Newsletter: Insurable Interest no. 1
This is the web version of my monthly newsletter, Insurable Interest. Subscribers received it in their inboxes on 2 August. Future editions drop on the first Monday of each month. You can subscribe by completing the form at the end of this post or here.
I will usually put each edition in a post here two weeks after its initial release but this month I am putting it up a little early. If you think it’s worth getting when it comes out, there is a chance to subscribe at the end of this post.
Welcome to Insurable Interest no. 1
Welcome to my new newsletter. I hope to use it to share my thoughts on developments and trends in Australian insurance law, along with some brief notes on, and links to judgments of interest to insurers, policyholders and practitioners. Because this is new, I might play around with the way I present this newsletter. For example, some months, I may attempt a long-read analysis of one particular issue, while in other months presenting more case notes. If you have preferences as to the type of content I address each month, please drop me a line. I want to make this as useful to readers as possible.
This month, I look at the current state of business interruption claims in Australia and the challenges facing policyholders in making successful claims once the Courts have provided guidance on policy construction. My brief case notes all come from the Federal Court, which has been busy with insurance issues over the winter.I'm always happy to discuss any topics in this newsletter (or any really) you can contact me through hitting the buttons at the end of the post.
Business: still interrupted
As I write this, much of Sydney remains locked down and Brisbane has announced a snap lockdown to address outbreaks of the delta variant of Covid-19. Not to be left out, Victoria and South Australia have also just emerged from their own lockdowns. This has obviously affected many millions of people and many thousands of businesses. The latter would hope to be able to call on insurance to indemnify them against their losses. Unfortunately, the state of business interruption claims remains in flux. This is despite policyholders winning a significant victory in the New South Wales Court of Appeal. That decision held that insurers' attempts to excise business interruption as a result of pandemics, like Covid-19, was not effective in so doing. In June, the High Court refused insurers' special leave application. Since then, the Insurance Council of Australia and the Australian Financial Complaints Authority agreed to a second test case, commenced in the Federal Court, to determine issues of construction of various business interruption clauses. This will be heard in August 2021, with any appeal (and you can place your house on that occurring) to be heard in November 2021. When the subsequent appeal will make it to the High Court for special leave, is anyone's guess.
The delays in determining crucial issues of cover in Australia is, like our vaccine rollout, lacking when compared to the United Kingdom. There, the test case went from trial in the High Court of England and Wales to judgment in the UK Supreme Court in just over six months. While the final orders took a little longer, at least UK insurers, policyholders and advisors have certainty about coverage as the pandemic carries on.
I should say that I am not criticising insurers or the ICA for insisting on the need for test cases to determine issues relating to the pandemic exclusion or of coverage. You can read the ICA's reasons for the two test cases here and, frankly, those reasons are sound. The problem for me is the delay caused by the way the test cases proceeded. Again, this is no swipe at the NSW Court of Appeal, it was right to have the matter jump directly to it, instead of insisting it first be heard by a single judge. I think the difference between the UK and Australia lies in power of the relevant regulator to commence proceedings in the public interest. You will note that the parties to the NSW test case were individual insurers and policyholders. In contrast, the UK test case was commenced by the Financial Conduct Authority. AFCA does not have the power to commence similar proceedings here. While it's great that AFCA has negotiated with insurers to determine appropriate cases to be heard in the Federal Court, I think things could have been resolved a lot quicker if it had the power to bring proceedings. At the very least, it may have avoided the situation in which broader issues of cover had to wait for the determination of the pandemic exclusion's applicability.
Did NSW lockdown hard enough? The business interruption problem
This isn't the place to get into state v state rivalries over Covid reponses (as a South Australian born Victorian, it's not a battle I want to fight). However, if the Federal Court adopts similar interpretations of the business interruption clauses before it as the UK Supreme Court, policyholders are likely to find it difficult to claim where businesses were permitted to remain open. Just to prove my non-parochial stance, I note that this is likely to be a problem for Victorian policyholders at the start of the 2020 long lockdown.
The problem arises for those policyholders whose policies' business interruption clause are based, at least in part, on a prevention of access to the businesses' premises. The Court held, correctly in my view, that while informal announcements, such as the Prime Minister announcing businesses would be prevented from operating during a specific period, prevention of access meant just that, prevention of access to the premises for the businesses' normal operations. This means that where businesses have sustained losses due to individuals being instructed to stay at home, the policyholder is not indemnified for those losses. I think the result is likely to be the same in Australia.
