On 21 February 2022, the Full Court of the Federal Court of Australia (Moshinsky, Derrington and Colvin JJ) handed down its judgment in Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2022] FCAFC 16, an appeal concerning a business interruption insurance policy during the COVID-19 pandemic.
The matter raised issues as to the proper construction of an insurance policy styled as an "Industrial Special Risks Insurance Policy" (ISR Policy). The Full Court found in favour of the insurers, noting that insurance policies are commercial instruments where there has been an evaluation of the extent of risk for the purpose of settling upon an appropriate premium.
This is a welcome judgment for insurers regarding the construction of insurance policy coverage provisions in novel situations such as the COVID-19 global pandemic, and in turn the assessment of reserves.
Background
Star sought a declaration that its insurers were obliged to indemnify it for loss resulting from interruption to its business caused by government orders and advice directed to restricting the spread of COVID-19. The primary judge, Allsop CJ, determined that the declaratory relief sought by Star should be refused.1
On appeal, the Full Court noted that the ISR Policy begins with a provision to the effect that the policy incorporates its various parts "which are to be read together". The ISR Policy was therefore to be given an operation by which all of its components form a single coherent commercial instrument.
Section 1 of the ISR Policy is headed Material Loss or Damage and Section 2 is headed Consequential Loss. Following each of the two sections is a list of memoranda, a list of exclusions, a further list of memoranda that applied to both sections and finally a list of endorsements.
The Full Court traversed the case law that establishes that a policy of insurance, as a commercial contract, should be given a businesslike interpretation. In this matter the ISR Policy (as a commercial instrument) should be construed as a whole by considering the entire text.
The Full Court noted that the ISR Policy document has some aspects that are bespoke, and other aspects that indicate the use of standard terminology. It adopts a form common to many insurance instruments, whereby separate clauses are deployed to limit, exclude and extend the operation of the principal provisions that describe the nature and extent of the primary cover.
In order to agree a premium for the particular coverage that is sought, underwriters usually work with policies that provide established and known types of cover for particular types of risk. From that base, they must evaluate the incremental changes to exposure that result from the inclusion of particular limits, exclusions and extensions.
Therefore, although the Full Court focused upon the particular clauses in issue, they placed those provisions in the overall context of the ISR Policy by due regard to what it revealed about its purpose.
The key provisions of the ISR Policy
The indemnity in Section 2 of the ISR Policy is expressed in the following terms:
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 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.
The above provision is immediately followed by a proviso in the following terms:
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 for, or admitted liability in respect of, such Damage unless no such payment shall have been made or liability shall not have been admitted therefore solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.
Memorandum 7 of the Memoranda to Section 2 provides:
Except to the extent this Policy is hereby modified under the following Memoranda the terms, conditions and limitations of this Policy shall apply...
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.
Memorandum 9 provides that "Damage" is extended to include loss resulting from:
a) Any occurrence of a Notifiable Disease (as defined below) at the Premises or a Notifiable Disease attributable to food or drink supplied at the Premises,
b) Any discovery of an organism at the Premises likely to result in the occurrence of a Notifiable Disease
...which causes restrictions on the use of the Premises on the order or advice of the competent Local Authority...
Star accepted that COVID-19 met the policy definition of "notifiable disease".
Star's claim
Star's position depended upon two propositions concerning Memorandum 7, namely:
(a) the reference to "loss" is not confined to physical loss; and
(b) the manifestation of COVID-19 (both as to the risk and the eventuality of its spread) falls within the ambit of the words "or other catastrophe" such that orders and directions by government authorities made in order to limit the spread of COVID-19 were "in connection with or for the purpose of retarding" that catastrophe.
Decision
Upholding the decision of the primary judge, the Full Court rejected Star's position concerning Memorandum 7 and found that Memorandum 9 expresses the full extent of the insurers' liability under the ISR Policy.
Memorandum 9 limits that liability in a number of ways, including by requiring there to be an "occurrence" of human infectious or contagious disease "at the premises", by specifically excluding certain diseases by reference to the Biosecurity Act, by providing for a maximum limit on the period of any claim of three months and by applying the coverage sublimit within Memorandum 9.
The Full Court held that the scope of Memorandum 7 is to be read down so as to avoid inconsistency with the language of Memorandum 9 and dismissed the appeal, with costs.
1 Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2021] FCA 907.
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