Transit Pty Ltd v Arch Underwriting at Lloyd's (Australia) Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2021 01559

TRANSIT PTY LTD (ACN 086 515 077) & ANOR (according to the Schedule of Parties)	Plaintiffs
v
ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605) & ORS (according to the Schedule of Parties)	Defendants

S ECI 2021 01815

AMFR HOLDINGS PTY LTD T/AS THE DECK BRIGHTON (ACN 151 810 435) & ORS (according to the Schedule of Parties)	Plaintiffs
v
ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605) & ORS (according to the Schedule of Parties)	Defendants

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JUDGE:	DELANY J
WHERE HELD:	Melbourne
DATE OF HEARING:	20 & 21 March 2024, 26 & 27 March 2024, 4 & 5 April 2024
DATE OF JUDGMENT:	16 August 2024
CASE MAY BE CITED AS:	Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2024] VSC 485

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INSURANCE – Business interruption insurance – Policy endorsement – Whether insured entitled to indemnity – Construction of policy endorsement – Composite insured perils with consecutive sequential elements – COVID‑19 pandemic – Whether loss directly or indirectly arising from closure of the Premises or other premises in the vicinity of the Premises by order of public authority – Whether order of public authority directly or indirectly arising from disease occurring at such premises – Text of interconnected elements to be examined in their correct causal sequence – LCA Marrickville Pty Ltd v Swiss Re International SE (2022) 290 FCR 435, Star Entertainment Group Ltd v Chubb Insurance Australia Ltd (2022) 400 ALR 25, Star Entertainment Group Ltd v Chubb Insurance Australia Ltd (2021) 396 ALR 590 applied – Swiss Re International SE v LCA Marrickville Pty Ltd (2021) 394 ALR 461, FCA v Arch Insurance (UK) Limited [2020] EWHC 2448 (Comm), Princess Theatre Pty Ltd v Asvar Insurance Ltd [2024] VSC 33 referred to – Indemnity refused.

CONTRACT – Meaning – ‘directly or indirectly’ – ‘arising’ – ‘vicinity’ – Coxe v Employers Liability Assurance Corporation Ltd [1916] 2 KB 629, Quintano v B W Rose (2009) 15 ANZ Ins Cas 61-805, Walton v National Employers Insurance Association [1973] 2 NSWLR 73, Hi-Fert Pty Ltd and Another v Kiukiang Maritime Carriers Inc and Another (1998) 159 ALR 142 applied.

INSURANCE – Interest on claims – s 57 of Insurance Contracts Act 1984 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Hamish Austin KC with Andrew Cameron and Jessica Apel	Gadens
For the First Defendant (Arch Underwriting at Lloyd’s (Australia) Pty Ltd)	Peter Murdoch KC with Nick Wood SC	Colins Biggers & Paisley
For the Second Defendant (Chubb Insurance Australia Limited)	Todd Marskell	Wotton & Kearney
For the Third Defendant (The Underwriting Member of Syndicate 2003 at Lloyd’s of London)	David Collins KC with Hamish Redd SC	Clyde & Co
For the Fourth Defendant (Berkshire Hathaway Specialty Insurance Company (ACN 600 643 034))	Dean Luxton	Kennedys

TABLE OF CONTENTS

A. Background................................................................................................................................... 1

B. The Trial......................................................................................................................................... 8

C. The Insured Venues and the Periods of Insurance............................................................. 13

The Policy Terms......................................................................................................................... 14

D. Principles of Construction....................................................................................................... 21

E. Construction of the policy........................................................................................................ 22

The plaintiffs’ submissions........................................................................................................... 23

‘Directly or indirectly arising from’......................................................................................... 24
Causation — multiple ‘causes’.................................................................................................. 25

‘Such premises’................................................................................................................................. 26

The defendants’ submissions........................................................................................................ 29

The first element.......................................................................................................................... 30
The second element.................................................................................................................... 30
The third element........................................................................................................................ 32

F. Consideration.............................................................................................................................. 36

Element 1: ‘Loss as insured by this policy resulting from interruption of or interference with the Business’.............................................................................................................................. 37
Element 2: ‘directly or indirectly arising from closure or evacuation of the whole or part of the Premises or other premises in the vicinity of the Premises by order of a competent public authority’............................................................................................................................ 38
Element 3: directly or indirectly arising from infectious or contagious human disease occurring at such premises..................................................................................................................... 41
Other endorsements................................................................................................................... 44
Conclusion concerning construction........................................................................................ 47

G. The ‘factual premise’................................................................................................................. 47

The incidence of the disease and the Directions..................................................................... 48
What is meant by premises ‘in the vicinity’............................................................................ 51
The plaintiffs’ submissions............................................................................................... 51
The defendants’ submissions........................................................................................... 55

Finding as to the meaning of ‘vicinity’.................................................................................... 58
The causal requirement directly or indirectly arising: the plaintiffs’ submissions........... 60
The causal requirement directly or indirectly arising: the defendants’ submissions....... 63
The First Lockdown: the plaintiffs’ submissions.................................................................... 66
The First Lockdown: the defendants’ submissions................................................................ 68
The Second Lockdown: the plaintiffs’ submissions............................................................... 69
The Second Lockdown: the defendants’ submissions........................................................... 71
Were the Directions ‘arising from’ disease occurring at such premises?........................... 72
The First Lockdown: Findings.................................................................................................. 75
The Second Lockdown: findings.............................................................................................. 80

H. Quantum, Sub-limit and Deductibles issues remaining................................................... 82

March 2020 savings: period of apportionment....................................................................... 84
Excluded amounts...................................................................................................................... 85
Government waivers.................................................................................................................. 86
Sub-Limits and Deductibles...................................................................................................... 87
Findings concerning Sub-Limits and Deductibles................................................................. 91

I. Interest........................................................................................................................................... 92

Consideration.............................................................................................................................. 94

J. Disposition................................................................................................................................... 96

HIS HONOUR:

A. Background

The plaintiffs in proceeding S ECI 2021 01559 (the ‘Transit Proceeding’) and S ECI 2021 01815 (the ‘AMFR Proceeding’) operated pubs, bars and/or restaurants in greater metropolitan Melbourne in 2020 when COVID‑19 impacted upon public health and upon the Victorian economy.

The first case of COVID‑19 in Victoria (and Australia) was confirmed on 25 January 2020.

In order to limit the spread of COVID‑19, beginning on 23 March 2020 directions were issued (the ‘Directions’) under s 190 and s 200 of the Public Health and Wellbeing Act 2008 (Vic) (the ‘PHW Act’) causing the venues operated by the plaintiffs, or parts of those venues, to close.

The venues were closed for two periods of time, between 23 March 2020 and 31 May 2020 (‘First Lockdown’) and 8 July 2020 and 4 October 2020 (‘Second Lockdown’).

Each of the plaintiffs in the Transit and the AMFR Proceedings was at that time insured under an Industrial Special Risks Policy (the ‘Transit Policy’ or ‘AMFR Policy’ respectively). Each of the defendants was an insurer under those Policies, the terms of which, excluding the schedules thereto (‘Schedules’) , were relevantly identical (collectively, the ‘Policies’).

In these reasons, capitalised terms are used to refer to terms that are either capitalised or defined in the Policies. Unless otherwise stated, references to the Policy are to the Transit Policy.

Section 1 of the Policy provides indemnity for physical loss, destruction or damage during the period of insurance at the ‘Situation’, being the insured Premises at which each of the pubs, bars and restaurants are located. Section 2 provides indemnity for business interruption in the event any building used by the Insured at the Premises is physically lost, destroyed or damaged during the period of insurance and the Business carried on by the Insured is ‘interrupted or interfered with’. In that event the defendants agree to pay the amount of ‘Loss’ (as that term is defined in the Policies) resulting from such interruption or interference in accordance with the applicable ‘Basis of Settlement’.

The Policy contains endorsements applicable to all sections including extension CLOSEXB4. The plaintiffs rely on CLOSEXB4 to found their claim to be indemnified in respect of Loss resulting from the closure of the insured Premises during the two lockdowns. The outcome of the plaintiffs’ claims turns on the proper construction of endorsement CLOSEXB4 and on factual evidence relevant to the construction of the endorsement for which they contend.

The defendants in the Transit proceeding denied indemnity on 29 January 2021. In the AMFR proceeding the defendants refused to indemnify the plaintiffs in response to a letter dated 12 May 2021 in which the plaintiffs stated their intention to lodge a claim under the AMFR Policy.

CLOSEXB4 extends the cover provided under the primary indemnity in Section 2 of the Policy such that loss from specified events in CLOSEXB4 are insured perils. It is appropriate to reproduce CLOSEXB4 in full:

CLOSEXB4 CLOSURE BY ORDER OF A PUBLIC AUTHORITY
Loss as insured by this policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation of the whole or part of the Premises or other premises in the vicinity of the Premises by order of a competent public authority directly or indirectly arising from infectious or contagious human disease occurring at such premises shall be deemed to be loss resulting from damage to property used by the Insured at the Premises.
However, this extension will not indemnify Loss resulting from interruption of or interference with the Business directly or indirectly arising from or in connection with Highly Pathogenic Avian Influenza in Humans or any other diseases declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments.

There have been earlier cases concerning whether industrial special risk policies respond to claims for indemnity for business losses sustained as a result of government action in response to the COVID‑19 pandemic. The leading Australian cases are the decisions of the Federal Court in Swiss Re International SE v LCA Marrickville Pty Ltd,[1] at first instance per Jagot J, and on appeal, LCA Marrickville Pty Ltd v Swiss Re International SE,[2] per Moshinsky, Derrington and Colvin JJ (together, the ‘LCA litigation’) and in Star Entertainment Group Ltd v Chubb Insurance Australia Ltd[3] at first instance per Allsop CJ and on appeal, Star Entertainment Group Ltd v Chubb Insurance Australia Ltd,[4] (together the ‘Star litigation’), a decision of the Full Federal Court comprised of the same members of the Court who presided in the LCA Appeal.
[1]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 (‘LCA first instance decision’).
[2]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 (‘LCA Appeal’).
[3]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2021] FCA 907; (2021) 396 ALR 590 (‘Star first instance decision’).
[4]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 (‘Star Appeal).

Recently Osborne J of this Court delivered judgment in Princess Theatre Pty Ltd v Asvar Insurance Ltd.[5] While the Star litigation and the Princess Theatre litigation dealt with the construction of single policies of insurance, the LCA litigation dealt with ten different policies and extensions. The clauses considered in the LCA litigation were each concerned with the occurrence of disease at or within a specified distance of insured premises, as was the clause under consideration in the Princess Theatre litigation. In none of the earlier cases was the Court called upon to consider an extension clause in the same terms as CLOSEXB4.
[5]Princess Theatre Pty Ltd v Asvar Insurance Ltd [2024] VSC 33 (‘Princess Theatre’).

The parties agree CLOSEXB4 is, or is like, a ‘hybrid clause’, described in the following terms by the Commercial Court of the United Kingdom in FCA v Arch Insurance (UK) Limited:[6]

this terminology is only to be taken as a convenient means of referring to certain policy terms, which refer both to restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease.

