Policyholder insurance highlights 2020

The hot-topic in the current insurance market is whether, and to what extent, business interruption caused by COVID-19 is covered by insurance policies. We have been releasing regular updates, available on our website, in relation to the various ongoing test cases on these matters: ••in relation to the recently finalised appeal in the UK FCA test case – in which Herbert Smith Freehills represented the FCA in successfully advocating the policyholder’s positions (our most recent update available here); ••in relation to the various Australian test cases (here); and ••in relation to the Australian ICA test case (here). What are the key issues? Business interruption insurance (as part of an ISR policy) covers the loss of profit and increased costs that a policyholder suffers as a result of insured events. Typically that event or “trigger” for coverage is physical damage to the insured’s business premises. COVID-19 is not physical damage, so a typical policy will not cover COVID-19 related losses. However, many policies contain a variety of ‘non-damage’ extension clauses which may open up the possibility for a claim. A list of examples which might apply appears below. While every policy will turn on its own wording, there are generally three main issues relevant to seeking coverage under a ‘non-damage’ extension: Business interruption insurance for COVID-19 related losses TRIGGER ISSUE Have the specific requirements of the relevant ‘non-damage’ extension been met? Some guidance may be obtained from the various test cases being conducted, however not all extensions are part of the test cases already decided. Further guidance is expected from the Star City Casino case (which was closed by the actions of authorities) which is due to be heard in late April 2021. EXCLUSION ISSUE Are there any applicable exclusions? The disease extension is often subject to an exclusion for diseases declared under the Biosecurity Act and the standard ISR policy contains a general exclusion for physical damage caused by disease (both of which we consider irrelevant to claims under other non-damage extensions but this is to be decided in the Star City Casino case). Some policies still refer to the now repealed Quarantine Act (which the NSW Court of Appeal has held is not effective as an exclusion, although this decision is being appealed to the High Court). CAUSATION ISSUE Did the trigger cause the loss and what ‘other circumstances’ may be taken into account in demonstrating the ‘Standard’ turnover which the business would have achieved absent the insured trigger? This issue has been resolved in favour of the policyholders by the UK appeal decision, assuming it is followed by insurers in Australia – which it should be given that they were happy to follow the now overruled UK decision in the Orient Express Hotels case. HERBERT SMITH FREEHILLS POLICYHOLDER INSURANCE HIGHLIGHTS 2020 03 CATEGORY OF EXTENSION EXAMPLE WORDING Disease … will cover you for interruption to or interference with your business due to… (b) an outbreak of an infectious or contagious human disease occurring within a 20 kilometre radius of the Premises… Prevention of Access … will cover you for loss in consequence of access to or use of the premises being prevented or hindered by… any action of government due to an emergency which could endanger human life or neighbouring property… Hybrid …will cover loss arising from 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 … the outbreak of a notifiable human infectious or contagious disease occurring within a twenty (20) kilometre radius of the premises. Civil Authorities The word “Damage” under Section 2 of this Policy is extended to include loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe. Loss of Attraction Loss as insured by the Policy resulting from interruption of or interference with the Business:… (b) by the action of any lawfully constituted Authority attempting to avoid or diminish risk to life or property in the vicinity of such premises, which shall prevent or hinder the use thereof or access thereto, or which causes a fall in the number of potential customers attracted to the vicinity of the Premises, whether the premises or property therein shall be damaged or not, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises. Lessons for Policyholders The key thing that policyholders should keep in mind is that just because a claim has been denied does not mean that they do not have a claim. Some basic initial steps that policyholders can be taking include: a) locating their policy that provides coverage for business interruption (this will often be an ‘Industrial Special Risks’ or ‘ISR’ policy); b) reviewing the policy to determine whether it contains any of the ‘non-damage’ extensions or otherwise does not require physical damage (we are happy to help our clients by looking at your policy free of charge to tell you whether you have such a clause). Please contact us if you would like to discuss whether you