On 21 February 2022, the Full Court of the Federal Court of Australia delivered judgment on appeal in the Second Test Case: LCA Marrickville Pty Limited v Swiss Re International SE  FCAFC 17. The appeals were heard over five days in November 2021 before Justices Moshinsky, Derrington and Colvin. The judgment relates to appeal points run by policyholders and insurers in five of the original ten proceedings which comprised the Second Test Case at first instance.
The Full Court substantially upheld the judgment delivered at first instance by Justice Jagot in 2021. In doing so, the Full Court affirmed findings made by her Honour:
- in favour of insurers, including that:
- government orders made in response to a general risk or threat posed by COVID-19 do not satisfy ‘disease clauses’ or ‘hybrid clauses’. This is because such orders do not satisfy the necessary causal connection, requiring the order to result from a specific occurrence or outbreak of disease at, or in the vicinity of, the insured premises;
- where a policy contains an insuring clause (e.g. a ‘hybrid clause’) which refers expressly to disease and an insuring clause directed to more general matters, such as “threat of damage” or “risk to life” (e.g. ‘prevention of access clause’), the more general clauses do not provide cover for business interruption consequent upon disease; and
- ‘catastrophe clauses’ do not provide cover for business interruption caused by COVID-19 because the phrase “conflagration or other catastrophe” refers to events capable of causing physical destruction and a disease pandemic does not meet this description; and
- in favour of policyholders, including that:
- to demonstrate an “outbreak” of COVID-19, evidence of transmission of the disease is not required;
- ‘prevention of access clauses’ are capable of responding to business interruption caused by orders motivated by the general risk posed by the pandemic on a broad (e.g. state-wide) scale.
- trends clauses cannot be applied to make an adjustment for losses resulting from the same “underlying fortuity” which gave rise to the insured peril.
However, the Full Court also overturned certain findings which her Honour made in favour of insurers at first instance and decided the issues in favour of policyholders instead. These include her Honour’s findings that:
- adjustments should be made to account for certain benefits, grants and other payments received by policyholders. The Full Court determined that no adjustment should be made to reflect such payments; and
- interest under section 57 of the Insurance Contracts Act 1984 (Cth) does not accrue given the on-going test case proceedings. The Full Court determined that the existence of test case proceedings does not necessarily mean that it was not unreasonable for the insurers to have withheld payment of claims.
This briefing paper addresses certain key aspects of the appeal judgment, including those areas where the Full Court has departed from findings made at first instance. However, having regard to the number of proceedings, policies and issues involved, this briefing paper is not intended to provide an exhaustive summary of all of the findings in and implications flowing from the appeal judgment.
To download the full briefing paper in PDF format, see below.