[6]FCA v Arch Insurance (UK) Limited [2020] EWHC 2448 (Comm) (‘FCA v Arch’) [242].

A number of the clauses considered in the LCA litigation were ‘hybrid’ clauses. As stated by Derrington and Colvin JJ in the LCA Appeal, a characteristic of such clauses is:[7]

the sequential nature of the separate elements of the insured peril with the final elements (e.g. the restriction on the use of premises) being that which most effectively causes the loss… However, the preceding elements in their consecutive occurrence are also important.

[7]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [162].

The present dispute is focussed on the proper construction of the very lengthy first sentence in CLOSEXB4. Before turning to the first sentence it is important to say something about the second sentence which begins with the word ‘however’. The second sentence contains an exclusion that operates if the Policy otherwise responds by reason of the first sentence.

The second sentence states the extension will not indemnify Loss resulting from interruption or interference with the Business directly or indirectly arising from or in connection with any disease declared to be a ‘quarantinable disease’ ‘under the Quarantine Act 1908 and subsequent amendments’.

On 16 June 2016 the Quarantine Act 1908 (Cth) was repealed and the Biosecurity Act 2015 (Cth) came into force. The Biosecurity Act 2015 (Cth) does not provide for declarations of ‘quarantinable diseases’. It provides that in certain circumstances a disease may be determined to be a ‘listed human disease’.[8] On 21 January 2020 COVID‑19 (or, more specifically, ‘human coronavirus with pandemic potential’) was determined to be a listed human disease under the Biosecurity Act 2015 (Cth).[9]
[8]Biosecurity Act 2015 (Cth) ss 9 and 42.
[9]Biosecurity (Listed Human Diseases) Amendment Determination 2020 (Cth).

In HDI Global Specialty SE v Wonkana No 3 Pty Ltd,[10] the New South Wales Court of Appeal considered policies of insurance which excluded cover in the case of any circumstance involving ‘quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments’.[11] The Court of Appeal held the words ‘and subsequent amendments’ do not extend to or include the Biodiversity Act which was a separate Act.[12]
[10]HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) NSWSCA 296; (2020) 104 NSWLR 634.
[11]HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) NSWSCA 296; (2020) 104 NSWLR 634 [15].
[12]HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) NSWSCA 296; (2020) 104 NSWLR 634 [2], [38]–[47], [120]–[121].

Returning to the first sentence in CLOSEXB4, the plaintiffs put their case on the basis they suffered Loss otherwise falling within the terms of the Policy resulting from interruption of or interference with their Business directly or indirectly arising from the closure of their Premises. They make no claim for Loss resulting from interruption of or interference with their Business directly or indirectly arising from the closure of other premises in the ‘vicinity’ of their Premises.

The plaintiffs accept they must prove ‘such facts as bring the claim within the terms of the insurer’s promise’.[13] They do not seek to satisfy CLOSEXB4 by demonstrating that their Business Premises were closed as a result of the presence of infectious or contagious disease at their Premises. Their claim is for Loss due to the closure of their Premises by reason of the occurrence of COVID‑19 at premises in the vicinity of their Premises.
[13]Wallaby Grip Limited v QBE Insurance (Australia) Limited [2010] HCA 9;(2010) 240 CLR 444 [28].

The defendants submit and the plaintiffs accept their claims are based on two premises:

(a) The constructional premise: CLOSEXB4 applies where an Insured suffers Loss resulting from interruption of or interference with the Business arising from closure of the whole or part of the Premises by order of a competent public authority arising from COVID‑19 occurring at other premises in the vicinity of the Premises; and

(b) The factual premise: the relevant orders arose from COVID‑19 occurring at premises in the vicinity of the Premises.

The defendants submit the plaintiffs’ case fails because the constructional premise is not made out. Separately, assuming the correctness of the plaintiffs’ constructional premise, the evidence does not establish that any (let alone all) of the Directions arose from COVID‑19 occurring at premises ‘in the vicinity of the Premises’.

While the constructional and the factual premises are in issue, a number of matters are not in issue. First, the defendants admit each of the plaintiffs is an Insured under the Policy. Second, the defendants admit each of the plaintiffs is the operator of the venues alleged. Third, the defendants accept the plaintiffs have each suffered Loss resulting from interruption of or interference with their Businesses. Fourth, there is no contest that interruption of or interference with the Businesses directly or indirectly [arose] from ‘closure’ of the whole or part of the Premises by Directions issued by the Chief Health Officer or authorised officers under ss 190 and/or 200 of the PHW Act. Fifth, there is no dispute the Directions were in each instance an ‘order of a competent public authority’.

The plaintiffs conceptualise CLOSEXB4 as comprising three elements. The defendants adopt the same approach. The three elements are:

(a) (first element): There was Loss resulting from interruption of or interference with the plaintiffs’ Business;

(b) (second element): The interruption or interference directly or indirectly arose from closure or evacuation of the whole or part of the plaintiffs’ Premises or other premises in the vicinity of the Premises by order of a competent public authority; and

(c) (third element): The relevant order referred to was directly or indirectly arising from infectious or contagious human disease occurring at such premises.

The parties approached the proper construction of CLOSEXB4 from quite different perspectives.

The plaintiffs submitted first, that the causal link which must be established is more broadly expressed than those in issue in the test cases in the LCA litigation. None of the clauses considered by Jagot J finds a close analogue with CLOSEXB4. CLOSEXB4’s requirement that the ‘closure order’ be ‘directly or indirectly arising from infectious or contagious human disease’ is similarly worded to the clauses in test cases 8 and 9 in the LCA litigation.[14] However, in each of those cases the relevant occurrence of ‘human infectious or contagious diseases’ was required to have been ‘at the Business Premises’.[15] Second, none of the clauses considered by Jagot J provided cover where the closure of premises was contingent upon the occurrence of infectious disease ‘in the vicinity of the Premises’. Each of the clauses considered in the LCA litigation required the occurrence of disease to be at or within a specified distance of insured premises. Third, CLOSEXB4 contains a further broadening mechanism in its opening words: ‘Loss as insured by this policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation …’.
[14]NSD144/2021: Guild Insurance Ltd v Gym Franchises Australia Pty Ltd and NSD145/2021: Guild Insurance Ltd v Michael (t/as Illawarra Paediatric Dentistry).
[15]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461, 35.

In their written opening, the primary case for the plaintiffs was that the ‘vicinity’ of the Premises encompasses the entirety of the State of Victoria. In oral opening, the plaintiffs abandoned their primary case. Their focus switched to their ‘secondary case’, that ‘vicinity’ is Greater Metropolitan Melbourne and to their tertiary case that ‘vicinity’ connotes the Local Government Area (‘LGA’) in which the insured Premises is located.

The plaintiffs’ case is that properly construed CLOSEXB4 provides indemnity for loss resulting from interruption of Business directly or indirectly arising from closure of the insured Premises by order of a competent public authority directly or indirectly arising from occurrences of COVID‑19 at other premises in Greater Melbourne, alternatively occurrences of COVID‑19 within the LGAs in which each of the Insured Premises are located.

The defendants submit CLOSEXB4 is a narrowly defined peril against the occurrence of which they agreed to grant indemnity. The first sentence in CLOSEXB4 identifies a ‘sequential and composite’ insured peril.[16] Composite because it includes several different elements, sequential because each element must be identified and satisfied in order for the plaintiffs to be entitled to indemnity.
[16]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [119] (Derrington and Colvin JJ).

The defendants’ case is that indemnity is provided under CLOSEXB4 where an Insured has suffered Loss resulting from interruption of or interference with their Business arising from one of two alternatives:

(1)closure or evacuation of the Premises by order of a competent public authority arising from infectious or contagious human disease occurring at those Premises; or
(2)closure or evacuation of other premises in the vicinity of the Premises by order of a competent public authority arising from infectious or contagious human disease occurring at those other premises in the vicinity of the Premises.

The defendants submit the plaintiffs have not made a claim that engages either limb of CLOSEXB4 that as a result the plaintiffs have not established any basis for indemnity.

For the reasons in section F, the constructional premise for which the plaintiffs contend is not made out. For the reasons discussed in section G, the so called factual premise, which also involves its own constructional issues is not made out.

B. The Trial

On 5 March 2024, the parties filed a detailed Joint Chronology in each proceeding. The facts stated in the Joint Chronology are agreed facts for the purposes of the proceeding pursuant to s 191 of the Evidence Act 2008 (Vic).

On 7 March 2024 the parties filed a Statement of Agreed Facts relating to COVID‑19. On 19 March 2024 the parties filed a Supplemental Statement of Agreed Facts concerning the size of the relevant LGAs, what constitutes ‘Greater Melbourne’ as that term was used in Area Directions (No. 3) and related matters. Both statements recorded the agreement of the parties that the facts stated were not disputed for the purposes of s 191 of the Evidence Act 2008 (Vic). The 7 March 2024 statement is subject to the qualification that the parties do not agree that all of the facts in the statement are relevant.

The trial was conducted on the basis of the Joint Chronology and on the basis of the two Statements of Agreed Facts subject to the qualification in the 7 March 2024 statement.

The issues are defined by the pleadings.

The conduct of the trial was economical and efficient and the submissions were of a high standard.

The defendants divided up the presentation of submissions concerning the issues in dispute so as to avoid duplication.

Arch had the carriage of argument concerning the constructional premise and the primary argument concerning the factual premise. Lloyds advanced submissions concerning the proper construction and application of the Basis of Settlement. Chubb advanced submissions concerning the application of sub-limits and deductibles. Berkshire advanced submissions relating to the plaintiffs’ claim for interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth), alternatively, s 60 of the Supreme Court Act 1986 (Vic).

With the exception of the treatment of Pay-Roll (as that term is defined in the Policies) in the determination of Uninsured Working Expenses in the AMFR Proceeding where Chubb adopted a subtly different position from the other defendants each defendant adopted the submissions of the other.

In addition to tendering documents in the Transit Proceeding the plaintiffs relied on lay evidence contained in a witness statement of Antony Jackson amended following objections, and refiled dated 25 March 2024. Mr Jackson is a director of the first plaintiff in the Transit proceeding, Transit Pty Ltd, which owns and operates the Transport Hotel. He is also the sole director of the second plaintiff in the Transit proceeding, Notting Hill Tavern Pty Ltd, which owns and operates the Notting Hill Hotel.

In addition to tendering documents in the AMFR Proceeding, the plaintiffs relied on lay evidence contained in the witness statement of Jonathan Sherren, amended following objections and refiled on 25 March 2024. Mr Sherren was the sole director and secretary of each of the eight plaintiffs in the AMFR Proceeding.

Neither witness of fact was required for cross-examination.

The parties relied on expert evidence as to quantum. The plaintiffs filed an expert report of Mr Andrea De Cian dated 9 May 2023 in each proceeding. Chubb filed an expert report of Mr Ryan Carruth dated 1 December 2023 in each proceeding. Mr De Cian and Mr Carruth (‘the quantum experts’) prepared a joint expert report in each proceeding dated 9 February 2024. Supplementary joint reports were prepared in each proceeding dated 20 March 2024. These reports were followed by further supplementary joint expert reports dated 26 March 2024.

