Business Interruption Insurance for COVID-19: First Australian Test Case

6 minute read  25.06.2021 Kemsley Brennan, James Stanton, Kathryn Rigney

A high court decision has provided some clarity around certain specific exclusion clauses in business interruption insurance policies relating to COVID-19 – which will have a significant impact on insurance claims in Australia.

Key takeouts

  • Special leave to appeal refused in First Test Case
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  • On 25 June 2021 the High Court of Australia refused special leave to appeal in the First Test Case dealing with exclusion clauses in business interruption insurance policies, particularly in relation to Novel Coronavirus SARS-CoV-2 (COVID-19).
  • The NSW Court of Appeal decision, handed down on 18 November 2020, is now the standing authority.
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  • In effect, where the words 'declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments' appear in an exclusion wording, they will not incorporate reference to listed diseases under the Biosecurity Act 2015 (Cth) – unless otherwise stated in the policy.
  • Will my policy respond? It depends on the policy in question.
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  • That raises several other policy construction issues which will be the subject of a suite of Second Test Cases currently before the Federal Court of Australia. That will be Australia's response to similar issues already raised in the UK Supreme Court.

On 25 June 2021, the High Court of Australia refused insurers special leave to appeal from the 18 November 2020 judgment of the NSW Court of Appeal in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd trading as Austin Tourist Park [2020] NSWCA 296 (the First Test Case). The High Court's decision has been highly anticipated by both insureds and insurers around a specifically worded insurance policy exclusion clause arising in the context of COVID-19 related claims. The original decision of the Court of Appeal remains the authority in Australia for whether the Biosecurity Act 2015 (Cth) (BA) could be construed as a 'subsequent amendment to' the Quarantine Act 1908 (Cth) (QA). At the risk of oversimplification, the short answer is that the BA is not 'subsequent amendment' to the QA. Leaving aside other features of the particular policy, insurers would therefore not be able to exclude COVID-19 on the strength of that particular exclusion wording alone.

Brief overview

As we have previously reported, the NSW Court of Appeal decision was intended only to address a separate question around an exclusion clause appearing in certain policies issued by HDI and Hollard. The key words of the clause purported to exclude diseases which were 'declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments'. The question was whether that wording should be read to mean 'determined to be listed human diseases under the Biosecurity Act 2015 (Cth)'. A secondary question, as to when and how such an exclusion would operate, was not required given the Court's primary findings. However, that question has now been picked up as part of a set of Second Test Cases before the Federal Court of Australia.

In relation to the primary question, the Court unanimously rejected the insurers' arguments that the words 'and subsequent amendments' to the QA should be construed so broadly so as to encompass the BA. The Court did not accept that a reasonable person would have understood the words 'and subsequent amendments' to include a reference to the BA, and as a matter of construction, the references to the QA could not be construed as references to a replacement statute.

The effect of this would be that many insureds whose policies feature that specific exclusionary wording will not be barred from cover for COVID-19 losses by that exclusion. Cover for those insureds will, however, be dictated by the terms of those policies and the circumstances of each case. Our views are not to be construed as legal advice and are general observations on the decision only.

Insurance claims

In the midst of the global COVID-19 pandemic, the global insurance market saw, and is still seeing, numerous notifications of loss to businesses due to the disease, interruption to trade, and government-mandated closures. Insurers have also worked to respond to those notifications, with varying effect. As a consequence, the Insurance Council of Australia (ICA) agreed with the Australian Financial Complaints Tribunal (AFCA) to prepare and run a test case to resolve questions relating to the coverage available under certain exemplar insurance wordings.

The exemplar wordings contained an extension for certain occurrences of disease in or near the location of the relevant insured business, but contained an exclusion for certain serious communicable diseases. The Court of Appeal was asked to determine whether the mechanism by which the exclusion operated would encompass COVID-19 losses.

Business interruption policies

The business interruption policies in question were issued by insurers to small, medium and large businesses. Such policies are ordinarily intended to cover damage and loss to business premises, as well as the consequential loss of profit and any additional expense consequent upon that physical loss.

Classically, the business interruption cover in those policies would trigger following incidents such as floods, fires and building collapses. However, a large number of those policies also extend to cover other incidents which do not strictly result from damage to the property. Those types of cover were directly called into question by COVID-19 and examined by the Court.

Background facts

The first, second and third defendants were insured against interruption to their tourist park business for the period 28 February 2020 to 28 February 2021 under a business interruption policy issued by the first plaintiff, HDI Global (HDI). The retail business of the fourth defendant was insured under a similar policy for the period 11 May 2019 to 11 May 2020 issued by the second plaintiff, the Hollard Insurance Company Pty Ltd (Hollard).

Each of the policies provided cover for interruption or interference caused by outbreaks of certain infectious diseases within a 20km radius of the insured’s premises, but subject to an exclusion for diseases declared to be quarantinable diseases under the QA and subsequent amendments.

The QA had been repealed on 16 June 2016 and replaced by the BA, which did not provide for declarations of quarantinable diseases by the Governor-General, but provided for determination of 'listed human diseases' by the Director of Human Biosecurity. COVID-19 was not declared to be a quarantinable disease under the QA before it was repealed, but it was determined to be a listed human disease under the BA on 21 January 2020.

