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Determination
Case number | 12-00-794078 |
Financial firm | AAI Limited |
Case number: 12-00-794078 30 August 2024
The complainant holds a Business Insurance policy with the financial firm (insurer) which provides cover for a licensed restaurant and café it operates in central Melbourne, Victoria (the business). It lodged a claim for loss under the Business Interruption section of the policy following pandemic-related restrictions and orders issued by the Victorian State Government in July 2020.
The complainant says the business was closed, or its trading was restricted, for various periods from 23 March 2020 as a result of the government orders. However, it seeks recompense for the business losses it suffered during a 111-day period commencing 8 July 2020.
The insurer acknowledges the business suffered a loss. However, it denied the claim on the basis the complainant has not established a valid claim within the terms and conditions of the policy. It also says the policy exclusion (or ‘carve out’) related to the Biosecurity Act 2015 (Cth) (the Biosecurity Act) would exclude cover, even if a valid claim was established. The complainant says the Biosecurity Act carve out does not apply to the claim.
Has the complainant established a valid claim within the terms of the policy?
No. Whilst there is no dispute the complainant has suffered a loss, I am not satisfied the government orders were made as a result of an outbreak of an infectious or contagious human disease occurring within a 20-kilometre radius of the insured premises.
Is the insurer entitled to deny the claim?
Yes. The complainant has not established a valid claim within the terms and conditions of the policy.
Why is the outcome fair?
AFCA agreed to several test cases to obtain clarification of the issues associated various policies. The Federal Court made orders across a broad range of policy wording involving ten separate claims. The Federal Court considered policy wording similar to that which is considered in this complaint. AFCA is guided by the interpretation of the policies by the Federal Court.
AFCA acknowledges the impact of COVID-19 on businesses throughout Australia. However, consistent with the approach of the Federal Court, it is fair for the insurer to rely upon the terms and conditions of the policy to deny liability for the claim.
This determination is in favour of the insurer.
The insurer does not need to take and further action in relation to this complaint.
The complainant is represented by AC, a claims manager. Unless otherwise indicated, for the sake of convenience, the complainant and AC will be collectively referred to as ‘the complainant’.
No. The complainant has not established a valid claim within the terms of the policy. Whilst there is no dispute the complainant has suffered a loss, I am not satisfied the government orders were made as a result of an outbreak of an infectious or contagious human disease occurring within a 20-kilometre radius of the insured premises.
Circumstances of the claim
The complainant operates a licensed café and restaurant located in the City of Melbourne. It says that, commencing 8 July 2020, it was required to close its insured premises for a period of 111 days pursuant to government orders during Victoria’s second Stage 3 COVID-19 lockdown. The complainant says, because of its compliance with the July 2020 orders, and the subsequent orders which extended their operation, it has suffered a significant financial loss.
There is no dispute the complainant’s business suffered a significant reduction in income because of the government orders and directions and the closure of the insured premises. The extent of that loss, however, remains undetermined.
Complainant has onus to establish claim falls within terms of the policy
It is accepted insurance law that an insured has the initial onus to prove, on the balance of probabilities (that is, more likely than not), that the loss or damage claimed falls within the terms of the policy. This is sometimes called a valid claim. Only once this is established does the onus shift to the insurer to prove, on balance, the application of any exclusion if it seeks to refuse payment of the claim.
The complainant holds a Business Insurance policy with the insurer, the terms and conditions of which are set out in the policy documents, including the Product Disclosure Statement (PDS), the SPDS effective 20 June 2019 and the Certificate of Insurance/Policy Schedule.
Policy provides cover for various insured events
The policy provides cover for various insured events. Under the ‘Business interruption cover section’ of the policy commencing on page 57 of the PDS, cover is provided for several types of financial loss (including, gross profit, annual revenue and weekly revenue) brought about by reason of business interruption that occurs during the indemnity period.
Relevantly, under the subheading ‘Infectious diseases, etc.’ commencing on page 61 of the PDS, cover is provided for loss brought about by interruption of the business as a consequence of closure of the insured premises:
… by order of a competent government, public or statutory authority as a result of:
[…]
(b) an outbreak of an infectious or contagious human disease occurring within a 20-kilometre radius of the premises…
Claim made under a hybrid clause
The relevant provision of the policy under which the claim is made is commonly called a ‘hybrid clause’. This is a clause that provides cover for loss arising from orders or actions of a competent authority closing or restricting access to a business premises. Those orders or actions must be made or taken as a result of infectious disease, or the outbreak of infectious disease, within a specified radius of the insured premises.