On 27 March 2024 the parties filed an Amended Agreed List of Key Issues for Determination (‘the 27 March 2024 list’) current at that date including the competing responses of the parties regarding liability issues:

CLOSEXB4
(1)Did the Plaintiffs suffer loss “resulting from interruption of or interference with [each] Business” within the meaning of endorsement CLOSEXB4? (The parties agree that the answer is “yes”.)
(2)If yes to (1), did the interruption of or interference with each Business “directly or indirectly [arise] from closure or evacuation of the whole or part of the Premises … by order of a component public authority” within the meaning of endorsement CLOSEXB4? (The parties agree that the answer is “yes” in respect of the periods 23 March to 31 May 2020 and 8 July to 4 October 2020.)
(3)If yes to (2), did the order of a competent public authority “directly or indirectly [arise] from infectious or contagious disease occurring at such premises” within the meaning of endorsement CLOSEXB4? In particular:
(a)Upon the proper construction of endorsement CLOSEXB4, is each of the Plaintiffs entitled to be indemnified for loss resulting from interruption of their Business directly or indirectly Case: S ECI 2021 01815 Filed on: 19/03/2024 09:44 AM arising from closure of “the Premises” by order of a competent public authority directly or indirectly arising from infectious or contagious disease occurring at “premises in the vicinity of the Premises”? (The Plaintiffs say “yes”; the Defendants say “no”.)
(b)If yes to (3)(a), as a matter of fact, were the Premises closed by order of a competent public authority directly or indirectly arising from COVID‑19 occurring at premises in the vicinity of the Premises? (The Plaintiffs say “yes”; the Defendants say “no”.)

QUANTIFICATION
(4)Are the Plaintiffs entitled to be indemnified for any loss suffered after 4.00 pm on 1 October 2020 (in S ECI 2021 01559 (Transit Proceeding)) and 30 September 2020 (in S ECI 2021 01559 (AMFR Proceeding)) such that they are able to claim loss up to and including 4 October 2020?
(5)In the event the Policy responds, does the “annual aggregate” sub-limit of $500,000 (in the Transit Proceeding) and $350,000 (in the AMFR Proceeding), as identified in the relevant Policy Schedule for “Infectious or Contagious Diseases; Vermin; Pests or Defective Sanitary Arrangements; Food or Drink Poisoning; Murder, Suicide”, apply?
(6)If the sub-limit applies, is the sub-limit and any indemnity payable to the plaintiffs limited by the term “annual aggregate” and, if so, in what way?
(7)In the event the Policy responds, whether the 48-hour time deductible for any claim or series of claims applies?
~~(8)In the application of the “Savings clause” should:~~
~~(a)JobKeeper or other government subsidies be taken into account and, if so, in what way?~~
~~(b)rental abatements required by law be taken into account and, if so, in what way?~~
~~(c)any other savings, whether by way of commercial accommodation or otherwise, be taken into account and, if so, in what way?~~

(9)Should the references to “Damage” in the “Savings clause” and “Adjustments clause” in the Basis of Settlement in Section 2 be construed as the “Insured Peril” and, if so, when did the “Damage” occur?
~~(10)~~(8) Should the Transit Policy be construed as requiring ~~Pay-Roll Expenses and~~ COGS to be deducted as uninsured working expenses in the calculation of Gross Profit?
~~(11)~~(9) Should the AMFR Policy be construed as requiring ~~Pay-Roll Expenses and~~ COGS to be deducted as uninsured working expenses in the calculation of Gross Profit?
(10)In both the AMFR Proceeding and the Transit Proceeding how should the remaining differences in calculation between the experts be resolved?
~~(12)Are the declared values in the Transit Policy for 12 months or 24 months?~~
~~(13)~~(11)Is interest to be awarded under section 60 of the Supreme Court Act 1986 (Vic) or section 57 of the Insurance Contracts Act 1984 (Cth)?
~~(14)~~(12)If interest is awarded under section 57 of the Insurance Contracts Act 1984 (Cth), from what date is interest payable and at what rate?

The quantum experts gave evidence concurrently. They adopted their joint reports. In accordance with an agreed protocol, cross-examination was limited to four topic areas for each of the two proceedings relating to calculation of savings:

(a) March 2020 pro-rating (vs all of March 2020);

(b) Items excluded from calculation;

(c) Government waivers (liquor licence fees and payroll); and

(d) Calculation of COGS (average vs percentage).

The issues narrowed during the course of the trial. On 3 April 2024 the parties filed a Statement of Agreed Position — Quantum.

During closing submissions on 4 and 5 April 2024 the parties advised agreement had been reached on a number of quantum issues and that other quantum issues, while not agreed, do not require determination as part of the trial.

Following the trial, the parties filed an agreed Joint Tender List which lists 847 documents comprising the evidence cross-referenced to the transcript and submissions.

C. The Insured Venues and the Periods of Insurance

In the Transit Proceeding there are two relevant venues: the Transport Hotel and Public Bar at Federation Square (Melbourne CBD) and the Notting Hill Hotel (Notting Hill). The Transport Hotel and Public Bar at Federation Square is located in the City of Melbourne. The Notting Hill Hotel is located in the City of Monash.

In the AMFR Proceeding there are eight relevant venues; The Deck Brighton (Brighton), The King Hotel (previously known as El Coco) (Melbourne CBD), the Nixon Hotel (Docklands), True South (Black Rock), the Metropol (which, prior to 18 May 2020, was in St Kilda), Hotel Brighton (Brighton), Melbourne Central Lion (Melbourne CBD) and Bank on Collins (Melbourne CBD).

In the AMFR Proceeding the Deck Brighton, the Hotel Brighton and True South are located in the City of Bayside, the King Hotel (previously known as El Coco), the Nixon Hotel, the Melbourne Central Lion and Bank on Collins are located in the City of Melbourne, and the Metropol (which ceased operations on 18 May 2020) was located in the City of Port Phillip.

The periods of insurance for the Transit plaintiffs and AMFR plaintiffs overlap and are as follows:

(a) Transit Proceeding — from 4.00 pm on 28 February 2020 to 1 October 2020 with an indemnity period of 24 months beginning with the occurrence of the damage; and

(b) AMFR Proceeding — from 4.00 pm on 30 September 2019 to 30 September 2020 with an indemnity period of 18 months beginning with the occurrence of the damage.

In both cases the Placing Slip constitutes the Schedule to the Policy. The Placing Slip names the Insured, defines the Business and the Situation or Premises. In the case of Transit the ‘Business Description’ is in the following terms:

All activities of the Insured, principally, but not restricted Hotel Operators and/or owners, including Gaming, Accommodation, Restaurant, Bistro Operators, Pub Tab, Bottleshop, Conference Facilities, Property Owners & Occupiers and all other activities incidental thereto or for which the Insured may be or may become engaged.

The Transit Placing Slip uses the expressions ‘Situation and/or Premises’, interchangeably. It specifies sub–limits of liability including, by way of example, in relation to Section 1, burglary and/or theft (other than money) $100,000, and in Section 2, ‘Infectious or Contagious Diseases; Vermin, Pest or Defective Sanitary Arrangements: Food or Drink Poisoning: Murder, Suicide (Annual Aggregate) $500,000’. The Placing Slip also identifies ‘deductibles’ including in respect of, ‘Infectious or Contagious Diseases; Vermin, Pest or Defective Sanitary Arrangements: Food or Drink Poisoning: Murder, Suicide (Annual Aggregate) 48 hours’.

The Transit Placing Slip identifies ‘Declared Values’ for each Situation, including the two venues the subject of the Transit Proceeding as at 1 October 2019. Concerning the Transit/Transport/Taxi Situation under section 2: consequential loss; gross profit $14,610,000 and wages $2,772,000 are specified. Concerning Notting Hill Tavern, gross profit $5,924,000 and wages $1,746,923 are specified.

At the start of the trial there was an issue about whether the Transit Declared Values for gross profit and wages in the Placing Slip are for 12 months or whether they are for the indemnity period of 24 months. That issue has been resolved. Item 12 struck through in the 27 March 2024 list reflects that resolution. The parties now agree the Transit Declared Values are for 24 months. In the case of the AMFR Policy, the Schedule specifies the Declared Values are for 18 months.

The Policy Terms

The Policies are made up of a combination of standard terminology and bespoke exclusions and endorsements.

The CLOSEXB4 endorsement reflects a deliberate decision to extend the cover for business interruption beyond the cover otherwise provided for in the Policies which is dependent upon the occurrence of physical loss or damage by deeming Loss falling within CLOSEXB4 to be Loss resulting from damage to property used by the Insured at the Premises.

As stated by the Full Court in the Star Appeal:

In such context, where, as here, particular memoranda are used to expand or limit the scope of the indemnity afforded by the principal indemnity it may be inferred that the parties have turned their minds to particular topics or types of risk and drafted appropriate memoranda to deal with each such instance.

So much is plainly the case here. The issue for determination is what are the metes and bounds of the endorsement and does the extension of indemnity for which the endorsement provides respond in the factual circumstances under consideration.

The Policy proper begins with ‘IMPORTANT INFORMATION’ stated to be applicable to all parts:

This Policy incorporates the Schedule, Sections, Definitions, Conditions, Exclusions, Endorsements, Memoranda and Warranties (if any) and any other terms herein contained which are to be read together and any word or expression to which a specific meaning has been given in any part of this Policy shall bear this meaning wherever it may appear unless such meaning is inapplicable to the context in which the word or expression appears.
…
Provided that the total liability of the insurer(s) at any one Situation shall not exceed the appropriate Limit or Sub-Limit(s) of Liability as stated in the Schedule or such amount(s) as may be substituted therefore by endorsement or memorandum hereon or attached hereto and that each insurer specified shall only be liable to contribute to any loss covered by this Policy that proportion of the loss as is specified beside its name.

The insuring clause for business interruption, headed ‘Section 2 — Consequential Loss’ is relevantly in the following terms:

In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged during the period of insurance by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed “Damage”) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.

The Basis of Settlement clause in section 2 limits consequential loss to three items. Item 1: Loss of Gross Profit; item 2: Claim Preparation Fees; and item 3: Pay‑Roll. Items 1 and 3 are the subject of claim in the Transit proceeding. There is no separate claim in the AMFR proceeding for item 3, Pay-Roll. The sole item of claim in that proceeding is for loss of Gross Profit. There is no issue in either proceeding concerning item 2, Claim Preparation Fees.

The Basis of Settlement clause relevantly provides:

Item No. 1 — Loss of Gross Profit
The insurance under this item is limited to actual loss of Gross Profit due to: (a) Reduction in Turnover, and (b) Increase in Cost of Working, and the amount payable as indemnity thereunder shall be:
(a) in respect of Reduction in Turnover:
The sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover.