may have a claim. What are the kinds of extensions being relied on? There are a number of extensions being relied upon. Some examples of the main types of wordings policyholders should be looking for are: 04 POLICYHOLDER INSURANCE HIGHLIGHTS 2020 HERBERT SMITH FREEHILLS What cases are ongoing? There are a number of different test cases ongoing around the world. The main ones of note for the Australian market are: CASE ISSUES CONSIDERED STATUS UK FCA Test Case Trigger Issue: Application of various extensions used in the UK. Causation Issue. On 15 January 2021, the UK Supreme Court (highest court of appeal in the UK) decided 5-0 in favour of policyholders. The Court held that the extensions provided cover and the loss covered by the peril was not to be reduced by reference to what effect the broader pandemic would have had anyway. Judgment available (here). ICA Test Case (First) Exclusion Issue: whether exclusions referring to ‘quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments’ excludes COVID-19 given that the Quarantine Act was replaced by the Biosecurity Act 2015. The NSW Court of Appeal decided 5-0 in favour of policyholders (available here). On 16 December 2020, insurers applied for Special Leave to Appeal to the High Court (here). A decision on whether they will be granted special leave could occur within or shortly after Q1 of 2021. ICA Test Case (Second) Issues are not yet finalised, but are said to include proximity (Causation Issue) and prevention of access (Trigger issue). Not yet filed, but the ICA was reported after losing the First test case to be in negotiations to bring a further test case. Our view is that this should not be necessary in light of the 5-0 decision on these issues in the UK FCA appeal. Star Casino Case Trigger Issue: tests a Civil Authority clause. Exclusion Issue: tests general perils exclusion for physical damaged occasioned by diseases and whether a Biosecurity Act exclusion in a separate extension affects coverage under the Civil Authority clause. Scheduled to be heard on 29 – 30 April 2021. Judgment predicted perhaps mid-2021. This will be an important case for policyholders in Australia to watch as many Australian businesses were less affected by COVID19 at or within a vicinity of their premises but more so affected by the actions taken by authorities to respond to the pandemic. Melbourne Café Claim Exclusion Issue: tests whether an exclusion for losses caused by ‘biosecurity emergencies’ declared under the Biosecurity Act 2015 (Cth) applies to losses caused by the action taken by authorities under the Health Act (Vic) in response to the emergency The policyholder argued that its loss was not caused by the declaration itself but only by the actions of the Victorian Government in response. Judgment delivered on 18 December 2020 (available here). Although there were issues with how the separate question was framed, the Court considered that the exclusion referred to the state of affairs underpinning the making of the declaration and therefore did exclude loss caused by the response to the underlying emergency. HERBERT SMITH FREEHILLS POLICYHOLDER INSURANCE HIGHLIGHTS 2020 05 06 POLICYHOLDER INSURANCE HIGHLIGHTS 2020 HERBERT SMITH FREEHILLS Last year’s update included news of the policyholder’s successful appeal on the aggregation of deductibles for a class action which might have comprised numerous ‘Claims’ under a D&O liability policy1 . The issue of multiple or aggregated deductibles has been considered again this year, this time in the context of hailstorm damage to multiple properties under construction by the policyholder (a building company). Facts On 18 February 2017, a severe hailstorm west of Sydney caused damage to 122 partially constructed houses in a development at Kellyville and Rouse Hill. The builder, Kelly Homes, sought indemnity under an annual construction insurance policy issued by Allianz. The insuring clause and definition of ‘Indemnifiable Event’ each referred to individual ‘Insured Contracts’ for individual properties under construction. However, ‘Deductible’ was stated in the Schedule to be ‘$10,000 Any One Event’ and defined by reference to each ‘event or occurrence’, as follows: ‘Deductible’ means the amount of money specified in the Schedule for each applicable Section or type of loss as specified, that the Insured must contribute as the first payment for all claims arising out of one event or occurrence. Under the basis of settlement, a clause entitled ‘Application of Deductible’ also provided: The amount of the Deductible will be subtracted from the amount payable by Us for each event giving rise to a claim under this Section. If a claim arises from a single event and the Insured can obtain cover under more than one benefit in this Section, the Insured will only be required to pay the highest single Deductible applicable regardless of the number of Deductibles applying to this Section. The insurer argued that, reading the policy as a ‘coherent and harmonious whole’, the builder