AILA National Conference 2022 - Opening Address

Sydney

1 I begin by acknowledging the traditional custodians of the land from which I address you today, the Gadigal people of the Eora Nation, and pay my respects to their elders past, present and emerging. I would like to welcome you all to the AILA’s National Conference and express my thanks to the organisers for inviting me to open this important forum for the discussion of pressing issues facing the insurance industry today.

2 In my remarks this morning I will discuss some matters that we may derive from COVID-19-related insurance litigation.^[1] The COVID-19 pandemic has undoubtedly had a profound impact upon the insurance industry. Claims data published by the United Kingdom’s Financial Conduct Authority reveals that in the United Kingdom alone, more than £1 billion has been paid out in connection with non-damage business interruption claims since the pandemic began.^[2] On any view a hit to the reinsurance market. As we continue to grapple with the impact of the pandemic, judicial decisions on the topic of insurance coverage for business interruption occasioned by COVID-19 provide important insights for practitioners: lawyers, underwriters, managers, agents and brokers.

Importance of commercial courts

3 Considering not only the sums at stake but also the severity of the consequences for insureds of coverage being approved or denied, courts appreciate the importance of judicial guidance on whether certain policy wordings are enlivened by outbreaks of COVID-19 or by government authorities’ response to this deleterious disease. Commercial courts have, with some alacrity, attempted to expedite consideration of such questions.

4 How such expedition has been achieved has, of course, been shaped by the particularities of each jurisdiction.^[3] In England and Wales, for example, the Financial Conduct Authority and eight insurance companies agreed to bring a test case to resolve questions about 21 exemplar insurance policies under the Financial Markets Test Case Scheme. That Scheme permits a claim raising issues of general importance concerning financial markets to be determined without the need for a specific dispute between the parties.^[4] Following delivery of judgment in that test case by the UK Supreme Court, the Commercial Court announced that it would be monitoring COVID-19 business interruption insurance cases via a dedicated sub-list.^[5]

5 In Australia, our constitutional framework requires a justiciable controversy, which prevents hypothetical test cases being brought. Nevertheless, Australian courts quickly and effectively responded to the need for guidance from the business community. Australian courts have made a dedicated effort to hear matters concerning COVID-19 business interruption insurance on an expedited basis to support the hearing of these disputes by superior courts. The first major test case came from the Commercial List in the New South Wales Supreme Court that went immediately to a five judge Court of Appeal in Wonkana.^[6] In the Federal Court, similar expedition occurred, assisted by the smooth operation of the Federal Court’s dedicated Insurance List under the National Court Framework, which has existed since 2016. The ten cases comprising various insurers and policies concerning almost the full gamut of issues, LCA Marrickville v Swiss Re International SE,^[7] were commenced in the Federal Court in February and April of 2021. They were case managed by myself and Justice Jagot, and a trial occurred before her Honour in September 2021. In under a month, Justice Jagot delivered her reasons, comprising some 373 pages and 1,152 carefully considered paragraphs. The Full Court appeals from these cases, together with another appeal from me (Star Entertainment Group Limited v Chubb Insurance Australia Ltd^[8]) in the Insurance List, were heard in November 2021 and judgment was delivered in February 2022 such that the answer of the Full Court was provided less than a year after the cases were first filed (noting that a special leave application is currently pending before the High Court). I commend the judges involved, the Insurance Council of Australia for their assistance and initiative in bringing the cases forward, and the underwriters, brokers and insureds and their lawyers for their co-operation in achieving this expedition and providing the necessary clarity for policyholders and insurers.

The centrality of policy wording

6 The cases decided so far remind us of the critical importance of the wording of insurance policies. Obviously, the way in which policies define risks and coverage for those risks can vary considerably. The fact that an insurance policy includes coverage for a subject matter generally like ‘business interruption’ or ‘disease’ is only a starting point in the question of whether the insured is entitled to indemnity from the insurer. Whether an insured is covered for the occurrence and consequences of a particular misfortune involves determining whether their policy of insurance responds to the specific circumstances at hand. That inquiry invariably begins with the construction of the words of a policy to ascertain their meaning, in the context of the policy as a whole.