…
Less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage.
Provided that if the Declared Value of Gross Profit at the commencement of each Period of Insurance be less than the sum produced by applying the Rate of Gross Profit to the Annual Turnover (or its proportionately increased multiple thereof, where the Indemnity Period exceeds 12 months), the amount payable hereunder shall be proportionately reduced.
…
Item No. 2 — Claim Preparation Fees
…
Item No. 3 — Pay-Roll

As appears from item 1, in the Basis of Settlement clause, there are two elements involved in the calculation of loss of Gross Profit. The first element (a): Reduction in Turnover; the second element (b): Increase in Cost of Working. There is no claim in either proceeding for loss due to Increase in Cost of Working. That element of any potential claim may be put to one side. In both proceedings the plaintiffs claim loss of Gross Profit due to Reduction in Turnover.

Item 1(a) of the Basis of Settlement clause specifies the method by which Reduction in Turnover is to be calculated. Reduction in Turnover is represented by the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover. A number of the integers in the calculation are defined terms.

From that calculation there is to be a deduction in respect of ‘any sum saved’ during the Indemnity Period ’in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Damage’.

When calculating the Reduction in Turnover the ’Rate of Gross Profit’ is a critical integer. That expression is defined, as is ’Gross Profit’:

RATE OF GROSS PROFIT
The rate of Gross Profit earned on the Turnover during the financial year immediately before the date of the Damage.
GROSS PROFIT
The amount by which:
(a)the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed;
(b)the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.

Note: The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured’s normal accountancy methods, due provision being made for depreciation.

The rate of Gross Profit is the Rate of Gross Profit earned on turnover during the previous financial year. ’Turnover’, ‘Annual Turnover’ and ’Shortage in Turnover’ are defined:

TURNOVER
The money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.
SHORTAGE IN TURNOVER
The amount by which the Turnover during a period shall, in consequence of the Damage, fall short of the part of the Standard Turnover which relates to that period.
ANNUAL TURNOVER
The Turnover during the 12 months immediately before the date of the Damage.

A further integer in the calculation of reduction in Turnover is ’Standard Turnover’. ’Standard Turnover’ is defined not by reference to a financial year. It is defined as follows:

STANDARD TURNOVER
The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.

The calculation of ’Gross Profit’ requires the calculation of the amount by which the sum of the Turnover and the amounts of Closing Stock and Work in Progress exceed the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses set out in the Schedule. No Uninsured Working Expenses are set out in the Schedule to either of the Policies.

The parties, including Chubb in closing submissions, agree that in the case of the Transit Policy, as a matter of construction even though there is no reference to Uninsured Working Expenses in the Schedule, Pay-Roll should be treated as an Uninsured Working Expense. As a result of Chubb’s acceptance that Pay-Roll is an Uninsured Working Expense for the purposes of the Transit proceeding that issue no longer needs to be addressed.

In the AMFR proceeding the parties, with the exception of Chubb, agree that as a matter of construction of the AMFR policy, Pay-Roll is not an Uninsured Working Expense. Chubb agrees Pay-Roll is not an Uninsured Working Expense, not as a matter of construction of the AMFR Policy, but for the purposes of the AMFR proceeding. As a result, that issue no longer requires determination in the AMFR proceeding.

While an issue at the outset of the trial, the parties now agree that Cost of Goods Sold (COGS) although not identified in the Schedule to either Policy as an Uninsured Working Expense, is an Uninsured Working Expense in the case of both Policies. That issue now being agreed, it no longer requires determination.

The memoranda to section 2 of the Policy includes the following, to which reference was made by Arch in support of its construction submissions:

PREMISES IN THE VICINITY (PREVENTION OF ACCESS)
Loss as insured by this Policy resulting from interruption of or interference with the Business in consequence of damage to property in the vicinity of the Premises caused by a peril, damage as a result of which is insured hereunder, which shall prevent or hinder the use thereof of access thereto, whether the Premises or property of the insured therein shall be damaged or not, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises.
Loss as insured by this Policy resulting from interruption of or interference with the Business in consequence of damage to property in the vicinity of and forming part of or contained in the complex of which the Premises forms part caused by a peril, damage as a result of which is insured hereunder, which results in a cessation or diminution of trade due to temporary falling away of potential custom whether the Premises or property of the Insured therein shall be damaged or not shall be deemed to be loss resulting from Damage to property used by the Insured at the Premise.

Within the Policy, at the outset of the section headed ‘Pace Hospitality Agreed Endorsements Applicable to All Sections’, being a reference to all sections of the endorsements prepared by Pace but not to the Policy proper, the following appears:

ENDORSEMENT ATTACHING TO AND FORMING PART OF INDUSTRIAL SPECIAL RISK INSURNACE [SIC] POLICY
(Headings have been included for ease of reference and it is understood and agreed that the policy and endorsements are not to be interpreted by reference to such headings.)
Notwithstanding anything contained herein to the contrary, it is hereby declared and agreed that the following endorsements are made to the policy.

In addition to endorsement CLOSEXB4 the directive concerning headings has application to other endorsements including endorsement REPELXB4, the subject matter of which appears to intersect with the subject matter of CLOSEXB4. The final sentences of both endorsements are relevantly identical:

REPELXB4INFECTIOUS OR CONTAGIOUS DISEASE; VERMIN, PESTS OR DEFECTIVE SANITARY ARRANGEMENTS; FOOD OR DRINK POISONING; MURDER, SUICIDE.

Loss as insured by this Policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation of the whole or part of the Insured Premises by order of a competent public authority consequent upon:
(i)human infectious or contagious disease manifested by any person whilst at the Insured Premises;
(ii)the outbreak of a notifiable human infectious or contagious disease in humans occurring within the immediate vicinity of the Insured premises;
(iii)vermin or pests or defects in the drains or other sanitary arrangements at the Insured Premises;
(iv)poisoning directly caused by the consumption of food or drink provided on or from the Insured Premises;

(v) murder or suicide occurring in or at the Insured Premises;
shall be deemed to be the loss resulting from Damage to property used by the insured at the Insured Premises. Perils exclusion 4(a) shall not apply to the cover granted by this endorsement.
However, paragraphs (i) and (ii) will not indemnify Loss resulting from interruption of or interference with the Business directly or indirectly arising from or in connection with Highly Pathogenic Avian Influenza in Humans or any other diseases declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments.

Endorsement DZONEXS4 extends cover provided under section 2 of the Policy concerning loss resulting from access to the Business Premises being prevented or hindered by deeming certain loss to be loss to which the interference with access cover in section 2 has application:

DZONEXS4 LOSS OF ATTRACTION – GENERAL AREA
The second paragraph of the memorandum headed Premises in the Vicinity (Prevention of Access) is extended to include the following clause:
Any loss resulting from interruption of or interference with the Business in consequence of Damage to property within a 5 kilometre radius of the Premises which results in a cessation or diminution of the Insured’s trade or normal business operations, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises.

D. Principles of Construction

The principles of construction are not in dispute.

In its opening submissions Arch helpfully summarised the principles by reference to the decisions in the LCA litigation and the Star litigation. Paragraphs 82–85 that follow are directly taken from those submissions.

The language used by the parties in a contract of insurance must be interpreted objectively, by considering what the language adopted by them would mean to a reasonable businessperson in the position of the parties.[17] The question for consideration is not what each of the parties meant to say, but rather what is the objective meaning to be attributed to the words they have used to express what they have agreed.[18]
[17]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [8].
[18]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [10].

In the absence of a contrary intention, the construction of a commercial instrument will be approached on the basis that the parties intended to produce a commercial result and constructions that make for commercial nonsense or would work commercial inconvenience should be avoided. However, minds may differ as to the commerciality of a particular outcome. Therefore, reasoning by reference to commerciality has its limits.[19] In particular, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent one for one of the parties to have agreed.[20]
[19]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [11].
[20]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [66] (Derrington and Colvin JJ).

The policy should be construed as a whole.[21] That requires a substantive intellectual process of evaluating the degree of operative coherence and consistency between a proffered construction and the instrument’s other terms.[22] An ‘iterative process’, involving ‘checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences’, ‘enables a court to assess whether either party’s preferred legal meaning gives rise to a result that is more or less internally consistent and avoids commercial absurdity’.[23]
[21]Star Entertainment Group [2022] FCAFC 16; (2022) 400 ALR 25 [14]; LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [57] (Derrington and Colvin JJ).
[22]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [58] (Derrington and Colvin JJ).
[23]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [57] (Derrington and Colvin JJ).

Application of the contra proferentem rule is a last resort.[24] Having undertaken the orthodox process of construction, the court does not elect between whichever construction is favoured ‘by the narrowest of margins’. The rule only applies where, after ascertaining the literal or grammatical meanings and evaluating them against the text, context and purpose of the contract, there is insufficient basis for choosing between competing constructions.[25]
[24]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [89] (Derrington and Colvin JJ).
[25]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [102] (Derrington and Colvin JJ).

E. Construction of the policy

The plaintiffs submit that as stated by the Full Court in the Star Appeal when construing the Policy as a whole, ’[t]here must be due regard to the overall nature of the instrument, the nature of the transaction or dealing that it records and its commercial purpose as evident from considering all of its terms’.[26] The defendants agree. In its written closing Arch submitted:

While Arch’s focus is therefore on CLOSEXB4, it is important to read the Policy as a whole[27] and to construe it so that ‘all [of] its components form a single coherent commercial instrument’.[28] In particular, that requires a process of evaluating the degree of operative coherence and consistency between a proffered construction and the instrument’s other terms.[29] An ‘iterative process’, involving ‘checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences’, ‘enables a court to assess whether either party’s preferred legal meaning gives rise to a result that is more or less internally consistent and avoids commercial absurdity’.[30]

[26]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [14].

[27]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [14]; LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [57] (Derrington and Colvin JJ).

[28]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 [4].

[29]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [58] (Derrington and Colvin JJ).

[30]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [57] (Derrington and Colvin JJ).

While there is agreement upon the importance of construing the Policy as a whole, as earlier mentioned, the parties agree it is convenient to break up the analysis of CLOSEXB4 into three interlocking elements.

The plaintiffs’ submissions

The plaintiffs submit that while reading the clause sequentially is important for the purposes of understanding what is necessary to establish connecting features between each of the elements, ultimately the clause has to be construed as a whole. It is not appropriate to stop at a point during the reading and say the clause can only have one meaning, it is necessary to read on.

They submit the LCA Appeal Decision emphasises the need for close attention to be paid to the language of a clause conferring coverage for a complex peril, including the degree of causal relationship that is necessary. In this case, the relevant expression of the causal nexus is ‘directly or indirectly arising from’.

The endorsement responds when the order of a competent public authority arises ‘directly or indirectly’ from infectious or contagious human disease occurring at ‘such premises’ being a reference to disease. That is, COVID‑19, either at the insured Premises or at other premises in the vicinity of the Premises. ‘Such premises’ as an expression has a referential effect, looking back to the premises that are referred to earlier.