was making 122 claims under the policy, as the insuring clause related to each building contract, and therefore 122 separate deductibles were payable. The builder argued that only one deductible was payable on the basis that all claims arose out of the hailstorm which was “one event or occurrence”. Decision The NSW Supreme Court agreed with the builder that only one deductible was payable. The starting point was the provisions dealing with the deductible which contemplated multiple claims arising out of one event. The ‘Application of Deductible’ clause referred to ‘each event giving rise to a claim’, and the deductible was specified for ‘Any One Event’. Although ‘event’ was not defined, the Court found that as a matter of common sense and ordinary meaning, the hailstorm could only be considered one event. This conflicted with the definition of ‘Indemnifiable Event’, which related to each building contract, however that could be explained by the deliberate use of different terms: ‘event’ vs ‘Indemnifiable Event’. To the extent Allianz asserted that there was ambiguity in the overall interpretation of the policy, as it was a standard form insurance contract authored by the insurer, any ambiguity had to be resolved in favour of the insured. How many deductibles is that? Rawson Homes Pty Ltd v Allianz Australia Insurance Ltd [2020] NSWSC 1654 1. Bank of Queensland Ltd v AIG Australia Limited [2019] NSWCA 190 Lessons for Policyholders The calculation of deductibles can have a significant effect on the value of claims. When preparing a claim, it is important to carefully consider the policy wording when approaching characterisation of the event, the loss and the claim. This case also provides a reminder that the maxim of contra proferentem (ambiguities will be interpreted contrary to the party which prepared the document) may still have a role to play in the interpretation of insurer issued standard policy wordings. HERBERT SMITH FREEHILLS POLICYHOLDER INSURANCE HIGHLIGHTS 2020 07 Facts The policyholder purchased a helicopter located in Picayune, Mississippi, and in May 2018 arranged to ship the helicopter to Sunshine Coast Airport in Queensland. Under a facility master policy arranged by its broker and issued by Liberty Mutual, the policyholder obtained a placement slip insuring the transit of the helicopter on the terms of the master policy. The helicopter was found to be damaged on arrival because it was not sufficiently and suitably packed and the bracings tying it down in its container had broken in transit. The terms of the master policy excluded liability for defective packing ‘prior to the attachment of this insurance’. The insurer relied on this exclusion to deny indemnity on the basis that the helicopter was packed prior to the insurance ‘attaching’. So the key issue became when did the insurance “attach”? The master policy required Liberty to accept placement slips for ‘risks attaching’ during a one–year period that covered the transit period. The helicopter was packed on 18 May 2018 in Mississippi, although in Australian time (where the placement slip was arranged) it was 19 May 2018 and the placement slip stated a ‘Period of Insurance’ from 19 May 2018 until the arrival of the helicopter at Sunshine Coast Airport (without stipulating when the insurance ‘attached’). Importantly, the master policy incorporated the terms of the Institute Cargo Clauses (A) 2009 (ICC(A)), which provided that risk ‘attaches’ when the cargo is first moved for the purpose of immediate loading for transit, but also contained in extension which provided that: Coverage is extended to include Static Cover for up to 5 days prior to loading. The insurer argued that the risk ‘attached’ on the start of the Period of Insurance specified in the placement slip (19 May) and that the relevant packing time was the local time in Mississippi (18 May), so the helicopter was packed before the insurance ‘attached’ and therefore the damage was excluded. The trial judge accepted the insurer’s argument and the policyholder appealed. Decision The Full Federal Court unanimously overturned the trial judge’s decision, finding that the policy attached 5 days prior to loading because of the Static Cover extension. While the placement slip specified a ‘Period of Insurance’ commencing on 19 May 2018, this did not use the language of ‘attaching’, so did not prevent the terms of the master policy being applied to provide an earlier attachment date based on when the helicopter was loaded and extended for 5 days of ‘Static Cover’ beforehand. In reaching its decision, the Full Court found that the commercial purpose of stating a date in the placement slip was simply so that the insurer could determine whether it fell within the one year period of the master policy facility, and attaching cover only on the date stated in the placement slip would be contrary to the express words of the master policy and deprive the insurance of its primary commercial character, being for risks during the whole of a