Victorian hospitality venues fail in bid to obtain cover for COVID-19 business interruption

Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors [2024] VSC 485

The COVID-19 pandemic has resulted in a significant number of cases in a multitude of jurisdictions. This case (being two proceedings heard together) is a further instance in which the Courts have been reluctant to find in favour of Insureds seeking cover under Industrial Special Risk (ISR) policies for interruption to business caused by the COVID-19 pandemic, unless the express terms of an extension have been satisfied.

Key takeaways:

  • Policies must be construed as a whole in a manner that avoids commercial absurdity and is more or less internally consistent. This is an iterative process involving cross checking different aspects of the policy against the other and investigation of their commercial consequences.
  • The use of the term ‘vicinity’ is a reference to ‘near or about, in the neighbourhood of’ the Insured Venues. It is not to be defined by some jurisdictional boundary.
  • Insureds cannot ‘reason back’ from a particular factual scenario (in this case, instances of COVID-19) to fit requirements of a particular policy.
  • Where a policy has been prepared by a broker and proffered to the insurers on behalf of the insureds, the contra proferentem rule cannot be applied in favour of the insured.
  • Insurers (and insureds) must be careful to ensure that any applicable sub-limits or deductibles can be readily referenced to any endorsements that they are intended to apply to.

Facts

Background

The plaintiffs in the proceedings operated pubs, bars and/or restaurants in greater metropolitan Melbourne in 2020. 

The plaintiffs:

  • in proceeding S ECI 2021 01558 (the Transit Proceeding) operated the Transport Hotel and Public Bar at Federation Square and the Notting Hill Hotel; and
  • in S ECI 2021 01815 (the AMFR Proceeding) operated the Deck Brighton, The King Hotel, the Nixon Hotel, True South, the Metropol, Hotel Brighton, Melbourne Central Lion and Bank on Collins, (collectively, the Insured Venues).

The Insured Venues were closed for two periods of time, specifically between 23 March 2020 and 31 May 2020 (the First Lockdown) and 8 July 2020 and 4 October 2020 (the Second Lockdown). 

At trial, it was accepted by all parties that each of the Insured Venues had suffered loss resulting from the closure of the respective Insured Venues. 

Each of the Insured Venues were insured under identical Industrial Special Risks Policy that had been drafted by and proffered to Insurers by the Insureds Venues’ broker, Pace (the Policies).  Each of the defendants were an insurer under those Polices.  Whilst the policy wording for each of the Policies was identical, coverage for each of the Insured Venues was tailored by the relevant ‘Schedules’ (the Schedules).

The Policies

The Policies contained an endorsement titled ‘CLOSEXB4’.  The Insured Venues relied entirely on this endorsement to make out their claim for indemnity for the loss caused by the First and Second Lockdowns.  CLOSEXB4 stated (emphasis added):

CLOSEXB4 CLOSURE BY ORDER OF A PUBLIC AUTHORITY

Loss as insured by this policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation of the whole or part of the Premises or other premises in the vicinity of the Premises by order of a competent public authority directly or indirectly arising from infectious or contagious human disease occurring at such premises shall be deemed to be loss resulting from damage to property used by the Insured at the Premises.

However, this extension will not indemnify Loss resulting from interruption of or interference with the Business directly or indirectly arising from or in connection with Highly Pathogenic Avian Influenza in Humans or any other diseases declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments.

The capital ‘P’ premises emphasised above is a reference to the Insured Venues.

The parties in this proceeding agreed that CLOSEXB4 was best described as a ‘hybrid clause’ as it was referred to both restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease.

The focus of these proceedings were on the first sentence/paragraph.[1] 

The Schedules

The Schedules to the Policies included a sub-limit which was described as ‘Infectious or Contagious Diseases, Vermin, Pest or Defective Sanitary Arrangements; Food or Drink Poisoning; Murder, Suicide (Annual Aggregate)’ (emphasis added) (Sub-Limit).  The Sub-Limit in the Transit Proceeding was $500,000 and Sub-Limit in the AMFR Proceeding was $350,000.

 

Insured venue's case

The Insured Venues’ case was one which relied on loss resulting from interruption of or interference with a Business due to the presence of COVID-19 at premises in the vicinity of the Insured Venues (Premises).

The Insured Venues did not seek to advance any alternative case or interpretation of CLOSEXB4.  Specifically, they did not seek:

  • to make any claim for loss caused by interruption caused directly or indirectly from the closure of other premises in the vicinity of the Insured Venues; or
  • to demonstrate that the Insured Premises were closed as a result of COVID-19 occurring at the Insured Venues.

