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Lucky Star: BI court judgment offers bright spot for insurers

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After an adverse legal decision on business interruption cover and the pandemic in the first test case, insurers may gain some confidence from a Federal Court judgment handed down on a different matter in their favour.

The Star Entertainment Group argued the COVID-19 pandemic was a catastrophe and actions taken by governments that led to non-physical losses were covered under a civil authority extension in its industrial special risks (ISR) policy

But Chief Justice James Allsop, in a decision delivered on Thursday, sided with Chubb and other insurers in finding pandemics were not included in the policy and Government-imposed restrictions for COVID-19 hadn’t triggered cover under the extension.

“Of course, a pandemic of disease can in ordinary language be described as catastrophic or as a public health or economic catastrophe,” he said.

“But the context here is an ISR policy built on physical loss or destruction of or damage to property and an extension to make clear that the consequences of an authority taking steps to retard a great fire or other catastrophe is to be understood as damage.”

Chief Justice Allsop added that “also not insignificantly, the pandemic or disease of COVID-19 is not an insured peril”.

The civil authority extension in the case refers to “loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe”.

Herbert Smith Freehills says the reference to “other catastrophes” in context was found to be limited to insured perils capable of causing physical damage that would be covered by the policy. Since COVID-19 was not an insured peril there was no business interruption cover for the loss arising from the actions taken by authorities to retard it.

Partner Mark Darwin says there’s a good chance The Star will appeal the decision, with other firms closely watching the result given civil authority extensions are often included in wordings for major companies.

“A few claims have been waiting in the wings, so it is a big win for the insurers, particularly given it was their first win of any significance so far in test cases here and in the UK,” he told insuranceNEWS.com.au.

The Insurance Council of Australia (ICA) lost the first test case, which centred on out-of-date wordings citing the Quarantine Act and subsequent amendments, after a NSW Court of Appeal hearing. The High Court then closed the door on a last-ditch appeal.

The second test case includes nine claims and a wider variety of issues, scenarios and wordings and relates to policies for smaller businesses. The Chubb ruling may have limited application, but one of the policies, provided for a beauty salon, includes wording that refers to “the action of a civil authority during a conflagration or other catastrophe for the purpose of retarding same”.

Federal Court Justice Jayne Jagot is set to hear the second case from August 30 to September 8, with time already set aside in November for likely appeals.

A number of other court cases are also afoot, separate to the ICA test case process, as policyholders seek to have issues resolved.

Berrill & Watson Principal John Berrill says the catastrophe benefit in The Star case isn’t widespread across business policies overall, while implications for policies that are similar will still depend on individual cases.

“There is an argument to say the decision is confined to the wording of this policy and it still leaves open the question of whether a catastrophe benefit under another policy may respond,” he said.

While The Star was unsuccessful in its case, there are also policies that refer to damage to property and person, and not just property, which could be more successful.

“We have always taken the view that it is very difficult to argue that COVID-19 causes damage to property as opposed to damage to persons,” Mr Berrill says.

ICA says it’s considering the implications of the Chubb’s win in The Star case and is looking ahead to the second test case beginning at the end of the month. That will almost certainly be appealed whichever way it is initially decided.

But for the moment at least, and in one situation, the legal battles have taken a brighter turn for insurers on the business interruption front.

Click here for the full ruling on The Star case.