The defendant insureds claimed indemnity from HDI and Hollard for business interruption caused by COVID-19, which were declined. The insurers then commenced proceedings seeking declarations that on the proper construction of each clause in the HDI and Hollard policies, the words 'declared to be quarantinable diseases under the Quarantine Act 1908 (Cth)' should be read as 'determined to be listed human diseases under the Biosecurity Act 2015 (Cth)'.

Quarantine Act did not mean Biosecurity Act

The insurers argued, inter alia, that the exclusion was intended to carve out all serious infectious diseases, including those under the former QA and current BA. To deprive the clause of that meaning would lead to absurdity, since the QA was no longer in force. Particularly since the exclusion was intended to be ambulatory (to exclude diseases as and when they were listed or declared), the insurers argued that the commercially sensible interpretation of the clause was to allow the reference to the QA to also be reference to the BA. All five judges sitting in the Court of Appeal reached the same practical conclusion: the wording of the insurance policies should stand without forcing the insurers' intended meaning upon them. In short, the reference to the QA in those policies would not be read as incorporating the BA because it was a meaning inconsistent with the orthodox canons of interpretation.

Hammerschlag J emphasised that rules of contractual construction are uncontroversial and, by applying those, the exclusion wording was given the meaning on its face. That is, the exclusion would only operate for those diseases declared under the repealed QA. Those diseases, such as SARS and influenza remained diseases which would be excluded. However COVID-19 was listed under the BA and, therefore, the exclusion would not apply to that disease notwithstanding the insurers' intent that it would.

His Honour approached the issue on the basis that absurdity is more than just a lack of genuine commercial good sense. It entails commercial nonsense, to the point where it is obvious that the parties did not mean what they said and obvious what they meant to say Although his Honour accepted that it may have made better commercial sense for the parties to have referred to a current Act rather than one repealed four years earlier, the words used are not a clear mistake and, if they were, do not rise to the level of absurdity. Although he suspects that the insurers made a mistake, suspicion is insufficient and anyway there was no basis to suspect that the insureds overlooked anything.

Bathurst CJ and Bell P agreed with the reasoning of Hammershlag J. Meagher JA and Ball J reached the same conclusion but via slightly differing reasons. Among other things, Meagher JA and Ball J referenced the English authority of Impact Funding v AIG Europe [2016] UKSC 57, which provides that an exclusion clause must be read in the context of the contract of insurance as a whole, consistent with and not repugnant to the purpose of the policy.

Their Honours focused further on the fact that the bargaining positions of insurer and insured were not such as an ordinary commercial contract. That position was also accepted in Australian laws of contractual construction. Insurance policies are written by insurers and generally issued as standard form wordings, with little input from the insured in most cases. Given the policies in question fell into that 'standard form' category, their Honours determined that the meaning was sufficiently plain on the face of the contract as a whole: the exclusion would operate (and not be infected by absurdity) with reference to specific diseases, either a named disease other diseases declared under the QA, and this was not ambiguous. 

They also made the valid point – somewhat common in disputes with insurers – that the outcome could have been avoided by more careful drafting by underwriters, noting that elsewhere in the policy there is a reference to the Insurance Contracts Act 'or any subsequent legislation'.

The distinction in the Court's approach is a fine one. As Bathurst CJ and Bell P stated:

'The question is one of construction, and of the proper limits and extent to which a contractual document, here the policies of insurance, may be construed in a way which involves a departure from the actual words used by the parties, on their ordinary grammatical meaning. Both Hammerschlag J and Meagher JA and Ball J conclude that orthodox principles of contractual construction are not so flexible as to admit of the insurers’ second argument. We are of the same view.'

In hearing the special leave application, the High Court heard arguments that the concepts of an 'amendment' and a 'repeal or replacement' are overlapping and not contradictory, and that the policy wordings had merely been the victims of drafting error. The High Court was not moved sufficiently to allow leave to appeal. This was also notwithstanding submissions that it is estimated that there may be around 250,000 million insurance policies affected by such language, representing around $10 billion of potential losses to the market.

Summary

There are no further avenues of appeal in relation to the First Test Case. Having said that, the Court of Appeal's decision (and the High Court's refusal to grant special leave) must be treated carefully. The decision is not a panacea in favour of business interruption policyholders. Rather, it may assist only those policyholders who hold a small-to-medium enterprise type policy which features the specific exclusion wording: 'declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments'.

Before a policyholder even gets to the question of whether their claim is excluded under the policy, they must specifically address whether they have a claim in the first place. A policyholder should be taking stock of the operative insuring clause and seeking advice from their broker or legal team about whether the facts and circumstances in their case will trigger the policy in the first place. If they do trigger the policy coverage, they should then assess any exclusion clauses applicable to their policy.

The question of whether cover is triggered is now a matter before the Federal Court of Australia, and will be aimed at determined how and whether certain facts and circumstances are covered under a business interruption policy. In particular that set of 'Second Test Cases' is intended to address the question at the front of everyone's mind: will I be covered for COVID-19 losses? That is a policy construction question which requires careful consideration in every policyholder's case.

For more information about your own policy and how your cover applies, please contact our team.

Find out more about similar issues in the United Kingdom

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https://www.minterellison.com/articles/business-interruption-insurance-for-Covid-19

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