7 As the Full Federal Court said in Liberty Mutual Insurance Company Australian Branch t/as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd:

The working out in a coherent and congruent fashion of the operation of a market specific insurance policy requires a businesslike interpretation to bring about a commercial result based on what a reasonable business person would have understood the policy to mean. The principle that a policy is to be construed so as to avoid it “working commercial inconvenience” and so as to bring about commercial efficacy and reflect common sense is to be given concrete operation, not passing lip-service. To the extent that words used in an insurance policy have the capacity for broader or narrower operation, such constructional choice or ambiguity will be resolved by appreciating the context, including the market, in which the parties are operating, and the extent to which a reading of the words may produce commercial inconvenience or commercial efficacy as part of the ascription of meaning that would be made by a reasonable businessperson considering the language used, the surrounding circumstances known to the parties and the commercial purpose or objects of the policy as a whole to be secured. It should always be recalled, however, that a broad or a narrow meaning of a policy may only reflect the breadth or narrowness of cover that has been purchased by the premium.^[9]

(Citations omitted.)

8 The commercial convenience or inconvenience is not what can be discerned ex post facto after the event occurs but what can be reasonably appreciated or foreseen by the reasonable parties negotiating the policy.

9 I also draw your attention in that passage to the emphasis on the perspective of a “reasonable business person”. To adopt this perspective does not involve introducing subjectivity into an objective inquiry. Rather, it gives proper acknowledgement to the commercial context of insurance documents and is entirely in line with common sense. The identity of the “reasonable business person” depends on the circumstances of the case. A complex, commercial business interruption insurance policy will and ought be read from the perspective of a business person, having some commercial understanding, especially if represented by a broker, and not from the perspective of a small business owner inexperienced in the delicate balance of risk allocation in enigmatic commercial insurance policies. As the eminent Lord Bingham explained in Homburg Houtimport BV v Argosin Ltd:

When construing a commercial document in the ordinary way the task of the court is to ascertain and give effect to the intentions of the contracting parties…There are a number of rules, some very long standing, which give valuable guidance.

First is the rule…“that a business sense will be given to business documents.” The business sense is that which businessmen, in the course of their ordinary dealings, would give the document. It is likely to be a reasonably straightforward sense since, as Lord Mansfield famously observed: “The daily negotiations and property of merchants ought not to depend upon subtleties and niceties; but upon rules, easily learned and easily retained, because they are the dictates of common sense, drawn from the truth of the case.”

Secondly, it is common sense that greater weight should attach to terms which the particular contracting parties have chosen to include in the contract than to pre-printed terms….

Thirdly, it has long been recognised by very distinguished commercial judges that to seek perfect consistency and economy of draftsmanship in a complex form of contract which has evolved over many years is to pursue a chimera…The court must of course construe the whole instrument before it in its factual context, and cannot ignore the terms of the contract. But it must seek to give effect to the contract as intended, so as not to frustrate the reasonable expectations of businessmen…

Fourthly, “In all mercantile transactions the great object should be certainty…”^[10]

(Citations omitted.)

10 With this in mind, ultimately the task of interpreting an insurance policy, as the learned Justice Meagher said in an extra-judicial address to this Association, involves identifying and testing competing constructions of crucial wording against other provisions of the policy and the commercial consequences of the rival possible meanings.^[11]

11 Thus, in cases concerning COVID-19-related business interruption courts have carefully considered the meaning of the words “loss”,^[12] “physical loss or damage”,^[13] “danger”,^[14] “restriction imposed”^[15] and “inability to use”^[16] as those words appear in particular policies of insurance.

