A recent update on Covid-related business interruption coverage

In brief

The Federal Court of Australia recently ruled that a group of insurance companies was not required to indemnify a claimant for losses incurred as a result of government imposed COVID-19 business restrictions. 

The case of Star Entertainment Group Limited & Ors v Chubb Insurance Australia Ltd & Ors [2021] FCA 907 addresses two pivotal questions concerning Covid-related business interruption policy claims: what constitutes 'loss resulting from or caused by any lawfully constituted authority' and whether COVID-19 constitutes a 'catastrophe'.

Claim made for losses incurred due to business closure 

Following the mandatory closure of certain categories of businesses in 2020 to mitigate the spread of COVID-19 in Australia, Star Entertainment Group (Star Group), the owners and operators of the Star City Casinos in Sydney, Brisbane, and the Gold Coast made a claim under an Industrial Special Risks Insurance Policy (Policy) for the losses they had incurred from the closure of their businesses. 

The Policy provided cover to the Star Group for loss resulting from the interruption of their businesses due to physical loss, destruction, or damage to their properties by any cause or event not expressly excluded (Insuring Clause). The scope of coverage was subsequently extended to include any 'loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe' (Civil Authority Extension).

Cover was denied on the basis that the losses suffered were not caused by physical loss, destruction, or damage to the Star Group's properties and that COVID-19 was not a "catastrophe" within the meaning of the Civil Authority Extension. Star Group applied to the Court for declaratory relief. 

Court agrees with Insurer: COVID-19 is not a catastrophe within the meaning of the Civil Authority Extension 

Chief Justice Allsop of the Federal Court dismissed the Star Group's application for declaratory relief, finding that the losses claimed were not resulting from physical loss, damage, or destruction of the Star Group's properties and that COVID-19 did not constitute a catastrophe within the meaning of the Civil Authority Extension. 

The Court agreed with the Insurers that the Civil Authority Extension extended the coverage afforded under the Insuring Clause to the same type of physical loss of property but as resulting from the orders of a lawfully constituted authority. The Court, therefore, rejected the Star Group's submission that it included non-physical losses (e.g. economic loss, an inability to access the property, an inability to use the property, or a loss of custom) because the same would have to have been the cause of the business interruption itself.

The Court also agreed with the Insurers that the Australian authorities' responses to COVID-19 were a state of affairs arising from the imminent threat of a pandemic, as opposed to an event or occurrence capable of causing violent physical change or damage similarly to a conflagration.

However, the Court also noted that if its findings were incorrect and instead the construction proffered by the Star Group was accepted, that:

• bearing its ordinary meaning, there would be no limit on how developed the 'catastrophe' must be or a requirement that it must have occurred;
• the incipient threat or risk posed by Covid-19 in Australia would therefore constitute a 'catastrophe'; and
• the preventative actions adopted by the Australian authorities were in connection with, or for the purpose of, retarding the incipient catastrophe.

The Court otherwise withheld its judgment on the Star Group's claim under the Policy relating to the alleged spoilage of stock and merchandise whilst the parties filed their written submissions on the same in the interim. 

COVID-19 and the impact on business interruption insurance coverage

Subject to any appeal, the Court's judgment currently provides some certainty for Insurers as to the operation of similarly-worded special risks policies. 

Notably, there are other test cases currently on foot throughout Australia which, over the next few years, will provide further clarification on interpretation issues for business interruption policies in the context of COVID-19.