Businesses who have suffered a loss due to the COVID-19 pandemic may be able to claim business interruption insurance from their insurers, following a decision of the NSW Court of Appeal late last year.

What was the case about?

Business interruption insurance, or BI insurance, is a type of insurance that covers a business if they suffer loss due to a catastrophic event, such as a natural disaster. As a result of the negative effect, COVID-19 has had on many businesses, there has been contention about whether BI insurance covers the loss resulting from COVID-19 and the associated government-mandated lockdowns.

In July 2020, AFCA (the Australian Financial Complaints Authority) and insurers agreed on a test case that was brought to the NSW Court of Appeal to settle the contention. The purpose of this case was to reach a finding about the reference to the Quarantine Act that is present in lots of BI insurance policies.

Many insurance policies exclude cover for “a quarantinable disease under the Quarantine Act 1908 and subsequent amendments’. However, the Quarantine Act was repealed in 2016, which means it is no longer law. Instead, we now have the Biosecurity Act 2015, under which COVID-19 has been recognised as an infectious disease.

What was the outcome?

In the test case, the insurers ran two main arguments:

  1. That the insurance policies should be read as referring to the Biosecurity Act instead of the Quarantine Act, because reference to the Quarantine Act was just a drafting error; and
  2. That the phrase ‘and subsequent amendments’ should extend to the new Biosecurity Act.

The court did not accept either of these arguments and ultimately decided in favour of the insured.

In relation to the first argument, the court has the power to alter a contract if a drafting mistake was made, so that the contract properly reflects the parties’ intentions. However, in this case, the court said they will not alter the insurance policy to say Biosecurity Act instead of Quarantine Act because there was no ‘mistake in the expression of [their] intention.’ The parties intended for the contract to refer to the Quarantine Act – just because that Act is no longer in force does not mean the court will adjust the wording of the contract.  

In relation to the second argument, the court said the words ‘and subsequent amendments’ do not extent to a new Act that replaces the Quarantine Act altogether and, therefore, do not include the Biosecurity Act.

What happens next?

For the purposes of this test case, the NSW judgement will be applicable to BI insurance claims Australia-wide, however will only be persuasive in states outside NSW and not binding regardless of what state the insured business is located in. The insurers have applied for leave to have the NSW decision appealed to the High Court of Australia. We do not know yet whether the High Court will hear the appeal, so there is still some uncertainty around the legal position of BI insurance at this stage.  It is believed the High Court will hear the appeal as this determination will then be binding in all Australian states and territories.

Insurers have also commenced a second test case to determine the meaning of words and phrases such as:

  • Disease
  • Proximity of an outbreak to a business
  • Prevention of access to premises due to a government mandate

How does it affect me?

As with every contract, it is important to check what your individual insurance policy says about infectious diseases. The Insurance Council of Australia confirms policy holders can still lodge claims with their insurers and if they are unhappy with their insurer’s decision, they should first pursue their insurer’s dispute resolution procedure. If they are still unhappy, they should make a complaint to AFCA.

If you think you are entitled to a BI insurance payout, please get in touch with Lynn & Brown Lawyers for advice about your individual policy and if appropriate assist you with a complaint to AFCA or court proceedings. We can also provide you with assistance in negotiating changes to the wording of your BI insurance policy so that you will be covered by events like COVID-19 in the future.

About the authors:

This article has been co-authored by Chelsea McNeill and Steven Brown. Chelsea is a Law Graduate from Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.

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