The insurance industry is committed to an efficient, transparent, and consistent claims process that is fair to all policyholders and ensures the sustainability of the insurance industry, which is a vitally important sector of the economy.
Given the complexities that arise in relation to business interruption policies in the context of COVID-19 impacts, it has been necessary to obtain clear guidance from the courts as to how business interruption policy wordings are to be interpreted and applied so that decisions can be made by insurers and the Australian Financial Complaints Authority (AFCA) in an efficient, fair and consistent way.
There have been two test cases heard in the Courts to assist with determining key aspects of business interruption cover. These test cases are important in providing clarity to the broader insurance industry as to how business interruption policies are to be interpreted.
It is important to note that guidance was only sought in relation to business interruption policies and not any other type of insurance policy.
Insurers, including those not directly involved in the court proceedings, have committed to applying the reasoning of the final judgments of the test cases in an efficient, transparent, and consistent way when assessing claims. The insurance industry has also met the legal costs of the policyholders in both test cases.
Quarantine Act exclusion
Many business interruption policies sought to exclude cover for pandemics through a reference to the Quarantine Act, however, the Quarantine Act was repealed in 2016 and replaced by the Biosecurity Act. A test case on this issue was heard in 2020 in the NSW Court of Appeal, which ruled in favour of policyholders. This judgment was upheld in June 2021 when the High Court denied insurers’ application for special leave to appeal.
The High Court’s decision in June 2021 means insurers cannot rely on references to the Quarantine Act to deny liability in policies written in the same terms as the policies considered in the first test case.
Although this test case was decided by the NSW Court of Appeal the decision is relevant to all Australian claims regardless of location.
Policy wording interpretation
A second test case was undertaken to resolve further interpretations of aspects of business interruption policies to establish whether policyholders would ultimately be covered.
This test case centred around the meaning of policy wordings on disease definition, COVID-19 outbreak proximity, the impact of government mandates, and other policy wording matters.
The matter was heard in the Federal Court in September 2021 and a judgment was delivered in October 2021.
Policyholders filed appeals to the Full Court of the Federal Court on five of the test case matters and insurers filed cross-appeals and notices of contention in relation to those five matters.
Five other matters in the test case involving insurers Chubb, Allianz and Guild were not appealed.
The Full Court of the Federal Court delivered its judgment on 21 February 2022, which substantially upheld the earlier Federal Court judgment delivered in October 2021.
In short, the outcome following the appeal to the Full Court was:
- In nine of the ten cases (four of the cases that were appealed and the five that were not), the Court concluded that the insuring clauses do not apply, and that the insurers are not liable to indemnify the policyholders;
- In one of the cases that was appealed, the Court concluded that one of the insuring clauses applied, but observed there are substantial issues as to whether the policyholder can prove that it is entitled to any indemnity. The parties to this case will be given an opportunity to consider their respective positions, and the insured may seek to further pursue its claim before the trial judge; and
- Insurers could not rely on a section of Victorian property legislation to exclude liability.
Further details about the Court’s key findings is set out in this document which includes two schedules which contain a:
- Summary of outcome by claim; and
- Summary of policy wording guidance
This document and the schedules contain only a general summary of the key findings but a full copy of the judgment and summary delivered by Justice Jagot of the Federal Court on 8 October 2021 is available here:
A full copy of the judgment and summary delivered by the Full Court of the Federal Court on 21 February 2021 is available here.
1. Full Court of the Federal Court Judgment: Second test case
2. Full Court of the Federal Court Judgment Summary: Second test case
On 21 March 2022, applications for special leave to appeal to the High Court were filed by two policyholders and one insurer to appeal parts of the judgment of the Full Court. The High Court heard oral arguments on the applications for special leave on 14 October 2022 and refused all three applications.
The High Court’s decision means that the judgment of the Full Court was upheld and insurers can now apply the reasoning in that decision.
Claims will ultimately be determined based on the applicable principles of the final judgments in the test cases, as well as the wording of the particular policy of the policyholder.
What about class actions?
Class actions have been commenced against some insurers relating to business interruption claims.
Given the test case process agreed to by AFCA and insurers it is not necessary for policyholders to join a class action. Insurers have committed to AFCA and the Australian Securities and Investments Commission (ASIC) they will follow the rulings of the courts in both business interruption test cases in a consistent way when assessing business interruption claims. This also applies to claims that fall outside AFCA’s jurisdiction (ie, are valued at more than $1.085 million).
The issues to be covered in any class action are likely to overlap with the issues in the business interruption test cases which have now been decided. Given the overlaps involved, the Federal Court ordered that the four class actions which were commenced in July 2021 be adjourned until all the applications for special leave relating to business interruption were determined by the High Court. As the special leave applications have now been decided the Federal Court will now consider whether the class actions (or a part of them) will proceed.
Class actions typically involve substantial fees being payable to the lawyers and litigation funders. A policyholder who successfully resolves their claim via a class action may lose a significant portion of their claim in fees. In contrast, AFCA can make binding decisions on claims up to $1.085 million free of charge for policyholders.
Generally, a class action takes between one and three years to resolve, whereas the test case proceedings in the Federal Court have now been completed. This means that insurers (and AFCA) now have the direction and guidance from the test cases to process BI claims before any of the class actions are resolved.
How does this apply to small businesses claims?
Agreements have been signed by the ICA, AFCA and participating insurers that AFCA will follow the reasoning of the final judgments of the test cases when dealing with other similar complaints. Insurers including those not directly involved in the court proceedings, have also committed to applying the reasoning of the final judgments of the test cases in an efficient, transparent, and consistent way when assessing claims.
Small businesses can lodge a business interruption claim (if they have a business interruption insurance policy) at any time and insurers will respond to those customers on a case-by case basis. The ICA and its members, in consultation with the National Insurance Brokers Association have worked together to prepare a list which provides a general outline of the documents and information required to submit a BI claim. This list is for guidance only as each claim will be different and your insurer may require additional material. However, by preparing the material detailed in this list, your insurer will be able to assess your claim more efficiently. The list can be accessed here.
