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On Thursday 5 August 2021 Allsop CJ handed down his decision in the Star Entertainment Group v Chubb Insurance Australia Ltd [2020] FCA 907. This decision was keenly anticipated by the Insurance Industry as it is the second case in Australia to consider indemnity under a business interruption policy concerning losses related to the COVID-19 pandemic.
The first case, the ICA Test Case, considered the operation of the “quarantinable diseases” exclusion in the infectious diseases extension.
This case considers the construction of the Civil Authority Extension in an amended Mark IV Industrial Special Risks Policy (ISR).
In this case the applicant, the Star Group operates casinos in Sydney, Brisbane and the Gold Coast. It also operates associated hotel, food, beverage and retail businesses. During the COVID-19 pandemic it was forced to close various premises by government order. It claimed under its ISR policy for business interruption.
An ISR policy is broadly comprised of two sections. The first provides cover for the physical loss, destruction or damage to insured property. The second provides indemnity for loss resulting from interruption of business, the physical loss, destruction or damage of the property of the insured brought about by insured perils.
The indemnity clause of section 2 of an ISR Policy is worded as follows:
In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter being excluded (loss, destruction or damage so caused being hereinafter termed “Damage”) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will subject to the provisions of this policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.
Provided that the Insurer(s) will not be liable for any loss under this Section unless the Insured’s property lost, destroyed or damaged is insured against such Damage and the Insurer or Insurers by which such property is insured shall have paid form or admitted liability in respect of, such Damage unless no such payment shall have been made or liability shall not have been admitted therefor solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.
The Civil Authority Extension provides:
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 Star Group asserted that the word “loss” in the first line of the Civil Authority Extension should be given its ordinary meaning which includes loss of ability to use property and associated losses of loss of custom and financial loss. The effect of this would be to broaden the scope of indemnity under section 2 of the Policy to cover business interruption losses of any kind caused by conduct of a lawfully constituted authority in connection with or for the purposes of retarding any conflagration or other catastrophe.
They further submitted that the COVID-19 pandemic is a “catastrophe” and the governmental orders was the conduct of lawfully constituted authorities to retard that catastrophe.
The Insurers disagreed with the Star Group’s interpretation of the operation of the Civil Authority Extension. Insurers emphasised that the fundamental object of the Policy was to provide indemnity for various perils that cause physical loss, destruction or damage to real and personal property of the insured. That the policy was not intended, unless there was some extension, to cover loss of business in the absence of physical damage. Any construction of the Civil Authority Extension had to have regard to that fundamental object.
Insurers submitted that the word “loss” was used in two distinct ways in the insuring clause. First as part of the composite expression “physical loss, destruction or damage” and second as the amount to be paid resulting from the interruption in accordance with the Basis of Settlement. Insurers noted that elsewhere in the Policy, specific words - such as “Loss as insured by section 2” or “Loss as insured by this Policy” - were used to broaden the cover under Section 2 to financial loss which was not physical in nature. These words were not used in the Civil Authority Extension. As the government action did not cause any physical loss and destruction to the insured property, the extension did not apply.
Further, insurers asserted the words “other catastrophe” in the context of the policy meant an event which has geographical proximity to the property insured and happens at a particular time and place and in a particular way. The words suggest an identifiable and discrete event, not a state of affairs.
Allsop J agreed with Insurers interpretation. After a detailed analysis of the policy - in particular the interaction of sections 1 and 2 and the operation of perils exclusion 1 (b) and its write back he found that:
- the word “loss” in the extension means physical loss of property, not loss of use, or of custom or financial loss;
- the phrase “other catastrophe” means an occurrence or event not a state of affairs apt to cause physical loss or destruction of or damage to property and is not apt to refer to or encompass, and does not reach to include a pandemic; and
- consequently the Civil Authority Extension was not engaged.
This decision should be a welcome relief to insurers, in particular in respect to the Court’s willingness to accept that the general intention of an ISR policy is to respond to property damage and that specific language is required to enliven non damage BI triggers.
Read other items in the Australian Insurance Brief - October 2021
Insurance and reinsurance
Australia