COVID Tests Positive as a Basis for Claiming Business Interruption Insurance – A Win for Business Owners!

KEY TAKE OUTS:

• In a decision that is anticipated to have wide ramifications, a recent NSW Court of Appeal case has assessed the applicability of COVID-19 claims under business interruption insurance.
• Business interruption insurance (or business income coverage) covers operating expenses such as lost income, mortgage, rent or lease payment, taxes and employee payroll. It is common however for business insurance policies to have clever wording and drafting that excludes liability for losses suffered due to ‘viruses’ or ‘communicable diseases’.
• The recent case, HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296, has found that insurers cannot deny claims by insureds for loss caused by business interruption due to COVID-19 by attempting to rely on an exclusion that excludes “diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments”.
• The outcome of this case may mean that many of businesses affected by COVID-19 could be entitled to insurance payments under business interruption policies as the Court has found pandemic exclusions are not valid.

On 18 November 2020, the Court of Appeal handed down a decision in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296, setting a precedent over pandemic clauses in business interruption policies.

The case was brought following multiple complaints to the Australian Financial Complaints Authority by small business wanting to make a claim in accordance with their business interruption policies and being rejected on the basis of exclusion clauses.

The Facts

It was argued that the insurance policies excluded claims of loss arising from diseases declared quarantinable under the Quarantine Act, and human diseases under the Biosecurity Act, and as a result COVID-19 should also be covered by such clauses.

In particular, both policies contained exclusions for business interruption cover in the events of:

1. “the outbreak of a notifiable human infection or contagious disease occurring within a 20-kilometre radius of the location”;
2. “any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments”; and
3. “…no cover for highly pathogenic Avian Influenza or any other diseases declared to be quarantinable under the Quarantine Act 1908 (Cth) and subsequent amendments irrespective of whether discovered at the premises or out-breaking elsewhere”.

Each policy made reference to the Quarantine Act 1908 (Cth), and its subsequent amendments. However, the Quarantine Act was repealed in 2016 and both insurance policies therefore made reference to and relied upon non-existent legislation.

The insurers attempted to argue that the Biosecurity Act 2015 (Cth) (which is the act that replaced the Quarantine Act) was a “subsequent amendment” of the Quarantine Act, and therefore, COVID-19 was excluded from their cover. The difference between the two acts is the categorisation of diseases:

• under the Quarantine Act, a ‘quarantinable disease’ was any disease proclaimed by the Governor-General to be a quarantinable disease;
• under the Biosecurity Act, a human disease may only be a ‘listed human disease’ where it is communicable and causes significant harm to human health.

On 21 January 2020, COVID-19 became a ‘listed human disease’ under the Biosecurity Act, but because the Quarantine Act had been repealed, it was not declared a quarantinable disease.

Relying on the exclusion clauses in their policies, HDI and Hollard refused to compensate the businesses they insured as a result of the interruption caused by COVID-19. In doing so, they asserted that the wording ‘and subsequent amendments’ included ‘listed human diseases under the Biosecurity Act’.

The Decision

The Court of Appeal found in favour of the policyholders for the following reasons:

• the Quarantine Act 1908 (Cth) was repealed on 16 December 2016 and therefore COVID -19 is not a diseased to be declared quarantinable under that Act;
• the Biosecurity Act 2015 (Cth) is a separate Act and therefore was not a “subsequent amendment” to the Quarantine Act 1908;
• There was no reference to the Biosecurity Act in the polices; and
• The reference to the Quarantine Act 1908 (Cth) was not for the court to rectify as it was not deemed an ‘obvious mistake’ by the policy makers.

This meant that the exclusion clauses that were drafted in both policies did not exclude COVID-19, and as a result, any losses suffered during COVID-19 were claimable.

The Impact

This decision is important for many insurers and policy holders, as it increases the ability for businesses to lodge a claim under their business interruption policies (if held). Prior to this case, there was no guidance in relation to interpretation of exclusion clauses such as those included in these policies.

Given the wide-reaching impact this decision can have, it is expected that the insurers will seek to appeal this decision in the High Court of Australia. At the time of writing, there is no indication that a special leave to appeal has been filed as of yet.

Next Steps

If your business currently holds busines interruption insurance policy, in which your insurer has denied liability for losses suffered during COVID-19, it is important that an appeal against the internal decision is lodged.

Our commercial and disputes team can guide you through the drafting of your policy, and the processes required to appeal a decision made by an insurer. More often than not, an appeal is required to be lodged within a certain time frame and as such it is important you seek professional legal advice as soon as possible.