Is business interruption loss caused by COVID-19 lockdowns covered by infectious disease extensions?

Princess Theatre Pty Ltd & Ors v Ansvar Insurance Limited [2024] VSC 363

In a recent judgment, the Supreme Court of Victoria (Justice Osborne) considered whether Melbournian theatre owners were covered for business interruption loss as a result of COVID‑19 lockdowns in 2020 and 2021 under an infectious disease extension contained in two industrial special risk policies.

This is the first of two articles covering the judgment. In this first instalment, we set out the approach taken by the Court in relation to coverage. In the second instalment, we will address how the Court determined the applicable limits of liability and assessed the quantum of loss.

Background

The policyholder plaintiffs owned theatres in Melbourne and were insured under industrial special risk policies which contained infectious disease extensions.

The relevant extension provided:

• cover for business interruption loss in consequence of closure of premises ‘by order of or in consultation with or upon advice from a Statutory or Government Authority following an outbreak of human infectious or contagious disease (that is notifiable)’ [emphasis added]; and
• an exclusion of liability arising as a result of any diseases ‘declared to be quarantinable diseases under the Quarantine Act (1908) and subsequent amendments’.

In 2020 and 2021, several lockdowns were declared in Melbourne to limit the spread of COVID‑19. The policyholders sustained business interruption loss connected with the closure of theatres as a result of the lockdowns, and claimed over $20 million under the extension.

Issues

Did the advice to close the theatres ‘follow’ an outbreak of human infectious or contagious disease?

The parties accepted that the extension was a ‘hybrid clause’ of the kind considered in the COVID-19 business interruption test cases, LCA Marrickville, on which we reported here (first instance decision) and here (decision on appeal). In considering whether the extension applied, Justice Osborne looked at whether the clause required the events to occur in a particular temporal or causal sequence. This turned on two issues.

First, it was necessary to consider whether there was an order or advice from an authority ‘following’ an outbreak. The insurer argued, drawing on the reasons at first instance in LCA Marrickville, that the relevant order was made to protect public health generally rather than ‘following’ an outbreak within 25km of the insured premises.

Justice Osborne disagreed with this interpretation of the causal test required by the term ‘following’. His Honour distinguished this case from LCA Marrickville on the basis that the relevant clause in that case included the words ‘as a result of’ rather than ‘following’. Referring to dictionary definitions of the term, Justice Osborne found that the ordinary meaning of ‘following’ is temporal. To the extent that there was uncertainty with the term, his Honour found that the contra proferentem rule applied to impose an ‘essentially temporal’ requirement on the term ‘following’. His Honour therefore concluded (at [118]):

[T]he ‘following’ element of the Extension requires the insured to be able to establish that an outbreak occurred within the relevant radius, that an order was subsequently made, and that there was a connection between the two. It does not require the insured to establish that the outbreak was the sole or even the dominant cause of the making of the order, only that the two were connected and that an outbreak occurred prior to any order relied upon.

Second, Justice Osborne considered whether the closure was made ‘upon advice from a [relevant] authority’. His Honour found that a statement from the Prime Minister that non‑essential businesses should not open in circumstances where more than 500 people may be present met this requirement and, in any event, shortly thereafter a formal closure order was made which separately triggered cover.

Does Quarantine Act mean Biosecurity Act?

The insurer argued that the exclusion should be read as referring to the Biosecurity Act as the parties had a common intention to replace the reference to the Quarantine Act with a reference to the Biosecurity Act.

Justice Osborne found that the evidence before the Court, which included evidence from the insurer’s underwriter on the risk he understood he was underwriting, did not demonstrate that the parties in fact had this intention. But even if it could be demonstrated that the parties had that intention, Justice Osborne would have denied rectification on equitable grounds. This was because the underwriter accepted under cross-examination that the two Acts were different and he was aware that there was some ambiguity around the exclusion.

This conclusion is consistent with the position reached in LCA Marrickville where, at both first instance and on appeal, the Court found that a reference to the Quarantine Act could not be rewritten as a reference to the Biosecurity Act.

Takeaways

The decision shows that the term ‘following’ in an insuring clause may impose a looser causal requirement than ‘as a result of’, particularly where the purpose of the term is uncertain from the terms of the policy. Indeed, the requirement that one event occur ‘following’ another may require only that the former occur later in time than, rather than having been caused by, the latter.

In relation to replacing reference to one Act with another, the judgment shows that parties to an insurance contract will need to bear close consideration to their evidential onus in seeking to establish that the parties had a common intention for the contract to be read in a way that it is not expressed.