12 To take one example, in Star Entertainment Group Limited v Chubb Insurance Australia Ltd, the Full Federal Court considered whether the words “loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe” applied to loss resulting from the orders and directions issued by government authorities to limit the spread of COVID-19.^[17] The Full Court found that in the context of the relevant policy, the term “catastrophe” means a physical phenomenon, the course of which may be affected by a physical action.^[18] The appellant had argued that the clause should be read so as to apply to any actions taken in connection with any conflagration or other catastrophe.^[19] The Full Court rejected this construction on the basis that, as a matter of ordinary language, the focus of the phrase is upon circumstances in which an authority does a thing that amounts to retarding a conflagration or other catastrophe. The significance of the word “retarding” means that the insured peril must be of a kind that is capable of an authority taking an action to retard it. The word “conflagration” also assists in indicating the nature of the catastrophe and the actions that the parties had in mind, which supports the view that the parties contemplated actions in the nature of physical actions taken by authorities as a “conflagration” cannot be “retarded” merely by the making of orders or the giving of advice.^[20] The Full Court acknowledged that orders imposed to stop the spread of a human disease such as COVID-19 may broadly be described as “retarding” the disease, but there was awkwardness involved in such a description given that the spread of disease cannot be physically restrained and the orders of government authorities during the pandemic were not directed towards the virus itself, but rather to individual behaviour with the purpose of limiting the opportunities for the virus to spread.^[21] Therefore, the Full Court concluded that a reasonable business person would understand that the reference to “catastrophe” does not include an occurrence such as the COVID-19 pandemic.

13 The emphasis on a reasonable, business-like construction of insurance policies that takes the language of the policy as its starting point is an approach that finds favour with commercial courts internationally.^[22] In Terry Black’s Barbecue, LLC v State Automobile Mutual Insurance Company, the United States Court of Appeals for the Fifth Circuit considered whether the claimant insureds who operated restaurants in Texas were covered by business interruption or civil authority provisions of relevant policies of insurance.^[23] The policies of insurance provided cover for loss of income caused by (using the well-known words of general commercial liability policies) “direct physical loss of or damage to the property at the premises” and for loss caused by “the order of a civil authority…resulting from…exposure of the described premises to a contagious or infectious disease.” The Court held that executive orders issued by the Governor of Texas during the pandemic directing people to refrain from dining in at restaurants, which resulted in the appellants’ curtailing their usual business operations and losing revenue, did not trigger either provision. The suspension of dine-in services did not have a “tangible” impact on the appellants’ property and accordingly did not fall within the plain meaning of “physical loss”.^[24] The Court held that in the context of the policy the loss required was an actual loss of property rather than a loss of use of property.^[25] Further, the civil authority provision relating to contagious disease was not triggered in the circumstances because the orders did not “result from” the restaurants’ exposure to COVID-19. The risk that the insuring clause was directed to was the actual or alleged poisoning or contamination of the premises and hence the clause required that an authority’s orders be enacted because of exposure at the premises. The Governor’s orders did not trigger the clause because they were enacted to prevent the spread of COVID-19 generally in the community.^[26]

Careful attention to policies as a whole including their structure and nature

14 In construing policies of insurance in the context of COVID-19-related cases, the courts have also paid careful attention to the structure and nature of policies. In considering various prevention of access and hybrid clauses in The Financial Conduct Authority v Arch Insurance (UK) Ltd, the UK Supreme Court noted that the structure of these clauses required the satisfaction of multiple, discrete elements to trigger the insurers’ obligation to indemnify the policyholders.^[27] Each policy that the Court considered required, cumulatively, loss, interference in the use of an insured premises, and an underlying emergency or disease. The Court found that the structure of these particular clauses meant that the elements were “required to operate in a causal sequence”.^[28] Thus, on one of the policy wordings, cover required the occurrence of a notifiable disease which caused restrictions to be imposed by a public authority, which in turn caused an inability to use the insured premises and resulted in an interruption to the policyholder’s activities that directly caused their financial loss.^[29] The Court concluded that in the circumstances, the actions of the UK Government taken in response to the COVID-19 pandemic satisfied the elements of the clause in the required manner.^[30]