The biggest question in the Federal Court, as it was in the UK proceedings, are issues of causation. That is, the question will be what is the necessary nexus between Covid-19 infections in the policy-mandated vicinity to an individual business and the business's closure. In the UK, the Supreme Court held that each case of the disease informs the government's decision to impose restrictions and is a separate and equal cause of those restrictions. Practically, that meant that if there was at least one case of Covid-19 within the policy-defined area before restrictions were imposed, that was sufficient nexus. In Australia, I think there has ot be some doubt whether that approach will be adopted. If it is adopted, it may be harder to apply in Australia, as we have experienced far fewer infections than they have in the UK.
I will be tracking the second test case and will provide updates either here or on my website, as they come through.
Update 10 August 2021: On 5 August 2021 Allsop CJ delivered judgment in Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2021] FCA 907 in which insurers won one of the first battles concerning the construction of indemnity in an Industrial Special Risks policy. However, that decision did not consider the substantive disease clause at issue in many other situations. I will provide my thoughts soon, most likely in the next edition of this newsletter.
July's cases of note
Federal Court of Australia
Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2021] FCAFC 121
Allianz appealed from the first instance judgment of Allsop CJ, in which his Honour held that Allianz was unable to rely on s28(3) of the Insurance Contracts Act 1984 (Cth) to reduce its liability to zero because it was estopped from doing so or had waived its rights to do so by indicating its intention to provide indemnity. It resiled from this position over a year after making it. Allsop CJ also held that Allianz would be prevented from relying on the insured's non-disclosure because to do so would be a breach of Allianz's duty of utmost good faith.
The Full Court dismissed Allianz's appeal (McKerracher & Colvin JJ in the majority and Derrington J in dissent) but did so on the basis that Allianz had elected to affirm indemnity. This was a basis for the insured's claim that Allsop CJ had rejected. The majority also held that, despite the insured not raising estoppel directly in its concise statement, it was able to rely upon the principle in the proceeding and that it provided an alternative basis for its claim being upheld. In contrast, Derrington J held that Allianz should have been able to rely on s28(3) in light of the insured's significant non-disclosures. His Honour also took a very different, much more favourable, view to Allianz's actions between its apparent confirmation of cover and its ultimate reliance on s28(3).
Given the amounts at stake and the significant differences of opinion on principle between the trial Judge and the majority and the trial Judge and the majority and Derrignton J, this may be one that will make its way to the High Court.
All Class insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited (No 2) [2021] FCA 782
All Class, through its liquidator, brought proceedings against Chubb seeking indemnity for employee theft. The problem here was the employee was All Class's sole shareholder and director and there was a little issue as to whether the money was stolen. It had been taken from All Class's trust account, where funds held in trust for customers were kept, but it seems the money was used to prop up All Class's failing business, with an undetermined amount perhaps going to the director.
Ultimately, All Class's claim failed. I have written a more detailed note of this case at my website, here.
Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126
The final judgment from the Federal Court concerned insurers' liabilities for defects in the Opal Tower building in Sydney. This judgment was a result of an appeal from the first instance judgment of Lee J. The Full Court (Allsop CJ, Besanko & Middleton JJ) allowed the insured's cross-appeal against Liberty and dismissed Liberty's appeal, thereby finding Liberty liable to indemnify the insured for at least some of the defects. In contrast, QBE was successful in its appeal, thereby avoiding liability.
The proceeding largely turned on the construction of the insurance contracts concerned. The difference between the Full Court and Lee J in relation to the Liberty Contract was that Lee J found that there was ambiguity in the contract requiring rectification to address the effect of two apparently inconsistent clauses. In contrast, the Full Court found that the particular clauses were not inconsistent at all. In the course of this the Full Court chastised Lee J for apparently asserting that he was bound to interpret the High Court's 'true rule' in Codelfa by reference to the High Court's decisions, not those of the Full Court of the Federal Court. There might be some debate as to whether that was what Lee J was suggesting but, in any case, it's just interesting obiter.
QBE's appeal turned on whether a building could be considered a 'product' for the purposes of the QBE contract. The Court held that it could not.
Reading list
Each month, there will be cases that I just did not get to, despite best intentions. This month, that includes:
P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd [2021] NSWCA 136 A NSW Court of appeal decision concerning the sufficiency of notice under a claims made policy to trigger s40 of the ICA.
Travelers Insurance Company Ltd v Armstrong [2021] EWCA Civ 978
A English Court of Appeal decision concerning the application of joint retainer privilege to an insured's assignee.
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