Ambiguity construed against insurer

by Resolve Editor Kate Tilley

A Full Federal Court judgement confirms that, where there is an ambiguity in an insurance policy, courts will likely interpret it in a manner favourable to the insured.

The case involved a business interruption (BI) policy issued by AII Ltd, trading as Vero, for Rockment Pty Ltd’s café Vanilla Lounge, in Victoria, which was forced to close because of the Covid-19 pandemic.

Law firm Patrick & Associates, in a commentary on the case, said the policy provided cover for BI resulting from infectious diseases. However, the policy excluded coverage for claims that were directly or indirectly caused by or arose from, or were in consequence of any biosecurity emergency or human biosecurity emergency declared under the Biosecurity Act 2015 (Cth) (BA), its subsequent amendments or successor.

Covid-19 was declared to be such a disease under the BA, but Rockment argued its café’s BI losses occurred because of the Victorian Chief Health Officer’s directions issued under the Public Health and Wellbeing Act (PHWA).

Rockment argued that the loss was not caused by the declaration made under the BA and therefore the exclusion clause did not apply.

Vero declined cover, arguing the declared emergency under the BA was the catalyst for state lockdowns that followed, for which the exclusion clause provided.

Patrick & Associates said the Full Federal Court considered two main legal principles:

• The interpretation of an insurance policy should start and end with the ordinary meaning of the words used in the policy, and
• Because policies are commercial documents, they should be given a business-like interpretation and have regard to the context in which the policy is entered into to ascertain its purpose, thereby aiming to provide a commercial outcome.

Because the limitations on Rockment’s trading were imposed by the State of Victoria, the court considered Vero’s preferred construction was a significant departure from the ordinary meaning of the words used.

So, because the claim was founded through a state declaration, and the exclusion clause only excluded claims “directly or indirectly caused by or aris[ing] from” the human biosecurity emergency declared under the BA, the exclusion clause’s operation did not extend to state statutes and their operation in pandemics.

Law firm King & Wood Mallesons (KWM) appeared for Vero. Its commentary said the Full Federal Court rejected Rockment’s interpretation of the exclusion clause and accepted Vero’s submission the exclusion should be given a wide interpretation.

“The decision suggests exclusion clauses in a similar form are likely to be effective to exclude a broad range of losses arising from the Covid-19 emergency,” KWM said.
 

Separate question

Rockment had launched proceedings in the Federal Court in July 2020. The separate question about 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: “Is it sufficient to exclude coverage under the exclusion in ... the policy 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 court answered the question “no” but KWM said it gave the exclusion clause a broad interpretation “that is likely to mean the majority of Covid-19-related claims under [the Vero policy] and similar wordings will be excluded”.

The court identified three possible triggers for the exclusion clause:

(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 that:

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

Rockment argued for answer (a) and that therefore the exclusion operated only where the loss or damage was causally consequential upon a declaration under the Biosecurity Act.

Vero argued the answer was (b) or alternatively (c), both of which would mean the exclusion has a wider operation.

The court determined the answer was (b), ie the ‘emergency’, albeit that the emergency takes ‘the form of a human disease’ which must be of ‘such seriousness that it becomes the subject of a declaration’.

KWM said the separate question 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 Vero.

KWM said while the court did not accept that the exclusion was wide enough to exclude a claim simply because it arose from Covid-19, the decision supported a wide interpretation of pandemic exclusions in the form considered in Rockment and make it 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 order”.

The matter will be remitted to a single judge to determine the remaining issues in the proceedings.

Patrick & Associates commentary
King & Wood Mallesons commentary
Rockment Pty Ltd t/a Vanilla Lounge v AAI Ltd t/a Vero Insurance [2020] FCAFC 228 (18 December 2020)