COVID-19 Insurance Update: Insurers’ win round one in Star Casino claim based on loss resulting from action by authorities

The Chief Justice of the Federal Court has dismissed an insurance claim by Star Casino for its COVID-19 related business interruption losses.

The claim was based on an extension for “loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe”. Allsop CJ held that – while COVID-19 was a “catastrophe” in the ordinary meaning of the term, and that the actions by authorities were for the purpose of retarding it – the reference to an “other catastrophe” in this context was limited to insured perils capable of causing physical damage that would be covered by the Policy. Since COVID-19 was not insured, there was no BI cover for the loss arising from the actions taken by authorities to retard it.

This is a big win for insurers – the first win by insurers of any significance in a series of COVID-19 related BI test cases here and in the UK – and an important one in light of the flood of claims that would have followed a win by Star. Variations of the “Civil Authority Extension” (CAE) relied upon by Star can be found in most policies placed by the major brokers for ASX listed and large companies, so a lot of businesses have been watching the progress of this claim with more than just a passing interest.

Given the extent of the losses claimed by Star (the judgment notes there is no sub-limit), it seems inevitable that this first instance decision will be appealed to the Full Court of the Federal Court (3 judges), and potentially to the High Court after that. We will know within 28 days if there is to be second round in this battle. 

Background

Section 1 of the ISR Policy defines the types of “Damage” covered, which is typically limited to physical damage to insured property. In an “all risks” policy, all causes of the Damage are covered unless specifically excluded. Section 2 defines the business interruption (BI) cover payable upon the occurrence of such “Damage”.

COVID-19 does not cause physical damage, so policyholders need to rely on so-called “non-damage” extensions to cover to trigger an entitlement to Section 2 BI losses in the absence of Section 1 “Damage”.

The first ICA test case and many of the 9 claims in the second test case rely on the “Disease” extension and “Prevention of Access” extensions (see our summary here). Star’s claim however relied upon the CAE, which did not rely on the disease itself having interrupted its business, but rather the action taken by authorities with lockdown rules etc in order to retard the spread of the virus.

The key issues and findings in the Star claim

The CAE relied upon by Star was contained in Section 2 and extends the cover in the following terms:

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. [Emphasis added]

The meaning of this extension came down to two critical issues:

1. Does ‘other catastrophe’ in this context include COVID-19? Or is it limited to physical catastrophes – similar to the other example mentioned (‘conflagration’, which means a fire)?; and
2. Does the ‘loss’ to which Section 2 BI cover is extended mean “financial loss” (or even “loss of use/access/custom”, or is it limited to “physical loss” of the nature typically covered under Section 1?.

Allsop CJ found for the insurers on both issues, concluding that:

First, the better construction, and one conforming with the whole Policy, is to construe the words “conflagration or other catastrophe” in the Civil Authority Extension to refer to events or occurrences capable of or apt to cause physical loss or destruction of or damage to the property of the Insured at the Premises: that is, such events or occurrences as would be or are apt to be an insured peril.

Secondly, the loss referred to in the Civil Authority Extension is the physical loss of property not the loss of use of the property or loss of custom or financial loss.

Contextual reasons leading to the conclusion

There were a range of contextual matters his Honour took into account – many of which are not entirely discrete and all of which cumulatively lead to his interpretation of the CAE.

Overall structure and purpose: As a starting point, although His Honour noted that there are exceptions, fundamentally the structure and commercial purpose of an ISR policy is to cover physical loss or damage to Insured Property and business interruption resulting from that physical loss or damage.

Other extensions: There are several exceptions to the general rule that the policy only covers physical damage – being a variety of extension clauses providing coverage without reference to physical damage. On the policyholder’s argument, the CAE was one such clause. However, His Honour thought it relevant that the other extensions commenced with ‘Loss as Insured by Section 2…’ unlike the CAE which began by extending the term ‘Damage under Section 2’. His Honour considered this relevant as indicating that ‘loss’ in the other clauses related to ‘financial loss’ whereas ‘loss’ in the CAE related to extended forms of physical loss.

Lack of a sublimit: His Honour appeared to be influenced by the lack of a sublimit of liability attaching to the CAE. The effect of this being that, unlike other extensions, claims under the CAE could be made up to the overall limit of liability – being $4 billion.

Exclusions: The extension of the meaning of ‘Damage under Section 2’ also invited, in his Honour’s view, consideration of the general exclusions applying to physical loss destruction or damage insured under Section 1. Two exclusions were considered to be relevant:

1. First, exclusion 4(a) excludes physical loss, destruction or damage occasioned by … “disease”.
   
   His Honour noted that this means that “disease” is not an insured peril under the policy. Indeed, His Honour noted that the only coverage for disease is that contained in the limited terms of the “Disease” extension, which in this policy contained an exclusion for diseases listed under the Biosecurity Act 2015 (Cth).
   
   This meant that COVID-19 was not insured under the Policy (although this had never been challenged by Star). His Honour considered it would be an unusual result for loss from COVID-19 to be uninsured, but for losses from government action to retard it to be insured.
2. Second, the policy also contained an exclusion in the following terms (our emphasis added):

[This Policy does not cover]

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.

His Honour accepted the insurers’ submission that this excluded both Section 1 and 2 claims arising from damage to property by order of any Government, but the proviso wrote back cover only for Section 1 damage incurred for the purpose of preventing imminent damage. This meant, according to the insurers’ submission accepted by His Honour, that the work done by the CAE extension was to make it clear that a Section 2 claim could be made for business interruption losses arising from the Section 1 ‘prevention’ damage written back.  