‘Premises’, as used throughout CLOSEXB4, should take its ordinary meaning, ‘the property forming the subject of a conveyance’ or ‘a house or building with grounds, etc., belonging to it’.[31] But that is not to say that an occurrence of COVID‑19 must occur within a building to have occurred ‘at’ the premises. As Jagot J said in the LCA first instance decision:[32]

… Premises may or may not involve only a building. Turner v York Motors Pty Ltd (1951) 85 CLR 55 at 75; 58 ALR (CN) 1054 does not suggest that premises may not include more than a building. On this basis, depending on the facts, there may be an occurrence of COVID‑19 at the premises without there being an occurrence of COVID‑19 within a building. It depends on the nature of the premises.

[31]Macquarie Dictionary (online at 2 April 2024) ‘premises’ (defs 2(a) and (b)); Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [947]; LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [703].

[32]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [831].

It is sufficient for the nature of the other premises to be identified (in this case, including residential premises, hospitals, medical clinics and hotels).

The requirements of the CLOSEXB4 endorsement are satisfied if the occurrence of cases of COVID‑19 inside the relevant vicinity, together with cases occurring outside the relevant vicinity, were causes of the making of the orders of the competent public authority.

‘Directly or indirectly arising from’

The plaintiffs submit the words ‘directly or indirectly arising from’ in both the second and the third elements of CLOSEXB4 expand the requisite causal nexus beyond a proximate cause.

They refer to Quintano v BW Rose Pty Ltd[33] where Brereton J considered whether a claim was excluded because it was one ‘arising from’ the insolvency of any insurer or reinsurer. His Honour relevantly held:

[7] The words ‘arising from’ require that there be some causal connection between the claim and the specified matter, but the requisite nexus is satisfied by a less proximate relationship than that required by the phrase ‘caused by’ [GIO (NSW) v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437, 443 (Barwick CJ), 445 (Menzies J), 447 (Windeyer J)]. …
[8] It will satisfy the requirement that a claim ‘arise from’ a matter, if it originates in, springs from, or has its foundation in, that matter … . A cause of action arises from a set of material facts, proof of which found the cause of action. Similarly, a claim arises from the underlying facts that, if established, justify the claim. In my view, a claim can be said to arise from a matter — at least — if it has a foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim.

[33]Quintano v BW Rose Pty Ltd [2008] NSWSC 793; (2009) 15 ANZ Ins Cas 61-805.

One of the clauses examined by Jagot J in the LCA first instance decision was the clause in issue in NSD144/2021 Guild Insurance Ltd v Gym Franchises Australia Pty Ltd (‘Guild v Gym Franchises’):[34]

…closure or evacuation …. by order … arising directly or indirectly from … human infectious or contagious diseases or the discovery of an organism likely to result in human infectious or contagious disease at the Business Premises …

[34]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461, 495.

Her Honour referred with approval to the judgment of Lords Hamblen and Leggatt JJSC in Arch who observed that policy language such as ’directly or indirectly caused by’ may indicate that a looser form of causal connection will suffice than would normally be required.[35] Her Honour quoted with apparent approval from Coxe v Employers’ Liability Assurance Corporation Ltd[36] to the effect that the words ‘directly or indirectly’ exclude a requirement for a proximate cause and ‘a more remote link in the chain of causation is contemplated than the proximate and immediate cause’, accepting that ‘a line must be drawn somewhere’.[37] Concerning the clause in issue in Guild v Gym Franchises compared to other clauses under consideration, her Honour said:[38]

In NSD144/2021 Guild and Gym Franchises, however, the causal connection required is much looser, being ‘arising directly or indirectly from’. In that case, the difference is substantive, as indirect causation would encompass a far more expansive causal chain.
[35]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [46].
[36]Coxe v Employers’ Liability Assurance Corporation Ltd [1916] 2 KB 629, 633-4 (‘Coxe’).
[37]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [47].
[38]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [52].

Causation — multiple ‘causes’

The plaintiffs submit that there can be more than one proximate cause. As long as the occurrences of COVID‑19 inside ‘the vicinity’ had a non-incidental and non-tenuous causal role in the making of the Directions, that will be sufficient. They rely on the following statement by Jagot J in the LCA first instance decision:[39]

… It is not that an order cannot relate to areas inside and outside of the radius. It is also not that the order must be a result solely of circumstances inside the radius. It is that the circumstances inside the radius must be a cause of the order, even if circumstances outside of the radius are also a cause of the order (see further below) and the relevant cause in this case is not the risk or threat of COVID‑19 but the fact of an outbreak or likely occurrence of COVID‑19 as specified. In the present case no inference can be drawn that the circumstances inside the radius were a cause of the order in any sense. …

[39]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [284].

It is sufficient for the Direction to be ’a cause’ of the Loss rather than the Direction being that which ‘most effectively’ causes the loss as submitted by the defendants.

On the facts they submit CLOSEXB4 is triggered because there were occurrences of COVID‑19 at premises in the vicinity of the Insured Premises which contributed to the threat of the spread of COVID‑19 which was ‘a cause’ of the Directions.

They submit these cases are distinguishable from Guild v Gym Franchises because:

(a) there is evidence there were occurrences of COVID‑19 at premises in the vicinity of the Insured Premises;

(b) there is evidence the relevant decision-makers considered relevant occurrences of COVID‑19 in the making of the Directions, including those which had occurred at premises in the vicinity of the Insured Premises; and

(c) occurrences of COVID‑19 within the local community (‘the vicinity’) fuelled the making of Directions ‘to limit the spread’ of COVID‑19 from those cases.

‘Such premises’

The plaintiffs submit the phrase ‘such premises’ as it is used in CLOSEXB4 does not require the site of the occurrence of the disease and the site subject to closure to be the same premises. Consistent with its ordinary meaning ‘the person or thing, or the persons or things, indicated’ the term ‘such’ identifies the premises previously indicated.

They contend it is not in dispute that ‘such premises’ is capable of referring to both ‘the Premises’ or ‘other premises in the vicinity’. The difference in position is that, contrary to the defendants’ submissions, ‘such premises’ is a composite expression which on its ordinary meaning, refers to the premises indicated. It is not to be narrowed by reference to which of the two types of premises at which disease must have been present. If the operation of the endorsement was intended to be so confined the clause would have been split.

They submit that, if CLOSEXB4:

imposed two distinct and independent forms of indemnity, namely one arising from closure, evacuation and disease all occurring at the Insured’s premises and one arising from closure, evacuation and disease occurring at another premises in the vicinity, that would have been reflected in the drafting of the endorsement.

The word ‘or’ does not split the indemnity provided by the endorsement into two separate indemnities. The better reading of the words ‘such premises’ indicates either class of premises previously referred to. If the insurer wished to provide two distinct and independent indemnities, the insurer could have split them out, not merged them together into one composite collection of words.

Contrary to the defendants’ submissions, the term does not reflect any delineation of CLOSEXB4 into two independent limbs of coverage. ‘Such premises’ operates to refer to the classes of closed premises previously indicated, with the result that CLOSEXB4 can respond where there is a closure of ‘the Premises’ and the relevant occurrence of the disease was (1) at ‘the Premises’, or (2) at ‘other premises in the vicinity of the Premises’. CLOSEXB4 could be triggered where the closed premises (whether ‘the Premises’ or ‘other premises in the vicinity’), is the same premises at which the disease occurs; but it is not necessary that they be the same premises.

To the extent there may be two different types of indemnity, as contended for on behalf of the defendants, the use of the words ‘such premises’ draws those separate forms of indemnity back together. There must be a link between the closure or evacuation and the cause. The cause is tied to the expansive expression, disease occurring at either category of premises. As a composite peril, the clause must be construed as a whole.

While accepting that instead of ‘such premises’ the clause could have said ‘occurring at the Premises or other premises in the vicinity of the Premises’, the plaintiffs contend the words ‘such premises’ have the same effect.

The plaintiffs submit the following textual indicators support their construction:

(a)The term ‘or’ is used repeatedly in CLOSEXB4 to posit alternatives (i.e. ‘closure or evacuation’, ‘whole or part of’ and ‘the Premises or other premises of the vicinity’). However, when describing the locations at which COVID‑19 must occur, a deliberate choice has been made to use the composite term ‘such premises’ rather than distinguishing between ‘the Premises’ or ‘other premises in the vicinity’. The use of this different language within the endorsement suggests that ‘such premises’ should not be construed as delineating between two alternative limbs of indemnification.
(b)If there were two independent (and separate) limbs of indemnification within CLOSEXB4, it was open to the Insurers to make this clear, such as by using separate sub-paragraphs to delineate between those two limbs (as is done in other provisions). There are no sub-paragraphs in CLOSEXB4.

The plaintiffs submit the comparison undertaken by the defendants with REPELXB4 does not assist the argument that ‘such premises’ creates two separate limbs of indemnification such that the disease must occur at the same premises that is closed by order of the public authority. At best, as context, REPELXB4 cancels out both constructions.

There is potential for overlap with REPELXB4 which extends to paragraphs (i) and (ii) of that endorsement. CLOSEXB4 provides a broader, more flexible form of coverage in respect of occurrences of infectious or contagious human disease. That is consistent with the fact that CLOSEXB4 is concerned solely with closure by reason of disease while REPELXB4 deals with various other express limbs of coverage, specified perils such as vermin, pests, defects, poisoning, murder or suicide. In contrast to REPELXB4 which has numerous sub-paragraphs, CLOSEXB4 has almost a distributive approach with ‘or’s everywhere gathered together by the words ‘such premises’.

The plaintiffs submit the fact the Policies are ‘no stranger’ to providing cover where loss is suffered by a business as a result of circumstances arising at another premises (e.g. the ‘Premises in the Vicinity (Prevention of Access)’ shows that there is no commercial nonsense inherent in their construction: to the contrary, it supports that construction.

Finally, the plaintiffs submit the expression ‘such premises’ should be construed contra proferentem against the Insurers. Accepting that the rule is one of last resort, if the construction of the expression ‘such premises’ cannot be resolved by applying the usual rules of construction, then the contra proferentem rule must favour the plaintiffs, a proposition not affected by the fact an insurance broker was involved.[40]
[40]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461 [35], [1078].

The defendants’ submissions

Arch on behalf of the defendants submit there are two circumstances in which an Insured may be entitled to indemnity, either because the insured suffered Loss because its Premises were closed by order of a competent public authority (the first limb), or because it suffered Loss because other premises in the ‘vicinity’ of the Premises were closed by such an order (the second limb). Two distinct and independent indemnities are reflected, in the language of the clause – in particular, from the use of the disjunctive ‘or’ in the expression ‘… the Premises or other premises in the vicinity of the Premises’.

Arch submits the plaintiffs did not attempt to undertake a word by word, or phrase by phrase analysis of the way in which the endorsement works. The plaintiffs’ approach to the words ‘Premises or other premises in the vicinity of the Premises’ does not involve an analysis of CLOSEXB4 which gives a value or meaning to each of the words in the form in which they exist.

Arch structured its submissions by reference to the three interlocking elements of CLOSEXB4. It submits the second limb of the second element of CLOSEXB4 is significant in order to understand and apply the third element and to properly construe what is meant by ‘such premises’.

