Business interruption insurance and COVID-19: Interpretation of a common-form exclusion
by Diren Fernando, Partner at HWL Ebsworth Lawyers
On 18 November 2020, the New South Wales Court of Appeal gave judgment in much-anticipated proceedings addressing a so-called “pandemic exclusion” in certain policies of insurance covering business interruption. At issue was whether the exclusion carved out losses caused by COVID-19.
The proceedings were backed by the Insurance Council of Australia, to achieve some certainty about the operation of the relevant exclusion, which appears in similar terms within a number of business interruption policies issued by diverse insurers.
Two particular claims upon two different insurers were selected for a test case. Due to the significance of the issues, the case was removed directly into the Court of Appeal.
For the reasons explained below, the Court of Appeal concluded that the relevant exclusion did not apply to the COVID-19 pandemic.
However, it is fair to say that the Court’s conclusions turned on the wording of the relevant policies, and the application of principles of contractual construction. Caution must be exercised when trying to apply such findings to other policies.
The policies before the Court were in relevantly similar terms. They provided cover for business interruption due to outbreaks of infectious or contagious human disease within a 20 kilometre radius of the relevant business premises. However, they expressly did not cover diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments.
The problem with this regime was that, before the policies commenced, the Quarantine Act had been repealed. Many of the same objectives had been incorporated into new legislation, namely the Biosecurity Act 2015 (Cth). However, the later Act contains no reference to quarantinable diseases. Rather it provides for certain diseases to be determined to be listed human diseases.
It was accepted that the parties to the policies had been unaware that the Quarantine Act had been repealed at the time that they entered into the contracts. It was also accepted that COVID-19 had been determined to be a listed human disease.
The insurers’ position was that the reference to “diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments” should be read as “diseases determined to be listed human diseases under the Biosecurity Act 2015 (Cth)”.
Two arguments were advanced by the insurers.
The First Argument: Subsequent Amendments
The insurers’ first argument was that the policy wording specifically referred to subsequent amendments to the Quarantine Act, which (they said) should be taken to include the Biosecurity Act. The insurers argued that the phrase subsequent amendments extended to the repeal and replacement of the Quarantine Act by another statute with the same purpose and function.
To support their position, the insurers relied on a provision of the Acts Interpretation Act 1901 (Cth).
The court did not accept this argument. All five Judges of Appeal concluded that the phrase subsequent amendments did not encompass reference to a new, replacement statute.
Having regard to the ordinary meaning of the word amendments, the Court found that the phrase referred only to alterations to the Quarantine Act. To suggest that the phrase included a replacement enactment was seen as “many steps too far”.
It was noted in passing that the Acts Interpretation Act did not apply to interpretation of contracts.
The Second Argument: Correction by Construction
The insurers’ second argument was that, as a matter of construction, the Court should effectively correct what was said to be an error in the policies, so as to avoid absurdity.
The Court canvassed the various authorities governing this principle of contractual construction. Although the Judges of Appeal approached the matter somewhat differently, it was generally accepted that the literal words of a contract may be displaced, if it was clear that an error or mistake had been made, such that the literal meaning of the words used gave rise to an absurdity — as long as the objective intention of the parties was self-evident.
The Court cautioned that such “absurdity” meant more than merely lacking in commercial good sense. The words used would need to give rise to “commercial nonsense”, to the point that it was obvious that the parties did not mean what they had said, and it was obvious what they had actually meant to say.
The Court did not accept that the exclusion attracted the benefit of these principles. It concluded that the language actually used in the policies did not disclose a clear mistake — or, if it did, that the error did not rise to the required level of absurdity.
The Court observed that the exclusion could still operate in a workable way. The policies could, for instance, exclude those diseases which had previously been declared quarantinable diseases under the Quarantine Act. Although it might have been sub-optimal for the policies to refer to a “static” list of diseases which could not be updated, this did not amount to “absurdity” in the relevant sense.
Therefore, the actual wording of the contract should not be displaced.
Two of the Judges of Appeal identified another ground for rejecting this argument. They noted that the power to “correct” contracts through construction was intended to address the imperfect expression of the parties’ objective intention. In other words, it was to be used where there was a problem with the language that the parties had used to express their aims.
In this case, it was accepted that the parties had not realised that the Quarantine Act had been repealed when they entered into the policies. Therefore, it could not be said that there had been any mistake in the language which they had chosen to achieve their objectives. The problem was not with the expression of their intentions, but rather with their intentions themselves. This was not subject to correction by construction.
Outcome and Aftermath
Accordingly, the Court of Appeal unanimously concluded that the relevant exclusion did not apply to the COVID-19 pandemic. The disease in question had not been declared a quarantinable disease under the now-repealed Quarantine Act, and it was irrelevant that it had been determined a listed human disease under the Biosecurity Act.
As is always the case, the interpretation of any policy of insurance must have regard to the whole of the relevant contract. The specific wording and (to the extent permissible) the surrounding circumstances will shape the correct construction of the contract. It must be remembered that the Court’s Judgment addresses only the policies before it.
However, where the language of the relevant exclusion is effectively identical in multiple policies across the market, the Court of Appeal’s conclusions may — subject to appeal — be of significance.HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 20 ANZ Insurance Cases ¶62-250;  NSWCA 296