BI claims

Client update - Australian COVID-19 related business interruption losses: Update on Appeals of Test Case 2 and Star Casino Judgments

SYDNEY, 4 March 2022 

The Full Federal Court of Australia has determined the appeals of the Test Case 2 and Star Casino litigation. 

The appeal judgments were decided overwhelmingly in favour of insurers: in five of the six appeal cases, policyholders were found not to have any entitlement to business interruption coverage for COVID-19 related losses under the terms of their policies, based on the circumstances of their cases.  

Test Case 2 Appeal

The Test Case 2 appeal involved five separate small business claims from a range of business sectors and locations, involving various insurers and policy wordings. 

The Full Court found that four of the five policyholders were not entitled to business interruption cover for COVID-related losses under the terms of their policies. The question of coverage was left open in the fifth case. 

In deciding there was no cover, the Full Court made the following key findings in construing the policies:

  • Where policies contain specific clauses providing disease cover, cover is limited to those specific clauses. It would be incongruent to then find cover available under more general clauses. This meant disease coverage did not arise under other non-damage clauses in the policies including Prevention of Access, Closure by Authorities, Catastrophe or Loss of Attraction clauses.
  • Insurers could rely on exclusions referring to the Biosecurity Act to exclude cover for COVID-19, but references to the Quarantine Act could not be relied on for this purpose (see our earlier Client Update regarding the findings in Test Case 1). 
  • The word “catastrophe” means something that is sudden and relatively certain in time (but not necessarily ‘physical loss’), rather than a state of affairs which emerges slowly or progressively over time such as a pandemic. The reference to “or other catastrophe” in connection with “conflagration” required a significant physical event causing widespread physical destruction or loss of life. 
  • The findings in the UK decision of FCA v Arch were distinguished. Unlike the position in the UK, it could not be inferred that business closures (directed by state governments) were caused by local outbreaks of COVID-19 either at or within the areas required under the insuring clauses. Australia did not suffer the widespread outbreak of COVID-19 which occurred in the UK in 2020 and 2021. The actions of the Commonwealth Government were taken to prevent entry of COVID-19 into Australia, rather than respond to the existence of COVID-19 within Australia.
Despite finding there was no cover, the Full Court made the following additional findings relating to adjustment of covered claims:
  • Interest – Interest will begin to accrue on unpaid insurance claims from the date it is unreasonable for the insurer to withhold payment (which may include time for the insurer to investigate and reach factual conclusions).
  • Job Keeper payments do not reduce the amount payable for a valid claim.  
Star Casino Judgment 

In our earlier Client Update we reported on the Federal Court’s decision in Star Casino’s claim against insurers for business interruption losses due to COVID-19.  On appeal, the Full Court agreed with the earlier decision that there is no cover for such loss under Star’s ISR policy and dismissed the appeal. 

Consistent with the decision reached in the Test Case 2 appeal, the Full Court found the disease section of the Policy expressed the full extent of the insurer’s liability under the Policy and read down other sections of the Policy to avoid inconsistency with that clause. 

Next steps

It is unclear whether policyholders will apply for special leave to appeal to the High Court, which must be done within 28 days of the appeal decisions. If that happens, it could be mid-late 2022 before we know whether a further appeal will proceed to the High Court. 

Once there is certainty around any High Court appeal, insurers will finalise their coverage decisions in response to notified COVID-19 related business interruption claims. 

For those policyholders with insurance policies with specific disease clauses that have Biosecurity Act (or other valid) exclusions, the outcome of the appeal decisions is likely to be that there will be no cover under those policies. 

For policies with exclusions which refer to the (repealed) Quarantine Act, policyholders may still be entitled to make a claim for COVID-19 related business interruption loss depending on the specific terms of their policies and the facts of the claims (including any loss suffered).

Aon is here to help any client who held business interruption cover and wishes to lodge or notify an insurer of their business interruption claim. Insureds should also seek independent legal advice if they require legal advice on policy coverage. AFCA has produced an Information Sheet Establishing business interruption loss due to COVID-19” which sets out a helpful list of the type of financial information that should be retained and will assist in establishing business loss.

Any questions?

If you have any questions or wish to discuss your business interruption claim, or your potential business interruption claim, please contact your assigned Aon Claims contact person or member of your Aon account team. 

We will continue to provide updates on relevant developments in relation to this evolving issue in our Aon Newsroom.

Disclaimer: This Alert is not intended to be taken as personal advice and should not be relied upon as such. It is not intended to be comprehensive, nor does it, or should it be construed as constituting legal advice. You should seek independent legal or other professional advice before acting or relying on any of the content of this information. Aon will not be responsible for any loss, damage, cost or expense you or anyone else incurs in reliance on or use of any information contained in this Alert. 

© 2022 Aon Risk Services Australia Limited ABN 17 000 434 720 AFSL No. 241141 (Aon)  

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