Arch proffered as an example of the second limb the owner of a bakery (the Insured) located at Premises next to a supermarket (premises in the vicinity of the Premises) who might suffer Loss resulting from interference with its Business directly or indirectly arising from closure or evacuation of the supermarket by order of a competent public authority directly or indirectly arising from infectious disease occurring at the supermarket, and be entitled to be indemnified under the Policy with respect to that loss.

The first element

Arch and the defendants acknowledge that each of the plaintiffs has suffered loss resulting from interruption of or interference with its Business.

The second element

Arch placed significance on the use of the word ‘or’ in the second element of CLOSEXB4. Where there are alternatives, separated by the word ‘or’ there might be two claims both of which fall within the endorsement.

‘Closure’ and ‘evacuation’, separated by ‘or’ are alternatives. There might be one claim for Loss arising from evacuation and another for Loss arising from closure but both claims would not exist at the same time. If the Insured was required to evacuate the Premises and then the Premises were closed, the losses would be sequential. Assuming the Loss otherwise fell within the endorsement, the Insured could make a claim for Loss arising from evacuation and then a claim for Loss arising from closure.

Arch submits one of the most significant disjunctive ‘or’s in the second element is the separation ‘of the Premises’ and the ‘other premises in the vicinity of the Premises’ read together with the preceding language. The word ‘or’ where used before the words ‘other premises in the vicinity of the Premises’ signifies an alternative. In turn the words ‘other premises in the vicinity of the Premises’ is qualified by the words that have gone before. That is, Loss resulting from interruption or interference with the Business arising from the closure or evacuation of the other premises.

If there was a case of COVID‑19 occurring at the Premises that closed the Business at the Premises and there was also a case of COVID‑19 at other premises in the vicinity causing those premises to close, the insured could not make two claims. That is because there would not be a Loss that flowed from both events. Circumstances could not be envisaged where if the insured’s Business was interrupted or interfered with by the closure of its Premises, there would be additional or separate Loss due to closure as a result of COVID‑19 at premises in the vicinity of those Premises.

The insured Premises need not be the premises that are closed in order for the endorsement to have application. However what is required for indemnity to be available is that the premises that are closed must be the same premises at which the infectious or contagious disease occurs.

Arch submits the words, ‘directly or indirectly arising from’ add little where they appear in both the second and the third element of CLOSEXB4 and that they may be dispensed with for the purposes of construction. Their purpose is to shut out a potential argument if the word ‘indirectly’ was not included that in order to be recoverable, Loss must arise directly. The words ‘directly or indirectly’ are used to ensure that no person can say that in considering the order of a competent public authority closing or requiring the evacuation of premises that the closure or evacuation has to arise directly rather than indirectly. Provided the causal link is there between the order of the competent authority and the closure or evacuation, the endorsement ensures the Policy responds.

The word ‘vicinity’, referring to ‘the vicinity of the premises’, is concerned with the close physical relationship between the premises. It is the measure of that physical relationship that will be relevant to the question of whether the closure of the premises in the vicinity of the Premises, in the example discussed, the supermarket, has in fact caused the Loss of which the baker complains.

Arch submits the concept of ‘vicinity’ stipulates a relationship of proximity between the Premises and other premises, rather than a relationship of proximity between Premises and the occurrence of infectious disease. It submits the plaintiffs misread CLOSEXB4, in this respect. The endorsement does not, as the plaintiffs imply, ‘provide… cover’ where the closure of Premises arises from the occurrence of infectious disease ‘in the vicinity of the Premises’.

As to context, Arch submits CLOSEXB4 is distinct from:

(1)REPELXB4, which in sub-paragraph (ii) stipulates a relationship between the Premises and the outbreak of infectious disease (the outbreak must be in the ‘immediate vicinity’ of the Premises); this is different from the way in which CLOSEXB4 operates;
(2)various clauses at issue in the FCA v Arch litigation and in the LCA litigation which stipulated a relationship between the insured premises and the occurrence or outbreak of disease (the occurrence etc. must within a radial distance of the premises).

Arch submits CLOSEXB4 is similar to various other clauses at issue in the LCA litigation, which embodied a similar expression to the first limb of CLOSEXB4 (i.e., closure of the insured Premises arising from the occurrence or outbreak of disease at the insured Premises). The only relevant difference is that CLOSEXB4, unlike the clauses at issue in the LCA litigation, incorporates a second limb (i.e., closure of premises in the vicinity of the insured Premises arising from the occurrence of disease at those other premises).

The third element

Arch submits that understanding the disjunctive limbs of the second element of CLOSEXB4 is the key to construing the third element.

Arch agrees with the plaintiffs that the word ‘such’ where it refers to ‘such premises’ has a referential operation. It refers to the ‘premises’ hitherto referred to, being the ‘premises’ the closure or evacuation of which caused the interruption of or interference with the Business (be they the Premises, or the premises in the ‘vicinity’ of the Premises), which in turn caused the Loss.

This does not mean ‘such premises’ is to be ‘construed’ as ‘mean[ing] only the plaintiffs’ premises’. Rather, it reflects the sequential and composite terms of CLOSEXB4, and the fact that the second element has two limbs.

Where an Insured claims that it suffered Loss resulting from interruption of the Business arising from closure of the Premises, to be entitled to indemnity the insured must establish that the order of the competent public authority arose from COVID‑19 occurring at those Premises.

Where an Insured makes a claim for Loss caused by closure of ‘other premises in the vicinity of the Premises’, the Insured must establish: first, that ‘other premises’ have been closed by order of a competent public authority because of the ‘occurrence’ at those premises of an infectious or contagious disease; and second, that the Insured has suffered loss resulting from interruption of or interference with its Business arising from the closure of those ‘other premises’. Not only must the ‘other premises’ be in the ‘vicinity’ of the Insured’s Premises, the closure of those particular ‘other premises’ must cause the interruption or interference with the Business that (in turn) causes the Insured’s loss.

‘Such’ premises is a reference to the premises that are the subject of both the closure and also the site of infectious human disease. Applying the provisions to an actual claim, and working through the words of the endorsement, by the time you get down to the words ‘such premises’ you already know which premises are being referred to, whether they are the insured’s Premises or premises in the vicinity of the Premises. You already know because you already know what has been closed or evacuated. This analysis reinforces recognition of the narrow scope of CLOSEXB4 because it is apparent that it is the closure or evacuation of the ‘other premises’ that causes the Business interruption and therefore the Insured’s loss, not the occurrence of infectious disease at those premises.

Arch submits the plaintiffs’ mistake is to read CLOSEXB4 as if what is relevant is the presence of COVID at premises in the vicinity of the Premises. However it is not the presence of the infectious disease that causes the loss to which the policy responds by reason of the endorsement, it is the closure of the other premises. The loss occurs because insured Premises are in the vicinity of the closed premises.

Arch submits its construction is reinforced by two contextual considerations. First, the structure of CLOSEXB4, which indemnifies an Insured for Loss resulting from interruption of or interference with the Business arising from an event (closure or evacuation by order of a competent public authority) affecting:

To recap, because I do not agree with the plaintiffs that the ‘vicinity’ of the Premises is properly construed as a reference to cases anywhere else in Greater Melbourne, the plaintiffs fail on this point. If I am wrong as to the meaning of ‘vicinity’, they succeed in relation to this issue concerning the Second Lockdown only.

H. Quantum, Sub-limit and Deductibles issues remaining

The 3 April 2024 Statement of Agreed Position - Quantum records:

(a) As a matter of construction of the Policy in the Transit Proceeding, Pay-Roll is an uninsured working expense;

(b) It is agreed for the purpose of the AMFR Proceeding, Pay-Roll is an uninsured working expense;

(c) It is agreed Cost of Goods Sold (COGS) is an uninsured working expense for the purposes of both Policies;

(d) The quantum experts have calculated loss in the Second Further Joint Reports in:

(i) The Transit Proceeding, on the basis that COGS is an uninsured working expense, to be in the range of $3,667,798 – $3,888,582;

(ii) the AMFR proceeding, on the basis that Pay-Roll is not an uninsured working expense and COGS is an uninsured working expense, to be in the range of $1,250,859 – $1,371,964.

(e) As a matter of principle, the Court should determine how the following matters are to be calculated for the purpose of assessing loss:

(i) March 2020 pro-rating: whether sums saved in the month of March 2020 should be pro-rated based on the numbers of days during the month for which the closure orders applied.

(ii) Excluded amounts: whether the following items should be excluded from the sum saved calculation:

(A)Repairs and maintenance costs;
(B)bank charges; and
(C)cleaning costs, laundry costs and promotional costs.

(iii) Government waivers: whether liquor licence fees and payroll tax waivers should be a sum saved.

(f) If liability is established in the Proceeding(s), the Court will not be able to immediately quantify the loss. It may be the case that any outstanding matters relating to quantum can be agreed between the parties.

(g) However, if this cannot occur, further calculations from Mr De Cian and Mr Carruth may be required with respect to:

(i) the Court’s findings in relation to those matters of construction and principle in paragraphs 1(b) and 1(e) above; and

(ii) their assessment of the ‘Basis Period’, as referred to in the Second Further Joint Reports.

During closing addresses the parties advised agreement had been reached on a number of these issues and that only a limited number of issues require determination. In addition, there remained outstanding issues concerning Sub-limits and Deductibles under the Policies.

As the plaintiffs have failed to establish an entitlement to indemnity, it is unnecessary to deal with these issues. However, as they were argued, and in case they may become relevant hereafter, I will deal with them briefly. When doing so, I proceed on the basis of agreement between the parties that what is required is to determine the contested issues as a matter of principle and that the Court will not be able to quantify the amount to be paid under the Policies. In default of agreement on quantification, further calculations may be required to be undertaken by the quantum experts.

Following agreement concerning the status of COGS and Pay-Roll, if the plaintiffs are entitled to indemnity, and I have found they are not, in the case of the Transit proceeding, the plaintiffs are entitled to between $3,667,798 (Mr Carruth) and $3,888,582 (Mr De Cian) and in the case of the AMFR proceeding, to between $1,250,859 (Mr Carruth) and $1,371,964 (Mr De Cian).

The quantum issues remaining all relate to the calculation of ‘any sum saved during the Indemnity Period’ to which reference is made in ‘Item No. 1 – Loss of Gross Profit’ in the Basis of Settlement clause of the Policy.

March 2020 savings: period of apportionment

Information concerning costs for the month of March 2020 was not available on a daily basis. Mr De Cian considered it reasonable to assume that behaviours of the public, aware of the threat of COVID‑19 from January 2020 when the WHO made its declaration were impacted by awareness of the virus and that the businesses of the plaintiffs were therefore affected by the damage even before the Damage Period. In that circumstance he believed it appropriate to assume a linear or pro rata reduction across the month of March. Mr Carruth did not agree with that approach. In his opinion such an approach would bring the cost reductions outside the policy. He considered it was more consistent to allocate costs reductions to the nine day period where the business were closed. To do so achieved a matching between the period in which turnover was reduced and the period in which costs were reduced.

To illustrate the impact of the competing approaches, assuming a saving of $100 for the month of March 2020, the approach of Mr De Cian was to pro-rata that amount across 31 days. The approach of Mr Carruth was to pro-rata the $100 saving across the days of closure only beginning on 23 March 2020.

