Court of Appeal throws wrench in insurers’ get-out-of-paying pandemic scheme

File this under “you had one job”.

Many of Australia’s biggest insurance companies, whose principal occupation is doing everything they can to ensure that they never pay out on a policy, have had their pants pulled down by the NSW Court of Appeal with very expensive consequences.

The issue before the court, in a test case brought on by the peak industry body the Insurance Council of Australia, was whether insurance policies that cover business interruption will respond in the circumstances of a pandemic such as COVID-19.

One of the insured businesses in the case was the Austin Tourist Park, a caravan park in Tamworth NSW. It was shut down during the peak of the pandemic, causing its owners enormous losses just like many thousands of businesses all over Australia have suffered this year.

The owners had sensibly taken out business interruption insurance, which offered cover for losses in many situations, including the outbreak of a notifiable human infectious disease within 20km of the park.

Policies of this type routinely include a blanket exclusion for pandemic diseases, for the commercial reason that that is a risk so existential insurers can’t afford to cover it. Mostly they define the extent of the exclusion by reference to the laws under which pandemics are declared by public health authorities.

In Australia, that law used to be the Quarantine Act, first legislated in 1908 and amended many times until it was finally repealed entirely in 2016 and replaced by the modernised Biosecurity Act. It was under the latter law that COVID-19 was declared on January 21 2020 by the director of human biosecurity to be a “listed human disease”, triggering the extremely wide powers that the act gives health authorities.

The problem for the caravan park’s insurer, as it reportedly is for numerous major insurance companies including IAG, QBE and Suncorp, is that it hadn’t got around to updating its standard policy wording to refer to the Biosecurity Act. Instead the policy applicable as at January 2020 still said that the exclusion for disease cover applied to diseases declared under the old Quarantine Act (“and subsequent amendments”).

The Court of Appeal sat with a bench of five judges instead of the usual three, the test case having skipped the usual first instance step and gone straight up, everyone recognising that its outcome would have massive ramifications.

The insurance industry’s plea to the court was essentially this: when we said quarantine, obviously we meant biosecurity. It was a mistake to not update the policy wording when the law changed, but since the Biosecurity Act obviously replaced the Quarantine Act to achieve the same purposes it was the clear intention of the parties that the policy should be interpreted as if the substitution had been made there too.

Many legal principles of contractual interpretation were referenced but it boiled down to one: was the literal wording of the contract an absurdity? If so, the law allows the courts to replace it with wording that actually reflects the objective intention of the parties.

The court unanimously held that leaving the Quarantine Act reference in the exclusion clause was dumb, but not objectively absurd. It’s fine to say that, if the parties had been aware that that law no longer existed, they would have obviously replaced the reference with the correct one. However, they didn’t know and nobody turned their minds to it. The law doesn’t stretch so far as to fix up the problems their lack of knowledge caused, if the result still works.

The consequence for that policy is that only the diseases that had been declared under the old act when it was repealed (they include smallpox, rabies, SARS and MERS) are excluded from the insurance cover. COVID-19 isn’t.

For the industry, the case’s outcome means that any policy whose exclusion clause references the Quarantine Act can’t use the exclusion to refuse to pay out a claim arising from COVID-19. The ICA’s noises indicate that that will apply to very many insurers and many thousands of claims.

The ICA is also making noises about a High Court appeal. No doubt it will try, given the stakes. I don’t like its chances.

The lesson, of course, is to read your contracts. Which I did in respect of my own firm’s policy. Interestingly, while our insurer had remembered to update its exclusion wording to reference the Biosecurity Act, it still stuffed it up. The exclusion clause refers to “quarantinable disease”, the wording in the old law, rather than “listed human disease” as per the new law. If we had a claim, our insurer would have a problem.

Given that insurance companies essentially do only one thing — sell insurance policies — and employ huge numbers of people to minimise their risk of having to pay out on them, it’s pretty extraordinary that most of them apparently managed to miss the repeal of a law with such a radical potential impact on exactly that risk.

I’d call it negligence, a concept with which they are also familiar.