voyage, rather than merely part of it. Given the finding policy coverage began earlier than 18 May 2018, it was not necessary to determine which time zone applied, however the Court indicated that the local time where the event causing the damage (loading) occurred was likely to be the relevant time, as the policy provided worldwide coverage. Risk may ‘attach’ prior to the policy period (even when a helicopter is not attached!) Swashplate Pty Ltd v Liberty Mutual Insurance Co (2020) 381 ALR 648 Lessons for Policyholders This decision is a welcome and commercially sensible outcome, given the commercial purpose of such voyage policies is to insure the entire period of transit. However, it is also an important reminder of the value of ensuring that insurance coverage is arranged early, and to be aware of the terms of master policies, so that if needed appropriate extensions are included to provide protection where coverage is needed for periods prior to policy issuance. 08 POLICYHOLDER INSURANCE HIGHLIGHTS 2020 HERBERT SMITH FREEHILLS Facts A review by, what is now, the Financial Conduct Authority (UK) identified issues in the way Clydesdale Bank, a former subsidiary of NAB, had sold products to customers. Following an internal review into the way products had been sold, NAB chose to make a series of redress payments to a number of its customers. These payments were made by way of settlement agreements entered into voluntarily by the bank in circumstances where no court process proved liability on its part. The bank, represented by Herbert Smith Freehills, sought to claim for these payments and associated legal costs – totalling over £357 million – under its civil liability insurance. Insurers and reinsurers denied liability alleging that the voluntary payments were not covered as the policy required proof of an underlying legal liability, for which in this case there had been no finding or even proceedings commenced. The dispute turned on the construction of a number of terms in the policy, but primarily in issue was the construction of ‘Civil Liability’ which was covered by the policy, the meaning of which included: (a) a legally enforceable obligation to a third party for compensation, damages, legal costs or a Restitutionary Order in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound; (b) a legally enforceable obligation to a third party for compensation, damages, legal costs, or a Restitutionary Order acknowledged (subject always to… General Condition 7…) by an agreement made between the Assured and a third party in settlement of a Claim; General Condition 7 required the policyholder to obtain the insurer’s consent prior to entering into any settlement. The term ‘Claim’ was defined to include any demands “either for or which could reasonably result in the payment of compensation, damages, or a Restitutionary Order…” Decision The Court noted that liability insurance compensates a policyholder for damage which the insured must pay to a third party. In other words, generally, for coverage under a liability policy to be triggered there must be proof of an underlying legal liability to the third party. A settlement voluntarily entered into creates a liability to the third party, but does not prove that there would have been a liability had the settlement not been entered into. As such, proof of a settlement alone is, generally, not enough to trigger coverage under a liability policy, unless the insurer has breached or repudiated the policy prior to the settlement (in which case there is plenty of authority to establish that a reasonable settlement will establish the liability of the insurer in a claim for damages). The critical question in this case was whether the particular definition of ‘Civil Liability’ in this policy required proof of an underlying liability, or allowed just proof of a settlement? The Court held that the broad drafting of ‘Civil Liability’ and ‘Claim’ did not require proof of the underlying liability. This was supported by various textual considerations, but key to the Court’s reasoning was that: ••while subsection (a) of the definition of ‘Civil Liability’ required a legally enforceable obligation awarded by a court or tribunal, subsection (b) expressly permitted a legally enforceable obligation acknowledged by an agreement; and ••the definition of a claim expressly referred to a demand ‘which could reasonably result in the payment of compensation’. The Court expressly did not determine whether there had been a breach of General Condition 7 (or whether such a breach could be remedied by s54 of the Insurance Contracts Act 1984 (Cth)). The Court simply noted that the requirement to obtain the insurers’ consent prior to settlement did not change the Court’s interpretation of ‘Civil Liability’. Lessons for Policyholders The decision is a win for policyholders. However, it also demonstrates the complexity of the law in relation to when a settlement will or will not bind an insurer. A policyholder who is considering entering into a