November 20, 2020

The New South Wales Court of Appeal recently handed down judgment in the highly anticipated test case of HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296.

In a big win for insureds amidst the COVID-19 pandemic, the NSW Court of Appeal has provided clarification on a fairly common exclusion in Australian insurance policies excluding cover in business interruption claims for “diseases declared quarantinable disease under the Australian Quarantine Act 1908 (Cth) and subsequent amendments”. 

In a nutshell, a tourist park business and a health food store claimed under their respective insurance policies for business interruption losses due to the COVID-19 outbreak. The case was launched jointly by the Insurance Council of Australia and the Australian Financial Complaints Authority (AFCA) given its significance to the insurance industry at large. 

A feature of each policy was additional cover against the outbreak of an infectious or contagious human disease. Although each of the claimants had different insurers, the relevant parts of each policy wording were in similar terms.

There was no dispute that there had been a downturn in each plaintiff’s respective business as a result of COVID-19. Rather, the issue was that COVID-19 had not been declared a ‘quarantinable disease’ under the Quarantine Act 1908 (Cth) but rather as a ‘listed human disease’ under the Biosecurity Act 2015 (Cth). The reason for this was that the Quarantine Act had been repealed on 16 June 2016, some 3.5 years prior to the outbreak of COVID-19 in Australia. 

The insurers’ argument was very specific in that:- 

  • the Biosecurity Act had replaced the Quarantine Act such that it had to constitute a ‘subsequent amendment’ within the meaning of the policy wordings; 
  • the fact that COVID-19 had been classified a listed human disease was consistent with how the exclusion was intended to operate such that the omission to update the policy wording was an obvious mistake; and
  • the insurers were entitled to rectify the mistake. 

Although a number of different judgments were delivered, the Court of Appeal was unanimous that on the proper construction of each policy, the words “and subsequent amendments” did not extend to include the Biosecurity Act as it is separate legislation to the Quarantine Act and not an amendment. Although the Court of Appeal did not reject that there was a mistake, it did not consider rectification by implementing a reference to the Biosecurity Act in the wording was available in the circumstances.

IMPLICATIONS

Many insurers are likely reeling from this decision and the early signs from the fallout are that these arguments are certainly not over. An application for special leave to the High Court and/or similar test cases loom large. However, if the impact for insurers potential claim losses is as significant as has been reported at this stage, further action by the insurance industry would seem very likely. 

Insureds will likely be buoyed by the decision and, if they have not already, may turn to their insurance policies to seek relief for business losses this calendar year. It is likely the number of claims lodged for business interruption losses will sky-rocket in the immediate future. However, it is important to remember that:- 

  • the decision deals with one aspect of policy construction and does not resolve all of the indemnity issues insurers’ may have when it comes to determining business interruption cover; and 
  • each claim for business interruption losses will be subject to the wording of the specific policy, the circumstances of the particular business and the nature of the losses suffered.

All is not lost for the insurers affected. As with COVID-19 itself, all of the consequences are yet to play out.