Coronavirus and business interruption – bad news for insurers

In the recent New South Wales Court of Appeal case of HDI Global Specialist SE v Wonkana No 3 Pty Ltd¹, a test case in relation to business interruption claims following the advent of the COVID-19 pandemic, the Court rejected the argument put forward by several insurers (Insurers) that their business interruption policies did not cover COVID-19 related losses.

Insurers sought declarations in relation to the wordings of two insurance policies that COVID-19 was not a disease declared to be a quarantinable disease under the Quarantine Act 1908 (Cth) (Quarantine Act).  Both policies exclude from the definition of business interruption cover ‘diseases declared to be quarantinable disease under the Quarantine Act 1908 (Cth) and subsequent amendments’.²

The problem arose as the Quarantine Act was repealed and had not applied since 16 June 2016, when the Biosecurity Act 2015 (Cth) (Biosecurity Act) came into place.

The term ‘quarantinable disease' does not appear in the Biosecurity Act.  It refers to ‘listed human diseases’. 
 
COVID -19 was determined to be a ‘listed human disease’ under the Biosecurity Act on 21 January 2020.³

The insurers position was that cover does not extend to losses caused by COVID -19 because the contractual words referred to above should properly be read as ‘determined to be listed human diseases under the Biosecurity Act’.

Insurers sought a declaration to that effect.

The insured defendants sought declarations by way of cross claim that COVID -19 is not a disease declared to be a ‘quarantinable disease’ under the Quarantine Act and the execution clause is not enlivened.

The Court stated that an insurance policy is a commercial contract which is to be given a business-like interpretation.⁴

Hammerschlag J held that, in relation to the words ‘Quarantine Act 1908 (Cth) and subsequent amendments’ the correct construction is that the words do not anticipate a reference to an entirely new replacement Act.⁵

He commented that whilst it can be suspected that the insurers made a mistake in not amending their policy documents to refer to the Biosecurity Act, that suspicion was insufficient.  There was no basis to suspect that insureds had overlooked anything.  If the insureds had also made a mistake and insurers wished to contend that the insureds had done so, they could have applied to have the policies rectified.⁶

The application by the insurers was dismissed and a declaration was made that the exclusion clauses under the policies were not enlivened.⁷

The Insurance Council of Australia is currently considering the option of an appeal to the High Court.

Lavan comment

This decision is of huge significance to many businesses throughout Australia which are currently caught up in the argument that exclusions under various business interruption clauses in insurance policies are enlivened pursuant to the definition in the Quarantine Act.   

If the decision is upheld, hundreds of claims which have currently been rejected will now be indemnified.

Even if indemnity is granted however, businesses will still have to prove that the losses they suffered were as a direct result of the COVID-19 pandemic and that no other policy exclusions apply.

For those businesses which can illustrate this direct link, for example tourist villages, and caravan parks, the loss will be relatively straightforward to prove.

The impact on the insurance industry in Australia, which is already suffering as a result of the numerous class actions which have been brought in the last decade, will be significant.

The obvious flow on effect from this decision is that there is likely to be an overall rise in the level of insurance premiums throughout Australia and exclusion clauses in all policies which could respond to the COVID -19 pandemic are likely to be reviewed to limit the opportunity to bring a claim, as far as practicable.

Please contact Iain Freeman or Lorraine Madden if you have any questions.