existence of a bona fide dispute as to liability, including a test case, does not, of itself, mean that an insurer is not unreasonably withholding payment of a claim and is therefore not liable to pay interest on amounts payable under the policy.
The appeal judgment in the Second Australian BI Test Case is important and consolidates the position in favour of insurers making it difficult for most policyholders to successfully claim under business interruption insurance policies for COVID-19 related losses in Australia. However, each claim will turn on its own facts and policy wording.
The parties had a period of 28 days in which to apply for special leave to appeal to the High Court of Australia. Special leave applications have now been filed in the LCA Marrickville, Meridian Travel and the Taphouse Townsville proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