Other Catastrophe: In relation to ‘other catastrophe’ specifically, his Honour re-emphasised the overall contextual structure of the policy, noting:

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.

On the basis of these (and other) contextual considerations, His Honour sided with the insurers’ interpretation of the policy. 

Other matters

His Honour also made a number of further comments in case he was incorrect in his conclusions.

COVID-19 was factually capable of being a catastrophe: Insurers had argued that, if a catastrophe did not need to be a physical catastrophe, then COVID-19 was not factually capable of being termed a catastrophe in Australia as its impact was not sufficiently significant. His Honour soundly rejected these arguments concluding that although the incidence of COVID-19 in Australia was less than it was globally, it was nonetheless a catastrophe in the ordinary sense of that term.

Were the actions of authorities done to retard the catastrophe: Insurers also argued that the government actions were done to avoid catastrophe before it occurred in Australia, and that the actions did in fact avoid a catastrophe, so (they argued) the actions were not to ‘retard’ an existing catastrophe. His Honour concluded that this missed the point, and that the actions were taken to retard a global catastrophe with an incipient presence in Australia.

Application of the “Adjustments” Clause: Insurers also argued that another reason not to accept Star’s interpretation of the CAE was that in a quantum hearing the amount of any loss resulting from the action by authorities would need to be considered in a counterfactual hypothetical in which no action was taken by authorities such that the pandemic had spread ‘unretarded’. This, it was said, does not readily lend itself to a counterfactual – i.e. because it would be difficult to calculate, coverage should not be provided. His Honour rejected this as a reason not to allow coverage, and noted that ‘it is not entirely clear whether that [insurers’] approach would be legitimate considering the terms of Item 1’ (i.e. cover for Loss of Gross Profit) but that the words of the adjustments clause ‘may be wide enough to encompass such a hypothetical counterfactual’.

Surprisingly, His Honour made no reference in this context to the UK FCA Supreme Court decision which unanimously held (contrary to the insurers’ argument) that the adjustments clause does not permit the counterfactual to consider as ‘other circumstances’ the uninsured causes which arise concurrently with the insured cause. The Australian approach to the ‘adjustments’ clause – and what is the correct approach to any counterfactual – is an issue to be resolved in the second ICA test case.

Commentary

While reasoning to deny “financial loss” (BI) claims based on the commercial purpose would be understandable (why would the policy cover financial loss from actions taken to retard events that would not themselves amount to an indemnifiable BI claim if not retarded?), there are many clearer ways to draft the CAE if that was indeed the limit of its purpose – why not just say the extension covers actions by authorities “in connection with or for the purpose of retarding any conflagration or other catastrophe event which would have otherwise lead to Damage indemnifiable under this policy”. Despite acknowledging that the policy covered ‘all-risks’ (unless excluded), His Honour appeared to place significant weight on the fact that COVID-19 was not itself insured by the Policy, and so could not find a commercial purpose to find that loss arising from actions to retard the pandemic were insured by the extension. Unlike the NSW Court of Appeal decision in the first ICA test case, where the Court eschewed the alleged intention and focused upon the words used in the Policy (Quarantine Act and subsequent amendments), Allsop CJ appears to have been more focused on the intention of the CAE.

And yet despite this focus, restricting the extension to “physical loss” caused by the action of authorities does not answer the question of what work the CAE was intended to do? If the authorities caused physical loss in preventing imminent insured damage then there would be Section 1 “Damage” (under the write back to Perils Exclusion 1(b)) so a regular Section 2 claim would be available without need to resort to the CAE. If its intended purpose is merely limited to clarifying that Section 2 cover is available for Damage excluded by Perils Exclusion 1(b), one might expect a cross-reference to that exclusion (as there is for other extensions e.g. Memoranda 8, 10, 11 and 16).

It is unlikely that this will be the final round of the battle in the Star case. Given the importance of the decision and the amount at stake, it was always inevitable that whoever lost at first instance would appeal to the Full Court of the Federal Court. After that appeal, expect the loser of that round to then apply for special leave to appeal to the High Court.

In terms of a final resolution of the issues, the second ICA “test case” (which includes 9 claims including one that contains a similar CAE) will provide guidance on the operation of a number of different extensions allegedly triggering coverage, and also questions of causation and the calculation of the quantum of claims. The trial of that case before Justice Jagot will be heard later this month, but the Full Federal Court has already scheduled time in November to hear the inevitable appeal by whoever loses, with a view to delivering the appeal decision before Christmas. Assuming the second ICA test case deals with the CAE issue in a manner consistent with the Chief Justice, then regardless of any appeal by Star it seems likely that the Full Federal Court will consider this issue again in November. Our overview of the status of the various test cases can be found here.

Insurers will therefore understandably be unwilling to engage with any COVID-19 related BI claims until the resolution of the appeal in the second ICA test case.

But don’t expect the loser of that appeal to throw in the towel then – whatever is decided, we should all expect an application for special leave to appeal to the High Court, meaning that any certainty is unlikely before mid-2022.

For further information and comment, please contact Mark Darwin on 0412 876 427 or mark.darwin@hsf.com or Travis Gooding on 0428 225 475 or travis.gooding@hsf.com