There were two ancillary matters regarding the Sub-Limits and interest.  In regards to these, the Insured Venues also submitted that:

  • The Sub-Limit in the Schedule did not apply to the endorsement CLOSEXB4 and as a result, there was no applicable deductible.
  • The Insured Venues were entitled to interest under s 57(1) of the Insurance Contracts Act 1984 (Cth) (ICA) from 29 January 2021 in the Transit Proceeding and from 19 May 2021 in the AMFR Proceeding.

 

Judgment

The Court dismissed the Insured Venues’ claim.  Ultimately, the Insured Venues’ claim was dismissed based on the fact that:

  • on proper construction of the Policies, the case put forward by the Insured Venues did not fall within the confines of CLOSEXB4; and
  • even if his Honour was incorrect to find the above, that the Insured Venues had failed to demonstrate that the closure of the Insured Venues was caused either ‘directly or indirectly’ by an order of a competent public authority. Put simply, the Directions that were made by the Victorian Government did not arise (either directly or indirectly) from the occurrence of COVID-19 at other premises in the vicinity of the Insured Venues.

In regards to the other ancillary matters, the Court held that:

  • the Sub-Limit did not apply to the endorsement CLOSEXB4; and
  • the Insured Venues were not entitled to interest under s 57(1) of the ICA.

In reaching this decision, his Honour found the following:

  • The reference to ‘vicinity’ is a reference to the relationship between the other premises and the Insured Venues (Premises). ‘For the Policies to respond where the order is not an order relating to the [Insured Venues] themselves, the order must be for the closure or evacuation of other premises in the vicinity of the [Insured Venues]’.
  • The contra proferentem rule did not apply in this case. Even if it did, it could not be applied in favour of the Insured Venues because the Policies (including CLOSEXB4) were prepared by Pace being the broker for the Insured Venues and proffered to the insurers. 
  • The use of ‘vicinity’ is a reference to ‘near or about, in the neighbourhood of’ the Insured Venues. It does not refer to, as the Insured Venues contented, any jurisdictional area such as the state of Victoria, Greater Melbourne of any Local Government Area.  To do so would be inconsistent with ‘vicinity’ denoting geographic proximity in a uniform manner and would cause anomalies. 
  • The proof of whether the orders made directly or indirectly arose from the presence of COVID-19 at premises in the vicinity of the Insured Venues to be ‘objectively determined by what the authority did, what it said about it at the time, and the contemporaneous circumstances known by, or inferred to be known by the authority of the time…’[2]
  • There was no evidence to support a finding that the orders of the authority arose ‘directly or indirectly’ from COVID-19 cases in the vicinity of the Insured Venues. The stated purpose of each of the orders was to prophylactically ‘limit the spread of COVID-19’.  This provides no basis to support a finding that the orders arose ‘directly or indirectly’ from COVID-19 cases in the vicinity of the Premises. 

Additionally, in relation to the ancillary matters, the Court held that:

  • Nothing in the Schedule could be linked to the endorsement CLOSEXB4. Accordingly, the Sub-Limit did not relate to CLOSEXB4.
  • The underwriters were not ‘unreasonable’ in responding to the Insured Venues initial claim as the reasons given directly responded to the basis of the claim, was accurate, detailed and considered, and it invited the provision of further information.

This proceeding also raised and considered a number of issues relating to quantum which are not addressed in this article.

 

Comments

This case endorses what is now an established line of authority in Australia that the Court’s are reluctant to find in favour of Insureds seeking cover under ISR policies for interruption to business caused by the COVID-19 pandemic unless the strict terms of any extension can be established. 

However, it also serves as a timely reminder that each case is to be considered on its own merits having regard to the wording of the policy itself and the circumstances which is alleged to have caused the loss. 

Whilst the Insured Venues were not successful in this instance it does not mean that any ISR policy will not cover loss arising as a result of interruption and interference caused by the COVID-19 pandemic.  One only has to look at the Supreme Court of Victoria decision in Princess Theatre Pty Ltd & Ors v Ansvar Insurance Limited[3] in which the insureds were successful, albeit on a much broader wording that allowed for cover for loss resulting from interruption or interruption with the business in consequence of ‘closure of the whole or part of the premises by order of or in consultation with or upon advice from a Statutory or Government Authority following an outbreak of a human infections or contagious disease (that is notifiable)…within 25 kilometres of the premises’.

 

[1] The second sentence/paragraph concerned an exclusion for loss resulting from interruption or interference with the Insured Venues directly or indirectly arising from or in connection with any disease declared to be a ‘quarantinable disease’ ‘under the Quarantine Act 1908.  This was dealt with extensively in HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634.

[2] [288]

[3] [2024] VSC 363

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