Australian Courts rule against insurers in COVID-19 Business Interruption Test Case

Following our article of 16 September 2020 (see here), the Australian test case[1] to resolve business interruption claims resultant from the pandemic was resolved yesterday in favour of policyholders. The availability of cover will depend on the language of the infectious diseases exclusion, whether the policyholder suffered a COVID-19 outbreak and can prove loss as a result of same.

Many business interruption policies contained an exclusion referring to the Quarantine Act 1908 (Cth) (and any subsequent amendments) that intended to exclude loss in respect any disease declared as a pandemic by authorities. This specific act was repealed on 16 June 2016 and replaced with the Biosecurity Act 2015. The issue assumes particular importance in light of COVID-19, which is a listed disease under the Biosecurity Act but was not a quarantinable or known disease at the time that the Quarantine Act was repealed. Many policy wordings were never updated to reflect this change.

The particular insuring clause under consideration by the NSW Court of Appeal read:

We will cover You for interruption to or interference with Your Business due to an outbreak of an infectious or contagious human disease occurring within a 20 kilometre radius of the Premises, however there is no cover for highly pathogenic Avian Influenza or any other diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments irrespective of whether discovered at the Premises, or out-breaking elsewhere.

Insurers argued that the words “declared to be a quarantinable disease under the Quarantine Act 1908 (Cth) and subsequent amendments” were to be read as “determined to be listed human diseases under the Biosecurity Act 2015 (Cth)”.

Insurers contended that the intention between insurers and insured under the policy wordings was clear despite that the policies referred only to the repealed Quarantine Act. The insurers relied on this intent in order to decline claims made under the policies.

All five judges who heard the appeal disagreed with the Insurers and held that the COVID-19 disease is not declared to be a quarantinable disease under the Quarantine Act 1908 (or subsequent amendments). The Biosecurity Act is a separate Act that was passed to replace the Quarantine Act but such legislative action to repeal and replace an Act cannot be construed as an amendment to an Act within the ordinary meaning of the word “amendment” or “subsequent amendment”.

Accordingly, the quarantinable diseases exclusion does not capture COVID-19 and the policies in question should respond to indemnify the Insured for their losses provided that the other conditions in the insuring clause are satisfied and no other exclusions apply.

The Insurers are considering their position and whether to appeal to the High Court of Australia.

As a result of the decision it is foreshadowed there will be further losses to be met by the already distressed Australian insurance market. The consequence is most likely further upward pressure on property insurance premiums (amongst other product lines).

Today industry giant IAG entered into a trading halt, and share prices across major Australian insurers have fallen.

[1] HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296; Bathurst CJ; Bell P; Meagher JA; Hammerschlag J; Ball J