As businesses continue to experience financial pressure from unprecedented COVID-19 forced closures and restricted trading, many businesses naturally look to their business interruption insurance policies for relief.
Most insurance policies that provide business interruption insurance will specify circumstances in which an insured is not covered. Unfortunately for insured businesses, it is usual for a policy to exclude claims which are caused by an event that the World Health Organisation has declared a pandemic, such as COVID-19.
However, could there be an exception? This article examines the current speculation around whether business interruption insurance cover for COVID-19 may be properly excluded by policies with pandemic exclusions that exclude ‘diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments’. Policyholders of business interruption policies with the Insurance Australia Group (IAG) recently asked this very question when discovering this was the wording of IAG’s pandemic exclusion.
The problem for IAG and other insurers who frame their COVID-19 exclusion in these terms is that in 2015, the Australian Quarantine Act was repealed. It was replaced by the Biosecurity Act 2015.
After the Quarantine Act was repealed, many insurers updated the exclusion to refer to “listed human diseases” as this was the determinative disease identifier under the Biosecurity Act, which since 21 January 2020, includes COVID-19. But a number of insurers, including IAG, did not.
Does this then mean that the IAG exclusion clause and clauses like it with other insurers are invalid? Opinions are divided on whether the exclusion should or should not apply.
The argument for the exclusions to apply
Insurers we assume will argue that the intention under the two acts is the same and that the Biosecurity Act merely replaces the Quarantine Act or at the very least for IAG is a “subsequent amendment” to it.
The argument is that a “listed human disease” under the Biosecurity Act is now the legislative replacement for a disease declared to be a “quarantinable disease” under the Quarantine Act. The insurer could argue the intention to therefore exclude cover for such notifiable diseases is clear to the insured, and the effect of the exclusion is the same, regardless of what legislation is referred to.
Therefore, insurers we assume will insist they have a reasonable basis to rely on the wording of these exclusion clauses as enforceable, subject to the context and other provisions of the policy.
The situation would be clearer of course for exclusion clauses that refer to the Quarantine Act and then make use of additional words such as “or any replacement” or “or its current equivalent”. Such exclusion clauses are not likely to be unenforceable solely because the wording does not refer to the Biosecurity Act.
The argument against the operation of the exclusions
It could conversely be argued that the Quarantine Act has not been amended – it has actually been repealed altogether. So IAG’s wording “and other amendments” might be read narrowly to capture changes to that act only and not the repeal of that act. A repeal of legislation is not an amendment.
Because the legislation has been repealed, exclusion clauses which only refer to “quarantinable diseases under the Quarantine Act 1908”, without more, may be unenforceable given diseases are no longer declared “quarantinable” under the current legislation.
An insurer may argue that the intention under both Acts is the same, that is to exclude pandemic related disease, whether “quarantinable” or “listed human disease”. However, arguably the insured does not necessarily have the same intention as the insurer. There needs to be compelling evidence that the terms of the policy do not express the parties’ common intentions before a court would be prepared to rewrite the contract.
Even if it could be said that the intention of both Acts were the same, it remains to be seen whether it would be accepted by a court that an insurance policy could contain an implied term that reference to a certain piece of legislation should include another separate piece of legislation.
At best for insurers the wording is ambiguous, which could lead to them not being able to rely on the exclusion, as well established rules of policy interpretation adopted by the courts would go against the insurer.
And the winner is…
As can be seen above, there is no obvious winner. Whether these problematic exclusion clauses, which only refer to the Quarantine Act, are enforceable remains to be seen. What is clear is that insurers are certainly at risk of having these exclusion clauses challenged by insureds. In this COVID-19 environment, we think the likelihood of claims is very high given the adverse financial situation insureds are already in, or may be in shortly.
Holding Redlich is experienced in resolving coverage disputes and is able to assist in any dispute with insurers as it is not on any insurer panels. It is a narrow question which, if it can’t be resolved commercially, in our view could be litigated in the Federal Court’s Insurance List for short matters. The Insurance List provides a prompt and practical business-like method of swiftly resolving discrete disputes around policy interpretation and eliminates excessive and unnecessary "process-driven" costs.
COVID-19 restrictions are now slowly being lifted, and hints of a return to normal, or a new normal, are slowly being seen. The effects of the pandemic however will unfortunately be with us for a while longer and will take time to resolve. We have no doubt that disputes over the meaning and application of exclusion clauses in insurance policies will be part of the commercial disputes landscape.
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.