Lloyds on behalf of the defendants submit that neither of these approaches is correct. It submits the correct method is to apportion the savings in accordance with the percentage reduction in turnover for March, represented by the percentage of the reduction in turnover attributable to the closure of the Premises in the last nine days in March.

Item 1(a) in the Basis of Settlement clause refers to the sum produced by applying the Rate of Gross Profit to the amount by which Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover. The reference to ‘less any sum saved’ is a reference to ‘any sum saved during the Indemnity Period’. The definition of ‘Indemnity Period’ in Section 2 relevantly states ‘the period beginning with the occurrence of the Damage …’.

I prefer Mr Carruth’s approach in relation to this issue. It is consistent with the definition of ‘Indemnity Period’ that the period to which the sum saved should be attributed begins with the occurrence of the Damage, in this case upon closure on 23 March 2020. I do not consider there is a proper basis to apportion the reduction in costs to a period that includes dates prior to 23 March 2020. I agree that a consistency of approach is called for between turnover and cost. Although, as discussed by Mr De Cian, there may have been impact upon behaviours of the public and therefore on the plaintiffs’ Businesses prior to 23 March 2020 due to knowledge of the pandemic, there is no basis to conclude that savings in relation to expenses relate to the whole or any part of the period prior to closure and prior to the period of the First Lockdown.

Excluded amounts

De Cian did not include certain fixed cost line items as savings. One such item was described in the variation analysis between the experts as repairs and maintenance ‘general’. Mr De Cian considered that repairs and maintenance were deferred and that increased expenditure on these items when trading resumed between October 2020 and December 2020 following the Second Lockdown meant that there was in fact no saving. Mr Carruth did not agree.

Another example referred to by Mr De Cian concerned cleaning contractors and bank charges of the Notting Hill venue. Mr De Cian treated these items as a standard sums saved. For that reason, he considered no adjustment was warranted.

Both experts agree and Lloyds submit that it is necessary to separately investigate and to consider each cost item separately. I also agree that is the case.

In relation to repairs and maintenance, I prefer the evidence of Mr De Cian. I accept that given the increase in this category of expenditure following the Second Lockdown that on the available evidence it is appropriate to regard this category of expense as deferred rather than saved. On the other hand, bank charges and cleaning contractor expenses, other categories of excluded expenses considered by the quantum experts and upon which they reported, relate to different activities. I consider the treatment by Mr De Cian of both of these items is correct. Bank charges and cleaning contractor expenses represent sums saved during the periods of lockdown.

While the Lloyds submissions also refer to laundry and promotional costs, in the table headed ‘Variance analysis between experts calculations — Notting Hill’ to which attention was directed, those items are not shown as items upon which the experts disagreed. I accept Lloyds’ submission that no determination should be made concerning these or other fixed cost line items.

Government waivers

This item relates to liquor licence fees and payroll tax, waived by the State during time periods that include both lockdowns. Mr De Cian was instructed not to include savings on these items. Mr Carruth did not receive instructions to make any particular assumption. He separately identified both items but considered it was a matter for the Court to decide.

As noted by Lloyds in its written opening, in the LCA Appeal, Derrington and Colvin JJ held that as the criteria for Jobkeeper payments were financial ones, they did not depend on whether or not there had been an outbreak of COVID‑19 within 20 kilometres of the premises of the Business and they were not ‘sums saved’ for the purposes of the policy.[76]
[76]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435, [461] (Derrington and Colvin JJ).

As acknowledged by Lloyds in its submissions, the clause in this case is sufficiently similar to that considered in the LCA Appeal, and the waiver of liquor licence fees and payroll tax are also not relevantly location dependent such that it is appropriate to apply the same reasoning as the Full Court.

While I note the defendants’ final reservation of their rights concerning the decision of the Full Court should this matter go on appeal, applying these decisions in the LCA Appeal,[77] Government waivers of licence fees and payroll tax are not ‘sums saved’ for the purposes of the Policies.
[77]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435.

Sub-Limits and Deductibles

The preamble to both Policies includes the following:

Sub-Limits of Liability
The liability of the Insurer shall be further limited in respect of any one loss or series of losses arising out of any one original source or cause at any one Situation as set out hereunder: The Sub-limits of Liability apply in excess of any applicable Deductible.

The Schedules to both Policies include various sub-limits under the heading ‘Section 2 – Consequential Loss Sub-limits of liability’. In both Schedules one item is described as ‘Infectious or Contagious Diseases, Vermin, Pest or Defective Sanitary Arrangements; Food or Drink Poisoning; Murder, Suicide (Annual Aggregate)’. In the case of the Transit Policy, the sub-limit specified against this item is $500,000; in the case of the AMFR Policy, the sub-limit specified is in the following terms $350,000.

Both Policies contain an endorsement providing for the application of a Deductible. Each Policy also contains the following endorsement:

APPLYXS4 Application of Deductibles
Deductibles shall apply to the Limits and Sub-Limits of Liability in accordance with the Schedule but the Limits and Sub-Limits of Liability shall only be applied in excess of the relevant deductible.

Chubb framed the sub-limits issues in their written opening:

(a)Firstly, whether the sub-limit for ‘Infectious or Contagious Diseases’ applies only to the REPELXB4 Endorsement (the plaintiffs’ position) or to both the REPELXB4 Endorsement and the CLOSEXB4 Endorsement (the defendants’ position).
(b)Secondly, the proper construction of the ‘Infectious or Contagious Disease’ sub-limit having regard to both the preamble to the Sub-Limits section of the Policy Schedule and the description of the sub-limit as an ‘Annual Aggregate’ sub-limit.

Concerning the sub-limit, Chubb submits that as a matter of substance cover for business interruption caused by ‘Infectious or Contagious Disease’ is available under both REPELXB4 and CLOSEXB4. The plural ‘diseases’ in the Schedule appears to reflect two separate sources of Infectious or Contagious Disease cover, both of which are subject to the sub-limit and the deductible. Chubb submits the adjectives ‘annual’ and ‘aggregate’ qualify the sub-limit such that if cover arises under the REPELXB4 or CLOSEXB4 endorsement, the combined maximum exposure of the defendants for ‘Infectious or Contagious Diseases’ is $500,000 Annual Aggregate for Transit and $350,000 Annual Aggregate for AMFR.

The plaintiffs submit each of the Sub-Limits is referrable to a distinct subject matter to be found in earlier provisions of the wording. For example, the reference to ‘Claims Preparation Costs’ ($200,000 in the Transit Policy) is tethered to the subject matter of the provision granting indemnity for same. Noting the express directive in both the Policy itself and the endorsement that the Policy and endorsements are not to be construed by reference to headings, the plaintiffs submit that contrary to the position put by Chubb, the sub-limit argument does not rise or fall with impermissible reliance on headings.

The plaintiffs endorse and adopt Chubb’s submission that:

Where a sub-limit corresponds to an extension of coverage provided by an endorsement, the sub-limit and deductible will apply not because of a symmetry between the wording of the deductible and the wording of an endorsement heading but rather because of a symmetry between the language of the sub-limit and deductible and the substantive terms of the endorsement.

In its opening submissions, Chubb provided a table showing the working of CLOSEXB4, the words of REPELXB4 and the wording of the sub-limit in the Schedule, extracted in full below (emphasis added by Chubb).

Loss as is insured by this Policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation of the whole or part of the Premises or other premises in the vicinity of the Premises by order of a competent public authority directly or indirectly arising from infectious or contagious human disease occurring at such premises shall be deemed to be loss resulting from damage to property used by the Insured at the Premises.

Loss as is insured by this Policy resulting from interruption of or interference with the Business directly or indirectly arising from closure or evacuation of the whole or part of the Insured Premises by order of a competent public authority consequent upon:

(i) human infectious or contagious disease manifested by any person whilst at the Insured Premises;

(ii) the outbreak of a notifiable human infectious or contagious disease in humans occurring within the immediate vicinity of the Insured premises;

(iii) vermin or pests or defects in the drains or other sanitary arrangements at the Insured Premises;

(iv) poisoning directly caused by the consumption of food or drink provided on or form the Insured Premises;

(v) murder or suicide occurring in or at the Insured Premises;

shall be deemed to be loss resulting from damage to property used by the Insured at the Insured Premises. Perils Exclusion 4(a) shall not apply to the cover granted by this endorsement.

[paragraph about Quarantine Act exclusion omitted]

Infectious or Contagious Diseases; Vermin, Pest or Defective Sanitary Arrangements; Food or Drink Poisoning; Murder, Suicide (Annual Aggregate)

The plaintiffs submit that while there is complete symmetry between the language of the Sub-limit and REPELXB4, that is not the case concerning CLOSEXB4. They submit Chubb seeks to displace the clear symmetry by reliance on the use of the plural ‘diseases’ in the Schedule rather than the singular ‘disease’:

… This appears to reflect that there are two separate sources of the Infectious or Contagious Disease cover which are both subject to that sub-limit and deductible — that is, the CLOSEXB4 Endorsement and the REPELXB4 Endorsement.

The plaintiffs submit this ignores the fact that REPELXB4 itself has two separate sub-paragraphs dealing with cover relating to infectious or contagious disease. The drafter’s choice of the plural is readily understood in that context, even if it appears unnecessary. In any event, recourse to the use of the plural ‘diseases’ can hardly displace the obvious symmetry which exists supporting the position that the relevant Sub-Limit applies only to REPELXB4.

The plaintiffs submit that as not all aspects of the coverage conferred by the Policies are subject to Sub-Limits, the absence of a Sub-Limit in respect of CLOSEXB4 is unremarkable.

Concerning the issue of deductibles, the plaintiffs submit that just as there is no applicable sub-limit in the case of CLOSEXB4, there is no deductible. Chubb and the defendants do not agree.

The Policies provide for both dollar value deductibles and a 48-hour time limit. Chubb submits that as there are two separate claims, one for each lockdown, the 48-hour deductible is to be applied to each claim.

The plaintiffs do not accept that ‘all claims are subject to a deductible’. They submit it would be correct to say that, reading the ‘Deductibles’ section of the Policy Schedules, that all Section 1 claims for material damage are subject to a monetary deductible and some claims under Section 2 are subject to a 48‑hour deductible.

Findings concerning Sub-Limits and Deductibles

While there is not complete symmetry between the language of REPELXB4 and the language in the Schedule concerning the sub-limit, I am in no doubt the Sub-limit applies to REPELXB4. Both parts (i) and (ii) of REPELXB4 refer to infectious or contagious disease. Part (iii) refers to vermin or pests and defects in sanitary arrangements; part (iv) refers to poisoning caused by food or drink; part (v) refers to murder or suicide. Not only is there a general correspondence between the language in REPELXB4 and the Schedule, the sequence of items mentioned in the Schedule follows that of the endorsement. The reference to ‘diseases’ plural is consistent with the Sub-limit applying to parts (i) and (ii) of REPELXB4.

