This year’s pandemic has caused widespread economic disruption, in large part due to government lockdown measures, and have produced substantial financial losses for businesses. Policyholders have claimed under business interruption (BI) insurance policies for these losses. Insurers have been unwilling to grant indemnity as pandemics have generally been considered uninsurable risks for the industry. Much like war, climate change and nuclear risks, the costs far exceed the capacity of the insurance industry.
Typically, BI clauses cover losses from physical damage to an insured property. This year, however, insurers have seen BI claims arise from political decisions to lockdown economies. How then are insurers and their underwriters appropriate assess risk and determine adequate pricing for cover of these risks? Insurers will say these risks have not been passed onto the consumer by means of higher premiums. And policyholders will contend the pandemic has caused the kind of significant financial strain against which they sought protection. Pandemics are particularly troublesome as they are not diversifiable, unlike risks like natural catastrophes which might only affect a certain region or industry.
Recent judicial interpretation of these interruption clauses has largely favoured policyholders in the wake of this year’s pandemic, which has in turn cast doubt on the insurability of such systemic risks.
HDI Global Specialty SE v Wonkana No. 3 Pty Ltd  NSWCA 296
The Insurance Council of Australia backed this as a test case, probably the first of several. In this case, the defendant insureds operated businesses which were covered under similar policies made by the plaintiff insurers. These policies provided cover for business interruptions caused by nearby outbreaks of infectious diseases. Cover under the policies was, however, subject to similar exclusions which provided:
“The cover … does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.”
The defendants claimed indemnity for business interruptions caused by this year’s pandemic. Those claims were denied by the insurers. They argued that the Biosecurity Act constituted a subsequent amendment and that the reference to the repealed legislation was an obvious mistake which should simply be construed as a reference to the Biosecurity Act. Accordingly, they submitted, disruptions caused by this year’s pandemic were captured by the policy’s exclusion clause.
The defendant insureds argued the exclusion clause was not triggered, since COVID-19 was not listed as a declared quarantinable disease under the Quarantine Act. Interpretation of the language of the policy cannot, in their view, be corrected by construction.
The Court of Appeal ruled in favour of policyholders. Their Honours all held COVID-19 was not a disease for the purposes of the subject exclusion clause, and as such indemnity was not barred by the exclusion clause. While, as Justice Hammerschlag stated, “it would have made better commercial sense for the parties to have referred to a current Act rather than one repealed”, the court cannot substitute its own commercial judgment for that of the parties by way of construction.
The London Experience: FCA v Arch Insurance (UK) Ltd & Ors  EWHC 2448 (Comm)
On 9 June 2020, the FCA brought a test case in the High Court seeking judicial interpretation on the operation of cover under various non-damage BI insurance policies issued by various insurers.
The High Court handed down its judgment on 15 September 2020. In relation to disease provisions which provided cover for losses caused by BI following the occurrence of a notifiable disease within the vicinity of insured location, the court’s interpretation was mostly in favour of policyholders. The court held cover need not necessarily be revoked on the basis that the occurrence of the notifiable disease falls outside ‘the vicinity’ of the insured premises. The Court reasoned that local business remained susceptible to disruption from distant outbreaks, due to the contagious nature of the virus and as a consequence of an increasingly globalised world. It held:
“there would be no effective cover if the local occurrence were a part of a wider outbreak and where, precisely because of the wider outbreak, it would be difficult or impossible to show that the local occurrence(s) made a difference to the response of the authorities and/or public.”
The court also considered ‘prevention of access’ clauses which provide cover in circumstances where there has been a hindrance of access to the premises due to restrictions imposed by order of a government body due to an emergency within a specified area. The Court interpreted such wordings more restrictively, providing a narrower, more localised cover compared to the disease wordings. This is further complicated in practice where it can often be difficult to quantify the degree to which a business has been interrupted by, for example, regulations requiring restaurants to close but permitting takeaway services.
And back to Australia:
This has been similarly challenged here in Australia. Just recently, the Federal Court listed hearings in April 2021 to hear claims for indemnity by The Star Entertainment Group against its insurers for business interruptions suffered as a result of COVID-19. Star will argue trading curbs imposed by the government during lockdown have caused financial loss due to prevention of access or use of its premises to conduct normal business. Chubb, the lead insurer of Star, declined indemnity in May this year, and the matter has been stood over for further case management.
This issue is far from over. How this plays out in the Courts remains to be seen, noting application for leave to appeal to the High Court has been made in the HDI Global Specialty case. However, in the aftermath of the Hayne Royal Commission, we can expect public opinion will be against the insurers, and early indications are that those insurers who have reserved on the basis they will be paying out on these claims are likely to be correct.