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Welcome surprise: BI test case delivers win for insurers, but appeal looms

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After the shock of losing the first business interruption test launched last year there must have been much industry relief on Friday as the Federal Court handed down a judgment that went overwhelmingly in favour of insurers.

The decision delivered by Justice Jayne Jagot also contrasts with the UK test case run by the Financial Conduct Authority that finished in January and which came down more in favour of policyholders.

“My initial thoughts are that this is a surprising win for insurers,” HFW Special Counsel Sophy Woodward tells insuranceNEWS.com.au.

“It is surprising because the approach taken by Justice Jagot to causation appears to be somewhat different to that taken in the UK and other common law jurisdictions such as South Africa.”

Ms Woodward notes that the decision distinguishes between different factual circumstances in Australia compared to the UK, including Government arrangements and the varying nature of the COVID-19 outbreaks.

The Insurance Council of Australia (ICA) test case looked at nine small business claims lodged with the Australian Financial Complaints Authority as part of its dispute resolution process, while a separate QBE matter involving a question of Victorian property law was also heard.

The case looked at hybrid, infectious disease, prevention of access and catastrophe clauses and whether or not they provided cover during COVID-19 lockdowns and disruptions.

Justice Jagot, delivering a decision less than four weeks after the hearing, found the clauses do not apply, with the exception of one matter involving an infectious disease wording used in a claim involving IAG and Meridian Travel.

But even there, she suggested cover may not be triggered ultimately as evidence suggests the main “and perhaps sole” cause of impact was a cruise ship ban and restrictions on international travel to and from Australia.

“This is a different cause from the insured peril which requires the outbreak of a human infectious or contagious disease occurring within a 20km radius of the situation,” she said. “Insurance Australia and Meridian Travel will be given an opportunity to consider their respective positions.”

On another issue, Justice Jagot rejected insurer arguments that Victorian property law had the effect of replacing references to the now repealed Quarantine Act with references to the Biosecurity Act.

Arguments around regarding the Quarantine Act and subsequent amendments as including the replacement Biosecurity Act were previously fought and lost by insurers on other grounds in the first test case.

Justice Jagot also looked at how claim payments might be calculated if a Full Court appeal should find she is incorrect in whether cover is triggered.

“If I am wrong and the insuring clauses do apply, then the insureds’ losses are necessarily reduced by Commonwealth JobKeeper payments, relief on franchise fees granted by a franchisor, and rental reductions or abatements granted by a lessor,” she said.

Other payments in the nature of “act of mercy” payments, including a Commonwealth and a number of state grants, not made to reduce the insureds’ losses would be claimable.

Underwriters had already notched up one other preliminary legal win, with Federal Court Chief Justice James Allsop ruling in favour of Chubb and other insurers in a dispute with The Star Entertainment.

The casino group has already filed an appeal on that decision and it will now also be considered during the November 8-16 hearing dates set aside for the test case.

Insurers also still face a number of other legal battles with several class actions filed, including a case in the Victorian Supreme Court involving Melbourne theatres affected by COVID-19 restrictions.

Class Actions have been commenced in the Federal Court on behalf of certain QBE and Lloyd’s policyholders by Gordon Legal and Berrill & Watson. The case management hearing on those matters, supported by litigation funder Omni Bridgeway, is scheduled for February 8.

The class action lawyers say even with Friday’s judgment, test case appeal processes could still drag a final decision into next year. The ICA first test case was not finally resolved until the High Court rejected a final appeal application.

Berrill & Watson Principal John Berrill says there are many variations in policy wordings and the ICA process has taken far too long.

“It’s critical for businesses to get advice about whether they are covered, to gather all the necessary documents about their losses and to lodge a claim with their insurers,” he says.

“What’s really frustrating for Australian businesses forced to wait for money they believe is rightfully owed to them is that in the UK, these arguments were settled in January and businesses are already receiving payments for their losses.”

No-one’s prepared to get too hopeful or too despondent just yet on the back of the Federal Court decision on Friday.

“It’s obviously a setback for policyholders, but there is still a Full Federal Court appeal to be heard and potentially also the High Court,” Herbert Smith Freehills Partner Mark Darwin tells insuranceNEWS.com.au.