A significant Covid-19 related business interruption claim has been decided in favour of insurers. In Star Entertainment Group Limited v Chubb Insurance Australia Ltd  FCA 907, the Federal Court dismissed Star Entertainment Group’s claim for business interruption losses under an industrial special risks (ISR) policy. It appears Star has appealed the decision.
Not surprisingly, the decision ultimately came down to the construction of the specific policy in question. While consideration was given to whether government actions were causative of the loss, it was not the focus of the judgment. It is a reminder that, as was the UK experience, nuances in policy wordings may create different claim outcomes. Accordingly, companies should not think that a particular outcome in the courts will automatically apply to them.
Causation issues are expected to be dealt with more substantively in the second business interruption test case due to be heard in the Federal Court from 30 August to 8 September 2021.
Star Entertainment Group (Star), operator of casinos and other hospitality and retail venues, held an ISR policy (Policy) underwritten by eleven insurers. The Policy provided cover for physical loss, destruction or damage to the insured’s property (Section 1) and business interruption loss caused by physical loss, destruction or damage (Section 2). Section 2 cover was unlimited.
However, the Policy extended the Section 2 Cover by way of a civil authority extension (Memorandum 7). The provision stated:
CIVIL AUTHORITY EXTENSION
The word “Damage” under Section 2 of this Policy is extended to include loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe.
Before applying the extension, the word ‘Damage’ under section 2 of the policy referred to any building or other property ‘being physically lost, destroyed or damaged by any cause or event not hereinafter excluded’.
The Policy also provided $1 million in cover under a ‘Diseases Extension’. However, a ‘quarantinable disease listed in the Biosecurity Act 2015 (Cth)’ was excluded under that extension. Therefore …
Star rolls the dice
Star claimed that due to the civil authority extension, ‘damage’ under the policy included loss resulting from government action ‘in connection with or for the purpose of retarding’ the catastrophe of the COVID-19 pandemic. Star submitted that a ‘conflagration or other catastrophe’ is a sudden and widespread disaster and is not limited to fire, flood or earthquake.
Star was unsuccessful. Chief Justice Allsop was not convinced that the words ‘any conflagration or other catastrophe’ in the civil authority extension referred to events or occurrences which are not capable of causing physical loss, destruction or damage to property. Furthermore, he was not convinced that the ‘loss’ covered by the extension extended to non-physical loss, such as loss of use of the property or loss of custom or financial loss. Although not determinative, he also noted the insurers’ submissions that it would be odd if the civil authority extension provided unlimited cover for COVID-19 losses, when such losses were not covered under the Diseases Extension of the Policy.
No tricks to the Court’s interpretation
An insurance contract is a commercial contract. As a starting point, Chief Justice Allsop observed the Policy did not provide any cover for any form of business interruption or loss in respect of, resulting from or caused by COVID-19. Apart from the limited Disease Extension, the Policy also did not provide any cover for business interruption in respect of, resulting from or caused by any other disease. Star claimed its loss was caused by government action in connection with COVID-19, not COVID-19 itself.
While the claim was not declined because of an exclusion, instead finding that the insuring clause was not enlivened in the first place, the existence of perils exclusion 1(b) which applied to both Section 1 and Section 2 cover, was critical to the analysis of the civil authority extension in the policy.
Perils exclusion 1(b) stated that insurers will not be liable in respect of:
1. physical loss, destruction of or damage to the Property Insured
(b) resulting from confiscation, nationalisation, requisition or damage to property by or under the order of any Government or Public or Local Authority
Notwithstanding the provisions of Perils Exclusion 1(b) the Insurer(s) shall be liable for loss, destruction of or damage to, or the cost of removal of, sound property at the Premises for the purpose of preventing or diminishing imminent damage by, or inhibiting the spread of, fire or any other peril insured against under this Policy.
Chief Justice Allsop considered this exclusion ‘central to the resolution of the controversy’. It was significant that Section 2 (business interruption loss) only provided cover for damage that is ‘not hereinafter excluded’. Peril exclusion 1(b) excluded physical loss or destruction of or damage to property insured resulting from damage by or under the order of any Government of Public Authority but subject to a write-back.
