Courting trouble Australian insurers have lost a crucial test case over business interruption cover as more legal battles loom By Wendy Pugh
W
hat is absurdity? In the view of NSW Court of Appeal judges, it’s not insurers declining pandemic claims by relying on exclusions that refer to an old quarantine law that they didn’t know was replaced four years ago by new legislation. Australian insurers have been supremely confident that business interruption policies exclude losses related to the COVID-19 pandemic, even where wordings point to a repealed law, but they have been dealt an early blow. The Insurance Council of Australia (ICA) brought a test case to the Appeal Court to remove any lingering doubts that wordings citing the Quarantine Act 1908 “and subsequent amendments” should include the replacement Biosecurity Act 2015. While the Acts had different names, they had essentially the same purpose and function, insurers contended. The policy wording allowed for legislative changes that might evolve over time and it would clearly be absurd to base an exclusion around a law that no longer exists. The matter was considered important enough for five judges to hear the expedited case, but unfortunately for insurers, they ruled 5-0 in favour of policyholders in a decision handed down on November 18. The judges, taking slightly differing paths to reach the same conclusions on some of the issues, took a literal reading view when it came to the words. Justices Anthony Meagher and Michael Ball said it was “many steps too far” to suggest the Biosecurity Act, which has differences to its predecessor, could be considered a “subsequent amendment” under the ordinary meaning of the words.
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The other problem for insurers is that diseases declared under the Quarantine Act until its 2016 repeal still exist and could still be covered by the exclusion. The list includes avian influenza in humans, Severe Acute Respiratory Syndrome (SARS), cholera and yellow fever, but not COVID-19, which emerged late last year. While it would have made more sense to use the current law to ensure new diseases are also excluded, the wording was not a clear mistake, and it did not “rise to the level of absurdity”, Justice David Hammerschlag said. “In a commercial context, absurdity is more than just lacking in genuine commercial good sense. It entails commercial nonsense,” he said. Insurers have until mid-December to decide on an appeal to the High Court, but lawyers contacted by Insurance News have suggested overturning the NSW court’s ruling may be difficult, even if the matter is heard as a matter of public interest. “It looks like a pretty solid judgment, I have to say, on basic contractual interpretation principles, and it was five-nil,” Herbert Smith Freehills Partner Mark Darwin says. “There are no obvious points of appeal that leap off the page.” ICA is also consulting on the possibilities of running a second test case that explores issues such as proximity and prevention of access, as the industry digs in for more battles over COVID-19 pandemic cover. A victory in the first case for insurers could have knocked out a large number of potential claims, but for policyholders the win simply keeps the door open, with more hurdles still to be cleared before any payments are agreed.