15 The interaction between different clauses in insurance policies is important in determining the extent of the insured’s coverage. In LCA Marrickville v Swiss Re International SE, the Full Court of the Federal Court considered one policy of insurance which included a business interruption clause (clause 7) covering loss resulting from business interruption caused by any legal authority preventing or restricting access to the insured’s premises as a result of threat of damage to property or persons within a 50 kilometre radius of the insured’s premises.^[31] That policy of insurance also included another clause (clause 8), a murder, suicide and infectious disease clause, which provided cover for any legal authority closing or evacuating the insured’s premises as a result of the outbreak of an infectious or contagious human disease within a 20 kilometre radius of the premises, excepting certain specified diseases. The Full Court upheld the primary judge’s finding that the business interruption clause had to be construed in the context of the infectious disease clause as to do otherwise would involve “profound incongruence and incoherence”.^[32] The Full Court accordingly found that the business interruption clause did not apply where an authority prevented or restricted access to the insured’s premises by reason of the outbreak of infectious disease because, if this were not the case, the requirements of the infectious disease clause (including its narrower radius and its exclusions and limitations) would be circumvented.^[33]

16 The composite nature of an insurance policy was an important factor in the reasoning of Justice Cockerill in the English case of Corbin & King Ltd and others v AXA Insurance UK plc.^[34] In that case, which was handed down in February this year, Justice Cockerill had to consider the scope of cover under a Denial of Access (Non Damage) clause and the applicable policy limit in a combined business insurance policy issued by the defendant insurer to the claimants, who owned various establishments in London which were forced to close on multiple occasions in 2020 due to the pandemic. In relation to the quantum of cover, it was significant for Justice Cockerill that the policy of insurance was a composite policy.^[35] A policy which insures the interests of a number of different insured persons is a composite policy and legally takes effect by way of separate contracts if the interest of the relevant individual insureds is not a joint interest. Justice Cockerill concluded that the policy in this case was a composite policy as each company had a separate interest relating to the separate restaurants owned by each company.^[36] In the context of this case, the claimants’ premises were located in different parts of London and therefore could well be differently affected by a danger triggering cover. The defendant insurer was accordingly bound to indemnify the claimants for each COVID-19 related closure at each set of insured premises.^[37]

Takeaways for industry participants: the interface between underwriters, brokers and the public

17 It is essential that underwriters, agents, managers and brokers appreciate how courts approach the construction of insurance policies if they are to understand what policies of insurance actually mean. Understanding the contours and limitations of the policies that are marketed to potential insureds is crucial if, in turn, insureds are to comprehend what it is that they are purchasing.

18 There is, understandably, a focus on the nominal price of insurance policies in the dynamic insurance market. However, emphasis on nominal price may risk obscuring the complete picture. Insureds must be aware that with a different premium comes a different level of cover; the premium paid informs the breadth of the scope of cover. Following from the Royal Commission into Misconduct in the Banking Superannuation and Financial Sector there has been an emphasis on community standards and expectations underlying the insurance industry.^[38] Notions of “fairness, reasonableness and community standards of decency and fair dealing” inform insurers’ legal obligations.^[39] Insurers play an important part in the life of the commercial and general community and the ability to engage clearly and openly on the coverage offered is an important aspect of an insurer’s relationship with those communities.

19 Of course, underwriters and brokers are practically concerned with maintaining viable businesses and this involves the effective marketing of insurance products. However, it is insufficient for brokers merely to furnish policies to insureds, with a clear statement: ‘Read this carefully!’, without assisting the insureds to understand what it is they are to read and to pay for. Brokers and underwriters must comprehend, at a minimum, the scope of cover and the material exclusions, and how these interrelate, for each policy that they market to be able to competently advise on what these mean for an insured’s business. The sale of a detailed policy of insurance that provides an excellent level of cover in general will be all for naught if what is contained in exclusion 5 is crucial for the conduct of the insured’s business.

20 Insurance industry participants are well advised to exercise their best efforts to manage insureds’ expectations so that the cover paid for is the cover expected. This cannot be done without a sophisticated understanding of the wording of insurance policies and skilful engagement between underwriters, brokers and insureds.

21 As you come together over the coming days to discuss the topical subjects of climate change, class actions, and cyber security, to name a few, I encourage you to consider the interface among underwriters, agents, brokers, and the community and the fundamental role that choice of policy language plays in this industry.