You are here:
Rockment Pty Ltd t/a
Vanilla Lounge v AAI Limited t/a Vero Insurance  FCAFC 228
Much attention has been given to the COVID-19 Business
Interruption insurance policy test cases in the NSW Court of Appeal (subject to
appeal) and the UK Supreme Court – the outcomes of which were somewhat
unexpected and unfavourable to insurers. However, given the discrete issues in
those test cases, a recent Federal Court Full Court judgment may be more
significant and authoritative for insurers seeking to rely upon current
pandemic exclusions. The Full Court unanimously held that the pandemic
exclusion should be given a broad and wide operation to exclude cover where a
clam arises from circumstances constituting an emergency as declared under the Biosecurity Act 2015 (Cth).
The policy holder was the owner of a café restaurant in
Victoria and had an insurance policy providing business interruption cover for
loss or damage caused by specified ‘insured
One of the specified insured events was ‘infectious disease, murder, suicide’ under which cover was provided
for: ‘ … Loss or damage as a result of
the closure or evacuation of the whole or part of the premises by order of a
competent government, public or statutory authority as a result of: … (d) the
outbreak of a notifiable human infectious or contagious disease occurring
within a twenty (20) kilometre radius of the premises …’
Cover was however excluded for: ‘… any
claim that is directly or indirectly caused by or arises from, or is in
consequence of or contributed by: … (b) … 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 Exclusion’).
On 16 March 2020 the Victorian Government declared a State of
Emergency under the Public Health and
Well-Being Act 2008 (Vic).
On 18 March 2020 the Commonwealth Government issued a
declaration that a ‘human biosecurity
emergency’ existed in Australia under s475 Biosecurity Act based upon Coronavirus (COVID-19) being an
infectious disease posing a severe and immediate threat to human health on a
nationally significant scale. That declaration enlivened powers under the Biosecurity Act by which the
Commonwealth Health Minister could impose restrictions on human activity,
however there was no relevant exercise of these powers.
Subsequent to the Commonwealth declaration, a number of
declarations were made by the Victorian Chief Health Officer under the Public Health Act which limited human
activity across Victoria, and which limited the business operations of the
policy holder such that it suffered a loss of gross profit.
On 14 April 2020 the policy holder notified the insurer of
its claim under the policy for business interruption loss. On 4 May 2020 the
insurer declined cover relying upon the Exclusion.
The policy holder issued proceedings in the Federal Court of
Australia seeking cover under the policy for its losses resulting from the
Victorian declarations. As part of those proceedings the Court was requested to
determine a ‘separate question’ as to
the operation of the Exclusion, in advance of determining all other issues. The
purpose of the separate question appears to have been to economically and
expeditiously determine the outcome of the claim if the Exclusion applied.
Further, the potential importance of the outcome of this question for other
cases apparently justified the question being referred for determination by the
Full Court, rather than a single judge.
The separate question the Court was requested to answer was:
‘Is it sufficient to exclude coverage
under [the Exclusion] … 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 insurer’s primary submission was that the Exclusion was
triggered as the claim was caused by ‘the
existence of a listed human disease
which formed the basis of a declaration of a human biosecurity emergency under
the Biosecurity Act’. In the alternative, its secondary (and potentially
broader) submission was that the Exclusion operated when ‘the claim was caused by the
state of affairs which constituted
the human biosecurity emergency which was declared under the Biosecurity
The policy holder contended that the Exclusion required the
claim to have been caused by the ‘declaration’
of a human biosecurity emergency, such that the operation of the Exclusion was
limited to excluding losses consequent upon the making of the declaration under
the Biosecurity Act.
The Full Court (Besanko, Derrington and Colvin JJ) had
difficulty determining the question as the manner in which it was framed was
not entirely harmonious with its interpretation of the Exclusion. The Court
answered the question ‘no’, which was
the answer sought by the policy holder (ie. the Exclusion did not operate in
the circumstances described in the question). However the Court made clear that
its construction of the Exclusion was largely consistent with the insurer’s
secondary submission. That is, the answer was technically ‘no’ due to the problematic manner in which the question had been
In determining the operation
of the Exclusion, the Court noted the broad causal connection permitted by the
use of the phrases ‘arises from’ and
‘in consequence of’, such that the
nexus / connection could be remote. The question then was identifying the
relevant ‘causal factor’ in the
On a ‘plain reading’
of the Exclusion, the Court considered that the relevant cause of the claim
needed to be ‘… an emergency which is
identified as one which is declared under the Biosecurity Act …’ – which
was not the primary position of either party.
The Court then descended into more detailed consideration of
the text and words used in the Exclusion, and arguments as to its ‘commercial purpose’ to interpret it.
In relation to textual considerations, the Court considered
that the relevant causal factor was an emergency which had been declared (being
a qualification to the subject matter), rather than the ‘declaration’ itself. Further, it would be incongruous to limit the
causal operation of the Exclusion to only Commonwealth declarations in
circumstances where cover was also provided for actions taken by other
governments and agencies (which may have exercised power for the same
underlying reason or cause).
In considering the commercial purpose of the Exclusion, the
Court qualified this consideration by stating that ‘primary importance ought usually be given to the ordinary meaning of
the words upon which the parties have agreed’ and that the ‘… commerciality of a particular construction
is relevant only when the lack of commerciality is so pronounced that it will
indicate some different construction must have been intended’. Ultimately
the Court was not influenced by the parties’ submissions as to the asserted ‘purpose’ of the policy (including the
insurer’s contention that it was uncommercial to provide pandemic cover) given
the limited evidence in support.
The Court ultimately concluded that the Exclusion applied to:
‘… a claim which is consequent upon loss
arising from a government ordered closure of the insured’s premises caused by the declared emergency …’.
However, this conclusion diverged from the question the Court was required to
answer as to whether the Exclusion applied to a claim caused by the existence
of a listed human disease as specified in a declaration. As ‘disease’ and ‘emergency’ were conceptually different, and ‘an emergency of a particular character’ was the relevant causal factor,
the posed question was necessarily answered ‘no’.
The Court otherwise observed that whether the Exclusion
operated in a particular case involving a government imposed closure required
examination of the causes for the closure. Where it occurred as a result of
requirements under the Biosecurity Act
following a declaration, it was likely that the causal connection would be
easily satisfied. Where the closure was pursuant to the power of another
authority, the position was less clear. However given the Exclusion permitted a
remote causal connection between the emergency and government action, it might
be difficult for a policy holder to deny the causative impact of that
government action after a declaration has been made.
Whilst the question determined by the Court did not
explicitly support the insurer’s broad interpretation of the Exclusion, it is
clear that the Court agreed with the insurer’s secondary (broader) submission
that the relevant causal factor which caused the policy holder’s loss was the
state of affairs which constituted the ‘human
biosecurity emergency’, which was declared under the Biosecurity Act. As such, the interpretation of this exclusion by
the Full Court (which is arguably as authoritative as the NSW Court of Appeal)
suggests a very broad operation for pandemic exclusions – subject of course to
adequate wording. This judgment will no doubt be welcomed by insurers given the
industry’s stated intent not to provide pandemic insurance – and may ultimately
be more relevant to their COVID-19 exposure given the ICA/AFCA test case
relates to exclusions referencing repealed historic legislation.
Further information / assistance regarding the issues raised in this article is available from the author, Andrew Toogood – Partner, Stephanie Lee – Senior Associate or your usual contact at Moray & Agnew.