None of this symmetry exists between the Schedule and CLOSEXB4. I consider the Sub-limit has no application to CLOSEXB4. The Schedule does not impose Sub-limits with respect to all endorsements. When it refers to a Sub-limit of $1,000,000 relating to ‘Prevention of Access’ in the Transit Policy, the language used is broad and not particularly specific. When it refers to the Sub-limit for infectious or contagious disease, the approach is quite different. It is specific. It corresponds closely to the language of REPELXB4. There is nothing in the Schedule to refer back or to link it to CLOSEXB4. The Sub-limit has no application to a claim under CLOSEXB4.

If the Sub-limit were to apply to CLOSEXB4, I accept the annual aggregate limits of $500,000 for Transit and $350,000 for AMFR would apply.

The reference in the Schedules to the 48-hour deductible are preceded by the same language as adopted in the Schedules concerning the Sub-limits. The Schedules refer to ‘Infectious or Contagious Diseases’ etc. For the same reasons as apply concerning the Sub-limits, there is no deductible to a claim in the case of CLOSEXB4.

I. Interest

In their written opening the plaintiffs initially claimed interest under s 60 of the Supreme Court Act 1986 (Vic) as well as under s 57(1) of the Insurance Contracts Act 1984 (Cth). In oral closings the plaintiffs abandoned their claim to interest under s 60 of the Supreme Court Act 1986 (Vic).

The effect of s 57(1) is that a person entitled to be paid an amount under a policy has an additional right to interest on that amount. Pursuant to s 57(2), the period in respect of which interest accrues commences on the day from which it was unreasonable for the insurer to have withheld payment.

The plaintiffs submit 29 January 2021 is the date from which interest began to accrue in the Transit proceeding as it was on that date that Colin Biggers & Paisley, acting on behalf of the underwriters, wrote to the solicitors for the Transit plaintiffs informing them that ‘cover is … not available under [CLOSEXB4]’.

The plaintiffs submit 19 May 2021 is the date from which interest began to accrue in the AMFR proceeding. 19 May 2021 is seven days after the date on which the solicitors for the AMFR plaintiffs wrote to the Claims Manager at PACE Insurance Pty Ltd, notifying him of their intention to lodge a claim. The 19 May 2021 letter referred to CLOSEXB4 and to the ‘inability of its Insurers and its customers to fully utilise its premises’.

Submissions concerning the plaintiffs’ claims for interest were made by Berkshire on behalf of all defendants. It submits the period in respect of which interest accrues pursuant to s 57(1) of the Insurance Contracts Act 1984 (Cth) commences only on ‘the day from which it was unreasonable for the insurer to have withheld payment of the amount…’ (s 57(2)). It is for the Court to determine that date. The question of reasonableness is to be judged ‘by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and consider its position’. Factors affecting the reasonable period of time include where the insured has pursued a claim of a different nature to that notified to the insurer or pleaded.[78] It may also be relevant that the insured failed to provide information reasonably required by the insurer to investigate the claim.[79] The question is ‘when a reasonable insurer would have accepted and quantified the claim, having regard to any actual limitations as to when the necessary information became available’.[80]
[78]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 (Derrington and Colvin JJ); Fitzgerald v CBL Insurance Ltd [2014] VSC 493, [428], [438], [439] (Sloss J).
[79]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [248], [255] (Derrington and Colvin JJ).
[80]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 [255] (Derrington and Colvin JJ).

Berkshire submits that allowing a reasonable period of time within which to investigate the claim and consider the position, it was not unreasonable to have withheld payment on 29 January 2021 in the Transit proceeding, and on 19 May 2021 in the AMFR proceeding:

(a)First, the correspondence relied upon by the plaintiffs did not articulate the factual claim now advanced with reliance upon CLOSEXB4.
(b)Besides referring to CLOSEXB4, at no point in the correspondence relied on by the plaintiffs did the solicitors identify the parameters, integers or bases of their (now) claims. For example, the correspondence did not identify the closure periods now relied upon, or — indeed — any periods over which that plaintiff’s Business had been relevantly closed for the purposes of CLOSEXB4. It did not identify the orders, made by a competent public authority, that had compelled closure.
(c)At no point in the correspondence was there any contention that orders had directly or indirectly arisen from the occurrence of COVID‑19 at the Premises, or even at premises within the vicinity.

Berkshire submits with specific reference to the Transit notification, in contrast to the claim at trial, the claim expressly articulated in the 23 November 2020 email was to the effect that closure was ordered as a general prophylactic. CLOSEXB4 was referred to only in so far as it applied further to occurrences at the Premises.

Separately, Berkshire submit the plaintiffs’ correspondence failed to provide information reasonably required to investigate the claims. In particular, the plaintiffs did not provide information that there had been occurrences of COVID‑19 at the Premises, or in the vicinity; or that closures had been ordered because of such occurrences.

With specific reference to the AMFR proceeding, the date of unreasonableness advanced by the plaintiffs is only seven days after the letter of 12 May 2021. Even if the letter was not subject to the deficiencies referred to, on no view was seven days the period of time which a reasonable insurer would require to investigate and consider the claim.

Finally, Berkshire submits the plaintiffs do not identify amounts purportedly withheld. Section 57 expressly operates by reference to the day from which it was ‘unreasonable for the insurer to have withheld payment of the amount…’ (emphasis added by Berkshire); not by reference to the denial of a claim for indemnity. Apart from failing to identify the amount, the plaintiffs fail to identify any basis upon which the defendants might have quantified the claims, by 29 January 2021 in the Transit proceeding, and 19 May 2021 in the AMFR proceeding.

The plaintiffs’ response to the final point is to submit the fact that there was not precise quantification of the loss in 2020 or 2021 is not determinative. They referred to the decision of Beach J in Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Ltd (No 2).[81]
[81]Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Ltd (No 2) (2018) 20 ANZ Insurance Cases 62-184.

Consideration

Transit notified of its claim by email from its solicitors dated 23 November 2020. Under the hearing ‘Basis for the claim’, paragraph 16 of the email referred to CLOSEXB4 providing cover for loss resulting from interruption to or indifference with the Insureds’ Business:

arising from a closure of the business by order of a public authority due to an infectious or contagious human disease occurring at the business.

No details of monetary loss were referred to in the email.

The 29 January 2021 letter in response from the solicitors for the underwriters advised the underwriters had determined the Policy does not respond. The reasons for the declinature followed. Included in those reasons concerning CLOSEXB4 was the statement:

On the facts and circumstances currently known … there was no manifestation of COVID‑19 at the Venues or in the immediate vicinity. The Insureds’ Premises were not directed or ordered to close because there was someone at the Premises with COVID‑19 or there was an outbreak in the immediate vicinity.

In light of the manner in which the basis of claim was articulated in the 23 November 2020 email, it being the fact that there was no case of COVID‑19 at any of the Insured Premises, I consider the reason given by the underwriters in the 29 January 2021 letter in response was not ‘unreasonable’. It was directly in response to the basis of claim and it was accurate. I reject the plaintiffs’ submission that interest pursuant to s 57(1) of the Act commenced to run in the case of the Transit Policy from 29 January 2021. It is unnecessary to identify an alternative date pursuant to s 57(2) from which it was unreasonable for the insurer to have withheld payment of the amount.

The AMFR notification was by letter dated 12 May 2021 from Gadens. In its introduction the detail of the claim asserted the Insured was provided cover by clauses in the Policy including CLOSEXB4. The letter did not refer to the occurrence of COVID‑19 at or in the vicinity of the Insured Premises, nor did it articulate why endorsement of CLOSEXB4 was engaged. Under the ‘Basis of claim’ heading it said:

14.The inability of the insured and its customers to fully utilize its premises as a result of the restrictions referred to above (a reference to restrictions in place from February 2020) is deemed to be loss resulting from damage to property used by the Insured.

The reply on 29 July 2021 from Colin Biggers + Paisley set out detailed reasons why the Underwriters had determined the Policy does not respond. In ss 3.5–3.9 of the letter detailed reasons were given as to why in the opinion of the Underwriters each of the elements 1–3 of CLOSEXB4 were either not satisfied or were only partially satisfied. Section 5(a) of the letter invited the Insured to provide further information they would like the Underwriters to consider.

Given the broad brush nature of the 12 May 2021 claim notification I do not regard a period of 7 days as a reasonable time for the insurer to respond, as is the premise of the AMFR reliance on 19 May 2021 as the date from which s 57(1) interest should accrue. I do not consider the information provided on 12 May 2021 was sufficient to enable the insurer to investigate the claim within a 7 day window. When the insurers did respond on 29 July 2021 via their solicitors the response was a detailed and considered response. It invited the provision of further information.

It is sufficient for present purposes to find that in the event the AMFR claim was otherwise entitled to succeed, interest pursuant to s 57(1) did not begin to accrue on 19 May 2021. As with the Transit claim, it is unnecessary to identify an alternative date pursuant to s 57(2) from which it was unreasonable for the insurer to have withheld payment of the amount.

J. Disposition

For the reasons discussed the claims by the plaintiffs in both the Transit Proceeding and the AMFR Proceeding are dismissed.

Unless any party should contend for a different costs order I will order the plaintiffs in both proceedings pay the defendants’ costs including reserved costs on a standard basis.

Should any party contend for a different costs order then that party shall file and serve submissions of no more than 4 pages in support of its costs contention by no later than 4:00 pm on 30 August 2024. Any submissions in response, also not exceeding 4 pages, shall be filed and served by 4:00 pm on 6 September 2024. I anticipate determining any further costs issues on the papers.

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SCHEDULE OF PARTIES (S ECI 202101559)

TRANSIT PTY LTD (ACN 086 515 077)

First Plaintiff

NOTTING HILL TAVERN PTY LTD (ACN 161 638 606)

Second Plaintiff

ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605)

First Defendant

CHUBB INSURANCE AUSTRALIA LIMITED (ACN 001 642 020)

Second Defendant

CATLIN AUSTRALIA PTY LTD (ACN 108 319 786)

Third Defendant

BERKSHIRE HATHAWAY SPECIALTY INSURANCE COMPANY (ACN 600 643 034)

Fourth Defendant

SCHEDULE OF PARTIES (S ECI 2021 01815)

AMFR HOLDINGS PTY LTD T/AS THE DECK BRIGHTON (ACN 151 810 436)

First Plaintiff

EXCH PTY LTD T/AS THE KING HOTEL (ACN 601 471 390)

Second Plaintiff

NIHO PTY LTD T/AS THE NIXON HOTEL (ACN 610 928 339)

Third Plaintiff

TSBR PTY LTD T/AS TRUE SOUTH (ACN 608 681 170)

Fourth Plaintiff

JSAL PTY LTD ATF JSAL INVESTMENT TRUST (ABN 90 326 084 500)

Fifth Plaintiff

HBBS PTY LTD ATF HBBS INVESTMENT TRUST (ABN 16 448 102 201)

Sixth Plaintiff

MCLI PTY LTD T/AS MELBOURNE CENTRAL LION (ACN 633 282 603)

Seventh Plaintiff

BONC PTY LTD T/AS BANK ON COLLINS (ACN 633 167 183)

Eighth Plaintiff