settlement without the consent of their insurer should be mindful of this complexity. It may even be that repudiation of the contract of insurance (and suing for damages for breach rather than indemnity under the policy) is the preferable course of action. These issues are particularly relevant given the recent increase in class action claims and high profile litigation where it is often undesirable for policyholders to hand over conduct of their defence to insurers. It is vital for policyholders to know their insurer’s position prior to entering into a settlement and, if the insurer's position is not favourable, what the effect of a settlement would be on any insurance claim. Prior to any settlement, policyholders should therefore seek legal advice on whether the settlement may prejudice their insurance claim and what steps they can be taking to avoid that consequence. Voluntary redress payments binding on insurers National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139 HERBERT SMITH FREEHILLS POLICYHOLDER INSURANCE HIGHLIGHTS 2020 09 Facts The policyholder (Oceanview) owned two adjacent lots in Darwin. It conducted a number of businesses on one lot (Lot 2333) including a hotel, supermarket, post office and service station. The other (Lot 2445) was leased to a nursery business (not conducted by Oceanview). A fire caused damage to infrastructure on both lots. Oceanview lodged a claim for property damage (to both lots) and business interruption to its business on Lot 2333 under an Industrial Special Risks (ISR) Policy issued by Allianz. Allianz agreed to cover the damage to Lot 2333 and the consequential BI loss, but not the property damage to the nursery on Lot 2445 (no claim was made for the BI loss of the nursery). The policy schedule which defined the Insured, the Business, the Situation, and Declared Values relevantly defined the “Business” as those businesses operation by Oceanview (on Lot 2333) and the “Situation” as “Lot 2333 and Lot 2445”. The Policy contained the standard indemnity clause and definition of “Property Insured” as follows (emphasis added): Clause 1.1 – Indemnity for material loss and damage: In the event of any physical loss, destruction or damage … not otherwise excluded happening during the Period of Insurance at the Situation to the Property Insured described in Section 1, the Insurer(s) will, subject to the provisions of this policy, including the limitation on the Insurer(s) liability, indemnify the Insured in accordance with the applicable Basis of Settlement. Clause 1.2 – Definition of “Property Insured”: All real and personal property of every kind and description (except as hereinafter excluded) belonging to the Insured or for which the Insured is responsible, or has assumed responsibility to insure …”. Allianz argued that the policy only covered damage to property which related to the “Business” of the policyholder and not the damage to the nursery. The policyholder submitted that the “Property Insured” under clause 1.1 of the policy was not confined or limited to the property related to the Business. Decision The Court found in favour of the policyholder, concluding that the material damage indemnity is not limited only to property relating to the Business conducted by Oceanview. It was held that the meaning of “Property Insured” under the indemnity, should be determined by construing clauses 1.1 and 1.2 in the context of the schedule and policy provisions as a whole in identifying the subject of the indemnity. Allsop CJ ruled that the Policy provided indemnity for “damage not otherwise excluded, happening at Lots 2333 and 2445 (the Situation) to (all) real and personal property of every kind and description, except as excluded, belong to [the insured], or for which it was responsible or had assumed responsibility to insure.” Lessons for Policyholders The case illustrates the importance of clearly and accurately defining the “Situation” and “Business” and indeed all material aspects of the coverage to properly convey the parties' intentions. If this is done, and the insurer takes a view on the claim which, viewed objectively, sits outside these intentions, a Court should be supportive of the policyholder's position. The insured “Situation” is not limited by the insured “Business” Oceanview Developments Pty Ltd trading as Darwin River Tavern & Darwin River Supermarket v Allianz Australia Insurance Ltd trading as Territory Insurance Office [2020] FCA 852 10 POLICYHOLDER INSURANCE HIGHLIGHTS 2020 HERBERT SMITH FREEHILLS Facts In 2014, Delor Vue Apartments, a body corporate for 62 Queensland apartments, became aware of a range of defects in the roof, which it attempted to address over subsequent years. In 2017, while the defects had still not been repaired, a new property damage and public liability was taken out with Allianz, although the roofing defects and repair works being conducted were not disclosed. Five days after policy inception, Cyclone Debbie caused significant damage to the apartment complex including