AFCA agreed to insurers initiating a number of test cases before the Federal Court of Australia (Swiss Re International SE V LCA Marrickville Pty Limited (2021) FCA 1206 (test case 2) and LCA Marrickville Pty Limited v Swiss Re International SE (2022) FCAFC 17 (appeal case) to assist in the interpretation of various policy terms and conditions. Test case 2 and the appeal case examined several different policies and are a guide for the interpretation of the policies.
July 2020 orders and directions
There was a well-documented history of outbreaks in the lead up to Victoria’s second lockdown. This included the closure of specific postcodes from 1 July 2020 and 4 July 2020. Shortly afterwards, having failed to contain those localised outbreaks, the Victorian State Government expanded the locked-down area to all metropolitan Melbourne, including the City of Melbourne.
Stage 3 restrictions were implemented from 11:59 pm on 8 July 2020 as per the Restricted Activity Directions (Restricted Areas), Area Directions (No.3) and Stay at Home Directions (Restricted Area). The purpose of the directions was to address the serious public health risk posed to Victoria by COVID-19 and restrict the operation of certain businesses in the restricted areas to limit the spread of COVID-19.
The directions were justified as follows:-
Based on close to a doubling case rate over a 14-day period, increasing spread of infections across multiple postcodes, and early indicators of risk in other parts of Metropolitan Melbourne, indications are that the current postcode approach is not aggressive enough to effectively contain the spread. It is proposed that Stay at Home and Restricted Activity Directions are extended to all postcodes within the 31 LGAs across Metropolitan Melbourne. The expansion of restrictions to this geographic area is needed to urgently supress growth and spread of the virus.
Further the preamble to the 8 July 2020 directions includes the following:-
[…]
These directions shall be collectively referred to as the ‘July 2020 orders’.
Claim must involve closure as a result of outbreak of COVID-19 within 20-kilometre radius
To fall within the terms of the ‘hybrid’ clause of the policy, the claim made by the complainant must first incorporate the ‘closure or evacuation’ of the whole or part of its business as a result of an ‘outbreak’ of an infectious or contagious human disease occurring within a 20-kilometre radius of the insured premises.
There is no dispute the Federal Government issued a statement that National Cabinet had agreed to impose COVID-19 restrictions on 22 March 2020. The Victorian State Government first announced restrictions on 23 March 2020. Relevantly, however, on 8 July 2020 the Victorian State Government issued July 2020 orders.
The parties agree that the Victorian State Government is a ‘legal authority’ pursuant to the terms and conditions of the policy.
Moreover, the Federal Court considered that ‘closure or evacuation’ did not require each person to be prohibited from entering or remaining on the premises. Rather, the Court considered that, if the public was not able to remain on the whole or part of the premises, the premises may well be ‘closed’ in whole or in part.
There is no dispute the complainant’s business suffered a significant reduction in income due to the effects of the COVID-19 pandemic. In fact, the complainant advised the insurer:
I am of the opinion this issue in this instance is not controversial. In particular, I note the nature of the complainant’s business and the services it offers. I therefore accept, for the purposes of this complaint, the complainant’s business was, effectively, forced to close for a defined period from 8 July 2020 by reason of orders made by the Victorian State Government.
Insofar as the requirement of ‘outbreak’ is concerned, the Federal Court held that the emergence or discovery of a person in the community with a highly contagious or an infectious disease such as COVID-19, in circumstances where the presence of the disease is otherwise unfamiliar or unknown, is an event or happening which satisfies the definition of ‘outbreak’.
An outbreak simply requires the presence of a person in non-controlled circumstances. For a disease such as COVID-19, one active case in an uncontrolled setting is itself an ‘outbreak’.
Given the location of the complainant’s business in the City of Melbourne, and the evidence presented by the parties, I accept there were ‘outbreaks’ of COVID-19, most likely within a 20-kilomtre radius of the insured premises during the relevant period.
Closures and consequential losses must be ‘a result of’ an outbreak within a 20-kilometre radius of the business premises
Satisfying the policy requirements of ‘closure’ and ‘outbreak’ is not enough to establish a valid claim under the ‘hybrid’ clause of the policy.
To establish liability under the ‘hybrid’ clause of the policy it is necessary to prove, on balance, that a closure or evacuation of the premises, by order of a competent government, public or statutory authority, was ‘as a result of’ the outbreak of an infectious or contagious human disease occurring within a 20-kilometre radius of the insured premises.
Moreover, the policy requirement is not satisfied simply because the relevant order was made because of the risk of COVID-19 to persons in the relevant radius. Rather, what is required is that the order was made ‘as a result of’ an outbreak within a 20-kilometre radius of the insured business premises.
