The unprecedented circumstances resulting from COVID-19 has amplified the need to clarify the uncertainty faced by small to medium-sized businesses over whether standard insurance policies cover business related losses.

As Australian Courts seek to determine whether business interruption policy wording ‘declared to be quarantinable diseases under the Quarantine Act 1908 (Cth)’ should be read as ‘determined to be listed human diseases under the Biosecurity Act 2015 (Cth)’, the United Kingdom delve into similar and relevant policy issues.

The Financial Conduct Authority v Arch Insurance (UK) Ltd and Others, [2021] UKSC 1

Facts of the case

Commencing a test case under the Markets Test Case Scheme, the Financial Conduct Authority (FCA) sought clarification from eight leading business interruption policy insurance providers as to the meaning and effect of four different clauses; ‘disease clauses’, ‘prevention access clauses’, ‘hybrid clauses’ and ‘trend clauses’.

‘Disease clauses’ appeared in sections of the insurance policy which provides business interruption cover in “consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises”.

Considered in a similar manner by both the High and Supreme Courts, the determination at the Supreme Court allowed for increased cover availability. It decided that “in order to show loss from business interruption of the insured business was proximately caused by one or more illness resulting from COVID-19, it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause”.

In clarifying ‘prevention of access’ clauses, the words were interpreted to include cover for business interruption losses resulting from public authority intervention, either preventing or hindering the access or use of business premises.

Whilst the words ‘restrictions imposed’ had meant something expressed in mandatory terms, the Supreme Court determined that restrictions did not necessarily require the ‘force of law’ for the policy to apply. Where ‘inability to use’ had meant a complete inability to use the premises, it may also include the prevention of access to a discrete part of the business premises, depending on the wording of the insurance policy. Despite this, a mere impairment or hindrance of use would not be sufficient to satisfy an ‘inability to use’.

Hybrid clauses involving a combination of elements of both ‘disease clauses’ and ‘prevention of access clauses’, bestowed cover which would result by “restrictions imposed on the premises in relation to a notifiable disease”. Such conditions are applicable if the closure or restrictions placed upon such premises manifested from at least one case of COVID-19 within the specified radius of the insured premises.

‘Trend clauses’ were additionally clarified to apply to business interruption resulting from COVID-19, which generally provided for “business losses to be quantified by reference to what the financial performance of the business would have been had the insured peril not occurred”. This prevents insurers relying on a trend clause to reduce the indemnity on the basis that losses were caused equally by other perils, including COVID-19.

What does this mean for Australian businesses?

Whilst the UK Court’s interpretation on such insurance clauses is not strictly binding on Australian Courts, the decision allows for small to medium-sized businesses to assess whether their business interruption cover may insure their losses resulting from the COVID-19 pandemic.

Whilst the Australian case, HDI Global Specialty SE v Wonkana No. 3 Pty Ltd trading as Austin Tourist Park [2020] NSWCA 296, seeks to clarify some policy wording, it does not delve into business interruption issues to the extent of the UK test case. Consequently, it is likely that Australia will need to run a second test case requiring further clarification of the construction of particular clauses.

Should the Insurance Council of Australia’s appeal to the High Court be denied, Australian insurance companies will be required to make payments to policyholders under the interpreted policies subject to any additional arguments the insurers may seek to rely upon.

Small and medium sized businesses are encouraged to seek early assessment of their policy to determine their eligibility to receive policy benefits for losses sustained resulting from the COVID-19 pandemic.

To make an appointment please contact Danielle Snell or Robert McGirr.

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