Thinking | 1 March 2022

Full Court upholds rejection of massive COVID-19 BI claim

By Matt McDonald

On the same day it delivered judgment in the 2nd COVID 19 BI test case, the Full Court of the Federal Court delivered a unanimous defeat for Star Entertainment Group in its attempt to recoup losses from the COVID-19 pandemic through its $4 billion Chubb ISR policy.

The Court noted that physical loss of or damage to insured property is at 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 (with our emphasis above) should be construed as meaning loss of use of undamaged property and that ‘other catastrophe’ encompasses the pandemic.

At first instance Chief Justice Allsop found that ‘loss’ in the Civil Authority Extension means physical loss of insured property and does not extend to loss of use of undamaged property. His Honour also rejected Star’s argument that the phrase ‘other catastrophe’ in the Civil Authority Extension encompasses loss of turnover caused by State and Federal public health orders made in response to the pandemic.

The Full Court considered the principles underpinning the proper construction of the Civil Authority Extension. In rejecting Star’s argument that it should be considered on its own terms and in isolation from other policy benefits, the Full Court noted that ‘the policy is to be given an operation by which all its components form a single coherent commercial instrument’. The policy is to be given a businesslike construction and should ‘not be approached by isolating particular fragments or disregarding its overall character’.

Turning to the two key questions of construction arising from the Civil Authority Extension:

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)?

The Full Court upheld Star’s first ground of appeal which contended that the word ‘loss’ in the Civil Authority Extension is not confined to physical loss. Contrary to Allsop CJ’s first instance finding, the Full Court held that the Civil Authority Extension extends the insured event (physical damage to insured property) such that it includes consequential loss resulting from a specified event (being the action of a civil authority in connection with or for the purposes of retarding any conflagration or other catastrophe).

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?

In resolving this question in Chubb’s favour, the Full Court paid close attention to the textual and structural foundation on which this question arises.

A fundamental difficulty identified in Star’s preferred 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.

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 insured premises and expressly carves out cover for pandemic type diseases (by reference to diseases listed under the Biosecurity Act). The Full Court noted that it would be incongruous for the policy to allow such 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.

The Full Court noted that, on Star’s case, ‘the very general would apply over the very specific’ in that the carefully worded terms of the Disease Extension (concerning not only what was covered but also what was not covered), would be defeated where the occurrence of human infectious disease might be described as a catastrophe. That construction was rejected by the Full Court, which held that the Disease Extension expresses the full extent of the liability of Chubb under the policy for any business interruption losses suffered by reason of the occurrence of human infectious or contagious disease.

It was also held that the reference to ‘or other catastrophe’ in the Civil Authority Extension must take meaning from its immediate context. The fact that this follows the word ‘retarding any conflagration’ means that ‘the focus of the reader is upon physical actions that can be done to impede, interrupt or slow down the course of a great fire’. The words ‘or other catastrophe’ are therefore to be confined to catastrophic events that can be retarded by physical actions directed towards restraining or interrupting the progress of a physical phenomenon. This construction does not extend to steps taken by civil authorities to curtail the risk of or spread of a contagion.

This decision and the related Full Court decision in the 2nd COVID BI test case confirm the importance of giving business sense to the construction of policy terms and taking into account their wider context, including the core commercial purpose of the policy.

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Matt McDonald

Matt is an experienced insurance lawyer acting for leading insurers, specialising in public and product liability.

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