Complainant says July 2020 orders were as ‘a result of’ an outbreak within a 20-kilometre radius of the business premises
Test case 2 and the appeal case did not address any instances of the more geographically targeted public health orders, such as those which comprise the July 2020 orders.
The language of the Full Court of the Federal Court in the appeal case at [573] (Taphouse), as well as that of J J in test case 2 at [258] (LCA Marrickville) and [588] (Taphouse), places significant emphasis on the absence of any geographical limitations (other than State borders) in the reach of the orders considered in the test cases.
It is clear the 8 July 2020 orders are, both in purpose and effect, geographically targeted. Thus, on page 2 of its undated submissions received by AFCA on 18 January 2023, the complainant contends these orders and directions were:
… imposed by a legal authority as a direct result of a huge spike in COVID-19 cases within a 20-kilometre radius on the insured’s premises. According to the information provided by [the insurer] and supported by the findings of Justice J, the [complainant’s] policy responds to this event.
Elsewhere in the document the complainant submits:
These were not state-wide directions. The directions were geographically targeted due to the high number of COVID-19 cases within [the affected Melbourne metropolitan areas].
The complainant also points to the following passage from the judgement of the Federal Court in test case 2 [571]:
I would agree with Insurance Australia, however, that after the event epidemiological evidence would be irrelevant. Such evidence cannot have been a causal factor for the authority taking the action. I do not agree that the stated purpose of the directions to “assist in containing, or to respond to, the spread of COVID-19 within the community” means that the intention of the Chief Health Officer was to “respond” to identified instances of COVID-19 and “contain” the virus within the geographical areas in which it was then prevalent. If that had been so, I would infer that the directions would have been far more geographically targeted (emphasis added). The fact that the directions were state-wide supports the inferences available from their terms; that the Chief Health Officer considered that the outbreak was present (whether she knew where or not) and involved a threat to each and every person across the whole of Queensland…..
Indeed, the complainant has supplied a great deal of documentation and written submissions to AFCA, all of which I have read in detail.
The complainant’s primary argument, much of which is set out in its submissions dated 11 December 2023 and 12 February 2024, is as follows. The policy responds to the complainant’s claim because:
Integral to the complainant’s submission is the clear distinction between the first Victorian state-wide lockdown orders issued in March 2020 and the 8 July 2020 orders for metropolitan Melbourne. The complainant says the two sets of orders are materially different in their rationale, purpose and scope. The complainant also says the first and second lockdowns were materially different in how they were applied and what motivated the Victorian State Government in those applications. The complainant submits, therefore, that the 8 July 2020 orders trigger the policy to respond to the complainant’s loss.
The complainant also contends, amongst other matters:
The complainant maintains that, unlike the orders considered in the test cases, the 8 July 2020 directions refer to and respond to geographically specific outbreaks, including outbreaks within and outside the 20-kilometre radius of its insured premises. In that regard, the second Victorian lockdown which commenced in July 2020 was targeted to stop the localised threat of COVID 19 that had suddenly increased in a relatively small area of the State overall. The 8 July 2020 directions are to be contrasted to the first Victorian lockdown commencing in March 20920 which was general and designed to stop the spread of COVID 19 across the entire state of Victoria.
The complainant concludes, therefore, that all elements necessary to trigger coverage under the insuring clause have been met.
Post-July 2020 closure not due to outbreak of COVID-19 occurring within a 20-kilometre radius of the premises.
In contrast to the complainant’s submissions, AFCA notes the following comments of Her Honour J J in test case 2 (at 84):-
It will also become apparent that there is an important distinction to be drawn between insuring provisions which depend on an occurrence or outbreak of an infectious or contagious disease within an area and insuring provisions which depend on the threat or risk of an occurrence or outbreak of an infectious or contagious disease within an area. The two concepts are different. Care must be taken not to elide the difference between the two … [T]here is a difference between assessing whether government actions were taken in response to the actual outbreak or occurrence of COVID-19 within a specified area and assessing whether government actions were taken in response to the threat or risk of the spread of COVID-19 across a wide area such as a State.
It follows that businesses in the complainant’s position must avoid precisely the same error highlighted by her Honour in the above passage – i.e. that they conflate the concept of a localised outbreak with a broader risk of transmission (“[c]are must be taken not to elide the difference between the two”).
In addition, paragraph 608 of Her Honour’s judgment is instructive:-
This tends to obscure the fact that what is required is an action of an authority of the relevant type which results from the specified circumstances. It tends to suggest that the specified circumstances must in fact exist rather than that the action must result from the specified circumstances which indicates that it is the state of mind of the authority which is relevant, which should be determined objectively based on the acts and statements of the authority at the time it takes the action (emphasis added).
