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Full Federal Court confirms broad operation of insurer's pandemic exclusion clause

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This article was written by Moira Saville and Liam Burgess

On 18 December 2020, the Full Federal Court delivered its judgment in Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCAFC 228, one of a number of recent and potentially significant court decisions in relation the scope of pandemic insurance exclusions.  

The Court rejected the interpretation of the exclusion clause put forward by the insured, and accepted the insurer's submission that the exclusion should be given a wide interpretation.  The decision suggests that exclusion clauses in a similar form are likely to be effective to exclude a broad range of losses arising from the COVID-19 emergency.

Background

The Applicant had made a claim under their business interruption policy for losses it says it suffered following the 2020 Victorian lockdowns.  AAI denied cover for the claim, and the Applicant commenced proceedings in the Federal Court of Australia in July 2020. 

A separate question concerning the proper construction of the exclusion clause was referred to three judges of the Full Federal Court, and heard on 27 November 2020. 

The Court formulated the question as follows:

Is it sufficient to exclude coverage under the exclusion in clause 8 in section 5 of Insurance Policy SPX015934895 if the claim is for loss or damage that is directly or indirectly caused by or arises from, or is in consequence of, or contributed by a human disease specified in a declaration of a human biosecurity emergency under the Biosecurity Act 2015 (Cth)?

The exclusion clause referred to in the separate question is as follows:

We will not pay any claim that is directly or indirectly caused by or arises from, or is in consequence of or contributed by:

… any biosecurity emergency or human biosecurity emergency declared under the Biosecurity Act 2015 (Cth), its subsequent amendments or successor, irrespective of whether discovered at the premises or the breakout is elsewhere.

The Decision

The Court answered the question "No" but gave the exclusion clause a broad interpretation that is likely to mean the majority of COVID-19 related claims under this and similar wordings will be excluded.

The Court found that it had been asked to identify the causal factor that will trigger the exclusion clause. It identified (at [15]) three possible triggers:

a)      The declaration made under the Biosecurity Act;
b)      The
emergency or the circumstances giving rise to the emergency; or
c)      The listed human
disease underlying the emergency.

The Court accepted (at [15]) that:

  • the exclusion clause would have a significantly wider effect if the trigger is (b) or (c); and
  • a narrower effect if the only causal trigger is (a).

The Applicant argued for answer (a), and that therefore the exclusion operates only where the loss or damage is causally consequential upon the making of the declaration under the Biosecurity Act (see [18]). On the Applicant's submission, the exclusion clause would only apply where a business had been shut down by a Commonwealth government order under the Biosecurity Act (not as the result of a Victorian State government order). 

AAI argued that the answer was (b) or alternatively (c) (at [17]), both of which would mean the exclusion has a wider operation.

The Court determined that the answer is (b), ie it is the 'emergency' (at [34]), albeit that emergency takes 'the form of a human disease' which must be of 'such seriousness that it becomes the subject of a declaration'.

The separate question, as drafted could only be answered "yes" if the causal trigger was (c), and therefore the Court answered the question "no" despite rejecting Rockment's construction and accepting a construction that was closest to the alternative construction put forward by AAI (at [70]).

The Meaning of 'Emergency'

The Court found that the emergency is the 'state of affairs which underpinned the making of the declaration' (at [27] similarly [35]) and:

"the essence of that state of affairs, the emergency, is the existence of a disease of great severity and significance" (at [47])

Other likely requirements for the existence of a biosecurity emergency appear to be (at [31] and [66]):

  • the disease poses a severe and immediate threat or is causing harm to human health on a nationally significant scale;
  • the circumstances of the emergency are such that the declaration is necessary to prevent or control either the entry into Australia of the disease or its emergence, establishment or spread (though this element may not be necessary, [66]); and
  • the existence of a declaration itself - 'The presence of these characteristics makes possible the making of the declaration which, itself, is also necessary' (at [31]).

Critically, while these factors align with the statutory thresholds for the declaration of an emergency, the Court found that the exclusion 'does not say that the claim must be caused by the Commonwealth declaration: it must be caused by an emergency of that limited kind' (at [37]).

Interpretation of the Exclusion

The Court's finding appears to give the pandemic exclusion clause a broad operation concerning claims for losses connected with COVID-19. 

The Court found that the exclusion clause will operate where a human biosecurity emergency has been declared to exist, and a business has been shut down by government order as a response to that emergency, whether Federal, State or Local. In particular:

  • The emergency need not directly cause the loss for it to be excluded - The Court held the exclusion can apply even where the connection between the emergency and any government action is remote (at [68]).
  • The commercial purpose of the exclusion is wide - The Court found that the 'the causal connection between the claim and the identified causes of loss is cast in wide terms' (at [6]).
  • The relevant loss-causing closure can be by any government – The Court concluded that "a claim which is consequent upon loss arising from a government ordered closure of the insured's premises caused by the declared emergency is within the scope of the Exclusion" (at [65]) and  'the chain of causation would link the claim to the emergency of the specified kind, irrespective of the entity that ordered the lockdown' (at [16]).

In considering the commercial purpose of the exclusion, the Court also noted that 'Courts could expect that insurers are not likely to offer high-risk cover for matters such as pollution or pandemics, save pursuant to express provisions' (at [63]).

Disease vs Emergency

The Court found that 'The listed human disease is conceptually different from the human biosecurity emergency"([66]), because a disease may be listed under the Biosecurity Act, but never become the subject of an emergency declaration.'

The Court found that hypothetically this could make a difference to the outcome in some unusual circumstances (see [67]), for example, a biosecurity emergency might be declared in respect of the risk posed by a particular listed human disease in some parts of the country, while other parts of the country remain free of the circumstances constituting the emergency.  A small outbreak of the same listed disease might occur in an otherwise unaffected part of the country, in which case a question might arise as to whether closures resulting from that isolated outbreak were contributed to by the emergency (and therefore subject to the exclusion), or if the small outbreak (and the closures responding to it) were causally separate from the emergency.

The Decision

While the Court did not accept that the exclusion would wide enough to necessarily exclude a claim simply because it arose from COVID-19, the decision supports a wide interpretation of pandemic exclusions in the form considered in the case and makes clear such exclusions are likely to be sufficient to preclude claims arising from government closure orders made in response to the pandemic emergency, regardless of the level of government that issued the relevant order.

The matter will now be remitted to a single judge to determine the remaining issues in the proceedings, including whether the exclusion precludes cover on the facts of the case.

Note: King & Wood Mallesons (including the authors) acted for the respondent in the proceedings mentioned in this article. 

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