Thinking | 12 August 2021
Federal Court Rejects massive COVID-19 BI claim
Chief Justice Allsop has rejected Star Entertainment Group’s attempt to recoup its losses from the COVID-19 pandemic through its $4 billion Chubb ISR policy.
His Honour carefully described the structure and operation of the policy and noted that physical loss of or damage to insured property is the core of an ISR policy. Section 1 provides indemnity for such loss. Section 2 provides cover for losses suffered as a consequence of the insured property being lost or damaged (business interruption losses). ISR is an all risks policy, in which the limits of cover are defined by excluded property and excluded perils.
The Chubb ISR policy included various extensions to this core cover, including a ‘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.
The case turned on the construction of this extension. Star suffered a significant drop in turnover from February 2020 by reason of the pandemic, and the associated public health orders made by State and Federal governments. Star claimed these losses were covered by the Civil Authority Extension notwithstanding that there was no physical damage to its insured property. The argument was that the word loss in the extension (in bold above for emphasis) should be construed as meaning loss of use of undamaged property and financial loss and that ‘other catastrophe’ encompasses the pandemic.
Before considering the proper construction of the Civil Authority Extension, his Honour noted that the policy otherwise provides no cover whatsoever for losses caused by COVID-19. Importantly, disease is an excluded peril. While the policy includes a Disease Extension (with a sub-limit of $1 million), it is only engaged by the discovery of organisms at the insured premises likely to result in the occurrence of a notifiable disease and it carves-out diseases listed under the Biosecurity Act 2015 (Cth).
The judgment usefully summarises the well-established principles for the proper construction of policies of insurance: ‘The policy is to be construed by giving business sense to a business document, being that which businesspeople in the course of their ordinary dealings would give to the document’. It is not an ‘exercise in fine textual exactitude as if one were engaging in a form of tongue and groove precision textual cabinet-making’. His Honour sensibly distilled several Latin maxims relied on by Chubb as merely reflecting the importance of using context to determine meaning.
Turning to the Civil Authority Extension, his Honour needed to resolve two questions:
First, does the word ‘loss’ in the extension mean physical loss (as contended by Chubb) or does it extend the section 2 cover to include loss of use of undamaged property or financial loss (as contended by Star)?
After considering the context in which the Civil Authority Extension appears, Chief Justice Allsop held that ‘loss’ means physical loss of insured property. His Honour held that a simple, contextual reading of the extension reveals an intention to extend cover only to physical loss to insured property caused by the acts of lawfully constituted authorities ‘for the purpose of retarding any conflagration or other catastrophe’ (such as physical loss to insured property caused by a back-burning operation intended to retard an approaching bushfire).
The fact the indemnity period under Section 2 commences upon ‘the occurrence of the Damage’ was also found to militate against ‘loss’ meaning loss of use of undamaged property or financial loss. An ‘occurrence’ in an insurance context means something which happens at a particular time, at a particular place and in a particular way. Loss of use or custom from restrictions imposed to contain the spread of disease cannot be aptly described as an occurrence. The loss the subject of the claim was caused by a state of affairs, not an occurrence.
Second, does the phrase ‘other catastrophe’ in the extension to section 2 encompass loss of turnover caused by State and Federal public health orders made in response to the pandemic?
Chief Justice Allsop again paid close attention to the textual and structural foundation on which this question arises:
In the Policy so overwhelmingly founded upon the causing of physical loss, destruction or damage and so contextually close to ‘conflagration’, the natural meaning of ‘other catastrophe’ is an event or occurrence apt to cause violent physical change or damage … Of course a pandemic of disease can in ordinary language be described as catastrophic or as a public health or economic catastrophe. But the context here is an ISR policy built on physical loss or destruction of or damage to property …
The fundamental difficulty with Star’s construction is that it would mean that the Civil Authority Extension would provide cover for the actions of authorities to retard a peril (disease) which is itself an excluded peril. As his Honour noted, this is not catastrophe insurance.
Star’s preferred policy construction also didn’t sit comfortably with the Disease Extension, which has a sublimit of $1 million, is only triggered when a notifiable disease organism is discovered at the premises and expressly carves out cover for pandemic type diseases (by reference to diseases listed under the Biosecurity Act). His Honour noted that it would be incongruous for the policy to allow such extremely limited cover for disease related losses, only for losses caused indirectly by the pandemic to be covered under the Civil Authority Extension without any sublimit, and so up to the policy limit of $4 billion.
This decision highlights the importance of giving business sense to the construction of a policy and taking into account the wider context of insuring clauses, including the core commercial purpose of the policy.
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