Insurers have succeeded in a test case involving claims by Melbourne businesses for business interruption losses they suffered during COVID-19 lockdowns.

The decision in the matters Transit Pty Ltd v Arch Underwriting at Lloyd's (Australia) Pty Ltd and AMFR Holdings Pty Ltd t/as The Dek Brighton v Arch Underwriting at Lloyd's (Australia) Pty Ltd included the Court's careful assessment of whether Melbourne businesses were entitled to indemnity under the "CLOSEXB4" endorsement in an Industrial Special Risks insurance policy. The Court considered many questions relating to policy interpretation and factual matters. However, the proper construction of CLOSEXB4 was of decisive importance.

Whilst the focus of this summary is on the decisive construction issue, it is worth noting that the Court observed that insurers would have in any case succeeded even if the plaintiffs' arguments on the policy's construction issue were preferred.

The plaintiffs operated pubs, bars and/or restaurants in greater metropolitan Melbourne in 2020 when COVID-19 impacted on public health and the Victorian economy. The venues operated by the plaintiffs were closed as a result of the effect of the government's directions under the Public Health and Wellbeing Act 2008 (Vic) (Directions) which resulted in two separate lockdown periods.

Each of the plaintiffs were insured under an Industrial Special Risks Policy, for which the defendants were insurers under those policies (Policies).

The provision critical to the plaintiffs' claims for indemnity under the Policies was the CLOSEXB4 endorsement which indemnified business interruption loss suffered by the insured resulting from the closure of either the insured's premises (referred to as Premises in the endorsement) or other premises in the vicinity of the Premises.

"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."

The plaintiffs made claims under the Policies for the business interruption losses they sustained during the Victorian COVID lockdowns - which were some of the longest in the world. The insurers denied the claims, following which the plaintiffs commenced proceedings in the Supreme Court of Victoria seeking to confirm indemnity under the CLOSEXB4 endorsement in the Policies.

The decisive issue in dispute was the proper interpretation of the CLOSEXB4 endorsement.

Primarily, the plaintiffs' claim was that CLOSEXB4 operated to indemnify the business interruption loss they sustained due to closure of their own Premises by reason of the occurrence of COVID at premises in the vicinity of their Premises. They made no claim for loss arising from closure of other premises in the vicinity of the Premises. The plaintiffs' case depended on the relevant trigger to the CLOSEXB4 endorsement being the presence of COVID at premises in the vicinity of the Premises.

The insurers argued that the plaintiffs' interpretation of CLOSEXB4 was incorrect such that the plaintiffs had not progressed any valid claim for indemnity under the endorsement. The insurers submitted the relevant trigger was closure of premises (either the Premises or premises in the vicinity of the Premises), not the presence of COVID.

The insurers conceptualised the CLOSEXB4 endorsement as having three interlocking elements, of which the second limb of the second element and the third element were critical. The elements were:

(a) Element 1: the plaintiffs suffered loss resulting from interruption of or interference with their Business - this was accepted by the parties;

(b) Element 2: the loss resulted from closure of evacuation of the Premises itself (limb 1) or from the closure or evacuation of the other premises in the vicinity of the Premises (limb 2) by order of a competent public authority; and|

(c) Element 3: the order of a competent public authority arose directly or indirectly from infectious or contagious disease occurring at such premises - the words "such premises" being a link to the same relevant premises in either limb of Element 2.

The Court accepted the insurers' position that, on proper construction of CLOSEXB4, the plaintiffs' claim could not succeed as:

(a) it was based interruption caused following closure of their own Premises (not that it was caused by the closure of premises in the vicinity of their premises); and

(b) Element 3 could not be satisfied if the plaintiffs could show that the Directions arose from COVID at "such premises", i.e. their own Premises, a claim the plaintiffs did not progress.

The insurers alternatively argued that, if the plaintiffs' interpretation was correct, the evidence did not establish that the Directions (or any relevant order) arose from COVID-19 at premises in the vicinity of the plaintiffs' Premises, such that the plaintiffs' claim would in any case fail (an issue referred to in the judgment as the "factual premise").

Despite dismissing the claim based on the construction issue, the Court observed that had the plaintiffs' interpretation of CLOSEXB4 been upheld, they would in any case have failed to establish their claim on the factual premise. The analysis of this issue begins at paragraph [194] of the judgment.

The Court dismissed the plaintiffs' claim primarily in relation to the construction issue, on the basis that they failed to progress a claim that fell within the language of the CLOSEXB4 endorsement. The Court further observed that had the plaintiffs succeeded in relation to the construction issue, the claim would have failed in any case as there was no evidence to show that the Directions arose from COVID at premises in the vicinity of the Premises.