its roof. The pre–existing defects quickly became apparent to Allianz in adjusting the claim, but nevertheless Allianz informed the policyholder by email that ‘despite the non–disclosure issue’ the policy would still be honoured. Specifically, the email stated: Despite the non–disclosure issue which is present, [Allianz] is pleased to confirm that we will honour the claim and provide indemnity to the Body Corporate, in line with all other relevant policy terms, conditions and exclusions. Over the next year, the parties debated the measure of indemnity under the policy, with Allianz seeking to deduct the cost of repairing the pre–existing defects from the cost of repairing the cyclone damage. Agreement could not be reached, culminating in Allianz making a ‘take–it–or– leave–it’ settlement offer, in which Allianz threatened to decline the claim entirely if the offer was not accepted on the basis it would not have insured the building at all had the pre–existing defects been disclosed (exercising its remedy for non–disclosure under section 28(3) of the Insurance Contracts Act). The policyholder rejected the offer and commenced proceedings seeking payment of its claim, arguing that Allianz had elected to waive its rights in relation to the non– disclosure and was estopped from reneging on its email, and further was in breach of its duty of the utmost good faith. Decision While the Court held that the policyholder has breached its duty of disclosure and that Allianz would have otherwise been entitled to reduce its liability to nil (as it was accepted that Allianz would not have insured the building), the policyholder’s claim succeeded because Allianz had elected to waived this right when it expressly confirmed in the email that the insurance policy was to be honoured despite Allianz being aware of non– disclosure issues. Furthermore, Allianz had breached its statutory duty to act with utmost good faith by making a ‘take–it–or–leave–it’ deal which was not commercially decent or fair in the circumstances. Lessons for Policyholders When considering the merits of pursuing an insurance claim, policyholders may also consider subsequent conduct of the insurer: if cover was unconditionally promised, then the policyholder may have a claim despite what its conduct might have entitled the insurer to do. Insurer waives its rights goodbye Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2) [2020] FCA 588 HERBERT SMITH FREEHILLS POLICYHOLDER INSURANCE HIGHLIGHTS 2020 11 Background Icon is a construction company which built the Opal Tower at Sydney Olympic Park, with practical completion being achieved on 8 August 2018. A 12 month defect liability period then commenced. A few months later (and within the defects liability period), major cracks were observed across three floors in certain wall panels and floor slabs and residents had to be evacuated. A class action was commenced by the residents against Sydney Olympic Park Authority which cross–claimed against Icon. Icon was liable for a total of $31m in rectification and alternative accommodation costs and legal fees. Icon claimed indemnity for its liability from its insurers, Liberty and QBE. It ultimately succeeded against both, even though the claims did not at first glance appear to be covered by either policy. Claim for an occurrence outside the insurance period Liberty issued Icon with a series of successive and identical 12 month contracts of third party liability insurance, arranged via its broker, to insure against the risks of construction. The policy provided for Icon to notify the insurer of the time period of the project, from which the insurer would calculate the insurance premium. Icon’s contract with Sydney Olympic Park Authority required it to rectify all defects for a period of 12 months after the date of practical completion (defects liability period). Icon’s notification to its insurer merely referred to the estimated project period and did not mention the defects liability period. The occurrence of the cracking which gave rise to the claim happened after the estimated project period, but during the defects liability period. Icon had also argued that s 54 of the Insurance Contracts Act operated to forgive its omission to notify the insurer that it required coverage for the Defects Liability Period. Decision The Court held that s 54 did not apply to circumstances where cover did not exist in the first place – rather, s 54 only operates to remedy defects to trigger cover which already exists. However, the Court held that the Liberty policy should be rectified such that it included cover for the defects liability period. Despite this, the Court was prepared to accept evidence of the policy holder’s representatives that they and the insurers representatives had always intended to cover the defects liability period under the contract. The Court was persuaded that all four parties involved in the negotiation, Icon and Liberty, and also Icon’s broker and Liberty’s representative, had the relevant intention