New Covid 'test case' out of New South Wales

HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296

Regular readers will be aware that Fee Langstone has been providing updates on the UK ‘test case’ on the business interruption response to COVID-19 related claims.

Closer to home, the New South Wales Court of Appeal has also recently handed down its decision in its own test case. It found in favour of insured businesses, ruling that insurers could not rely on certain disease exclusion clauses to deny claims for loss caused by business interruption losses from COVID-19.

Background

The test case involved two businesses that held business interruption policies with the insurers HDI Global Specialty SE and The Hollard Insurance Company Pty Ltd (the insurers). These policies provided cover for interruption or interference caused by outbreaks of certain infectious diseases within a 20-kilometre radius of the insured’s premises. However, there was no cover for “diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments”.

The issue was that before the policy commenced, the Quarantine Act 1908 (Cth) had been repealed and replaced by the Biosecurity Act 2015 (Cth) which incorporated similar objectives but did not refer to “quarantinable diseases”. Instead, the Biosecurity Act provided for certain diseases to be determined to be “listed human diseases”. It was accepted that COVID-19 had been determined to be a “listed human disease”.

The insurers’ arguments

The insureds claimed indemnity under their respective policies for business interruption losses caused by COVID-19. Their claims were declined. The insurers subsequently commenced proceedings seeking declarations that the exclusion should be read as referring to “diseases determined to be listed human disease under the Biosecurity Act” on the basis that the Biosecurity Act was a “subsequent amendment” as referred to in the exclusion.

The insurers’ second argument was that the references to the repealed Quarantine Act were so obviously wrong that the Court should construe it as including the Biosecurity Act to avoid commercial absurdity.

The Court’s decision

The NSW Court of Appeal did not accept the insurers’ argument, holding that a reasonable person would have understood “subsequent amendments” to refer to alterations to the Quarantine Act and not to an entirely new replacement act. Further, to read the clause as including the Biosecurity Act would be taking it “many steps too far”.

The Court also rejected the insurers’ second argument, holding that absurdity required more than a lack of genuine commercial good sense. What was required was commercial nonsense to the point where it was obvious that the parties did not mean what they said, and obvious what they meant to say. The Court was of the view that the language used in the policies correctly expressed the intention the parties objectively disclosed. Therefore, it found that the wording did not disclose a clear mistake and even if it did, it did not meet the level of absurdity required.

Comment (Philippa Fee)

Philippa Fee comments that the ‘black-letter’ approach taken by the Court in this case may surprise many, and certainly disappoint insurers. The courts in New Zealand, at least, have reiterated many times that insurance policies, like any contract, will be interpreted fairly and objectively to ascertain what was the parties’ intention. No one could doubt the insurers’ intention, which is to exclude claims arising from diseases of such widespread and serious nature that there is a public health emergency.

There is a practical lesson to learn from the decision, which is that it is essential for insurers to review insurance policies from time to time to ensure all references to legislations are up to date.