Full Bench rules on pandemic exclusion – what you need to know

In essence:

• A pandemic exclusion that applied to the business interruption component of many property / ISR policies will not apply, so business interruption caused by the pandemic will now be covered when it was previously thought to be excluded.
• The exclusion does not apply because it referred to diseases declared under the (now repealed) Quarantine Act 1908 rather than the replacement Act.
• Practically, you should check your insurance wording to determine if the pandemic exclusion contains a reference to the wrong Act.

The NSW Court of Appeal Full Bench has ruled against insurers in a business interruption test case that will have ramifications across the industry. Five Full Bench judges’ decision have been announced.

Policyholders had argued that Covid-19 pandemic claims that referenced the Quarantine Act 1908 in the exclusions were valid because the exclusions referred to legislation that no longer exists. The Biosecurity Act replaced the Quarantine Act in 2015, but not all policies were updated.

The ICA’s test case, lodged in consultation with the Australian Financial Complaints Authority (AFCA), consisted of two separate small business claims lodged with AFCA as part of its dispute resolution process.

The court found Covid-19 was not “declared to be a quarantinable disease under the Quarantine Act 1908 (Cth) and subsequent amendments”, so was not excluded from the disease benefit clauses.

It found the words “and subsequent amendments” did not extend to or include the Biosecurity Act, which was a separate Act.

Chief Justice Tom Bathurst and Justice Andrew Bell said the words “and subsequent amendments” should be given their ordinary meaning, “which is unambiguous and does not extend to a new enactment replacing the Quarantine Act and its particular mechanism for identifying, by declaration, certain diseases as serious and contagious”.

The court found the Acts Interpretation Act 1901 (Cth) did not support the insurers’ argument, either directly or by analogy. “That Act concerns statutory, as opposed to contractual, construction.”

Bathurst CJ and President Bell said: “Orthodox principles of contractual construction are not so flexible as to permit ‘declared to be a quarantinable disease under the Quarantine Act’ to be read as ‘determined to be a listed human disease under the Biosecurity Act’.”

Justice David Hammerschlag said: “The natural and ordinary meaning of the words in the disease benefit clauses do not involve an absurdity sufficient to justify a conclusion that the language should not be given effect. Notwithstanding the repeal of the Quarantine Act, the clauses still have a sensible, albeit limited, operation in respect of diseases declared under that Act at the time of its repeal. That result might be regarded as uncommercial, but it is not absurd.”

ASIC had previously told insurers to have plans in place to respond, if the decision went against them. Read more here.

You can read the full judgement here.

It is likely many insurers will now review policy wordings more closely.

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