I note the Full Court of the Federal Court determined Her Honour’s judgement was correct on appeal.
Moreover, relevantly, as set out above, the preamble to the 8 July 2020 orders includes the following:-
1.The purpose of these directions is to restrict the operation of certain businesses and undertakings in the Restricted Areas in order to limit the spread of Novel Coronavirus 2019 (2019-nCoV).
However, paragraph 3 of the preamble states:
These directions must be read together with the Area Directions (No. 5) and the Stay at Home Directions (Restricted Areas) (No. 6), as amended or replaced from time to time.
The preambles to both the Area Directions (No. 5) and the Stay at Home Directions (Restricted Areas (No. 6) include reference to their purpose as…‘to address the public health risk posed to Victoria’ by COVID-19.
Therefore, whilst the 8 July 2020 orders and directions were subject to specific geographical limitations, when read together with the Area Directions (No. 5) and the Stay at Home Directions (Restricted Areas) (No. 6), it is clear the underlying motivation of the directions was to address the serious public heath risk posed to the state of Victoria in its entirety or, at least, to a large portion of the State.
In addition, I am of the opinion it is of some import that the 8 July 2020 directions applied to a geographical area far greater than the 20-kilometre radius around the insured premises. This shows that the imposition of the 8 July 2020 directions was as a result of the Victorian State Government’s concern about the risk posed by COVID-19 throughout an extensive region of Victoria and not as a result of any specific outbreak occurring within that 20-kilometre radius.
In all the circumstances, I am of the opinion that the 8 July 2020 directions, like those orders considered in the test cases, were ultimately about ameliorating the risk of spread State-wide (or at least across a significant region much larger than the 20-kilometre radius).
In other words, the July 2020 directions were not imposed ‘as a result of’ any specific outbreak of disease which occurred within a 20-kilometre radius of the complainant’s premises. Rather, they were imposed as a result of the increasing spread of the outbreak across the broader metropolitan area. The expansion of restrictions in July 2020 was to urgently supress the growth and spread of the virus. The purpose of the directions was to address the serious public health risk posed to Victoria by COVID-19, having identified areas within Victoria which had a higher prevalence of, or risk of, exposure to COVID-19.
In summary, I accept the closure of the complainant’s business from 8 July 2020 was most likely a result of the threat of the spread or risk of an outbreak of an infectious or contagious human disease occurring across the broader metropolitan area and the associated risk to the State of Victoria as a whole. The closures were not ‘as a result of’ the outbreak of COVID-19 occurring within a 20-kilometre radius of the insured premises.
It follows that the complainant has not established a valid claim under the terms of the policy for loss suffered during closures commencing in early July 2020.
Yes. The complainant has not established a valid claim within the terms and conditions of the policy.
The insurer is entitled to deny the claim
In all the circumstances, I am satisfied the insurer is entitled to deny the claim for business interruption loss suffered by the complainant following the Victorian State Government’s issue of the 8 July 2020 orders and associated directions. This is because the complainant has not established a valid claim within the terms and conditions of the policy. In other words, I am satisfied the policy does not extend coverage to the losses claimed.
Biosecurity Act carve out
I note the debate between the parties about the applicability of the Biosecurity Act carve out.
As I have determined this complainant in favour of the insurer on the basis the complainant has not established a valid claim, there is no need to address issues in this determination about the applicability of the Biosecurity Act carve out to the claim.
Complainant has not established a valid claim
AFCA recognises the coronavirus has had a devastating impact on small businesses throughout Australia.
AFCA has been guided by the interpretation of the policies as applied by the Federal Court in several test cases. In all the circumstances, I am of the opinion that the Victorian State Government orders and directions of July 2020 which adversely affected the complainant’s business were general in nature as a result of concern for public health. The orders and directions were not made ‘as a result of’ an outbreak of COVID-19 occurring within a 20-kilometre radius of the insured premises.
It is, therefore, fair for the insurer to rely upon the terms and conditions of the policy to deny liability for the claim.
AFCA has determined this complaint based on what is fair in all the circumstances, having regard to:
The respective parties have completed a full exchange of the relevant information, and each party has had the opportunity to address any issues raised. We have reviewed and considered all the information the parties have provided.
While the parties have raised a number of issues in their submissions, we have restricted this determination to the issues that are relevant to the outcome.
AFCA is not a court of law. We do not have the power to take or test evidence on oath, or to require third parties to give evidence.
When we assess complaints, we consider:
We give more weight to documents created at the time the events occurred. If there are no relevant documents, we will decide what most likely occurred based on the available information.
If there are conflicting recollections and these are evenly weighted, we may find that a claim cannot be established.