The insurers submitted the write-back to the exclusion only applied to Section 1 (the material damage cover). Star argued that once there was coverage under Section 1, there was cover for business interruption under Section 2. Chief Justice Allsop preferred the insurers’ argument. In his view, the write-back referred only to the specific liability which insurers agreed to accept in respect of property damage. In his view, it did not write-back the cause or peril altogether for the purpose of Section 2 as well. Consequently, the purpose of the civil authority extension in the context of the Policy as a whole was to provide business interruption coverage for, among other circumstances, the circumstances of property damage subject to the write-back as it would otherwise be excluded.
On this basis, and having regard to other parts of the policy which used different wording to refer to loss of use, Allsop CJ held that there was a clear basis that ‘loss’ in the civil authority extension referred to physical loss only and not loss of use. Furthermore, ‘loss’ in the extension could not be financial because it would mean financial loss caused the interruption or interference with the business, which did not make sense. It should be the other way round. Furthermore, on Allsop CJ’s preferred construction, the words ‘other catastrophe’ in the civil authority extension only referred to an occurrence or event, not a state of affairs. Accordingly, it did not encompass a pandemic.
The game’s not over
The judgment also contains some judicial commentary in obiter which may be relevant to the construction of insurance policies in the local market. Chief Justice Allsop made these comments at the end of the judgment in case he was incorrect on the construction analysis. Interestingly, these comments are in favour of the insured.
The first issue considered in some detail was whether COVID-19 can be considered a ‘catastrophe’ in the context of the civil authority extension, and whether the actions of the various levels of governments were undertaken for the purpose of ‘retarding’ that catastrophe.
His Honour considered expert evidence from medical and economic experts and considered that there were four possible characterisations of COVID-19: as a global catastrophe, domestic catastrophe, incipient domestic catastrophe or no catastrophe at all. His Honour considered that the evidence showed that COVID-19 was, at the relevant time, a global catastrophe with at least an incipient existence in Australia and remarked that the ‘pandemic and the response thereto could not be disentangled’. His Honour also considered that the actions of the various levels of government were for the purpose of retarding the catastrophe.
A small win?
Notwithstanding it was unsuccessful on the business interruption claim, there were some promising comments for Star’s spoilage claim. Star claimed for spoiled food and beverages under an extension of the policy which provided a sub-limit of $250,000. Insurers denied this claim on the basis that a deductible of $750,000 applied. However, no specific deductible was stated in the policy for this cover. Insurers had asserted the deductible applied by force of the deductible section under Section 1 of the policy (material damage).
Chief Justice Allsop did not seem persuaded by insurers’ arguments but did not make a formal ruling. He found it difficult to reconcile a deductible three times the sub-limit, and that a spoilage claim could arise even if there is no material damage. He gave the parties opportunity to put further written submissions to resolve the issue.
Some concluding remarks – a lay-down misere for insurers?
While insurers were successful in this claim, it is possible there may be a different outcome after the appeal is heard. For now, policyholders may take comfort in the fact that the case was focused on the construction of a specific extension in Star’s ISR policy, meaning its application to other policies in the market may be limited.
This case follows a number of business interruption cases in Australia. In June this year, the High Court denied special leave to appeal the decision of the NSW Court of Appeal in HDI Global Speciality SE v Wonkana No 3 Pty Ltd  NSWCA 296. In Victoria, the case of the Vanilla Lounge is still ongoing following the decision of the Federal Court in respect of a specific question. The substantive aspects of coverage are still yet to be determined.
It is still yet to be seen how Australian courts will apply the decision of the UK High Court, noting there may be some material differences in policy wordings and the impact of COVID-19 in each jurisdiction.
We also expect causation issues to be dealt with more substantively in the second business interruption test case due to be heard in the Federal Court from 30 August to 8 September 2021. The second business interruption test case consists of nine separate claims which had been lodged at AFCA plus an additional test case initiated by QBE. The cases will be heard at the same time. It is expected the Federal Court will examine the meaning of policy wordings around disease, proximity issues relating to a COVID outbreak and the impact of government mandates.