Business interruption insurance is designed to indemnify a business for financial loss sustained because of agreed events. The name of the insurance can be misleading; it’s not designed to cover all interruptions to business, only the consequential loss from an agreed event, such as damage to a business premises forcing closure while repairs are made. Some policies extend cover to include interruption from other events, such as forced closure of a business due to infectious diseases or an order of a public authority. The cover is commonly included in property insurance, such as Industrial Special Risks and Business Package insurance.
Business Interruption insurance has been a major point of contention with insurers and their insureds following Covid-19 lockdowns. There is disagreement over whether businesses affected by the pandemic lockdown are indemnified for those losses. In many instances, the confusion arises from policy wordings relating to federal legislation covering pandemics.
One significant coverage dispute relates to whether Covid-19 is a quarantinable disease. Many Business Interruption insurances exclude ‘quarantinable diseases’ as defined under the Quarantine Act 1908. That Act, however, was repealed in 2016 and replaced by the Biosecurity Act 2015. Insurers argue that, although the Quarantine Act 1908 was repealed, the intention of the exclusion is to apply the substituted legislation with the same effect. This interpretation would allow insurers to apply the exclusion to decline Business Interruption claims.
It was agreed by the Insurance Council of Australia, in consultation with the Australian Financial Complaints Authority (AFCA) that the correct legal interpretation would be considered by way of a legal test case.
The test case
The test case consists of two separate small business claims lodged with AFCA as part of its dispute resolution process.
- The first involves insurance provided by HDI Global to the Austin Tourist Park in Tamworth; an
- The second is for business cover provided by Hollard for the Thrive, Health and Nutrition shop in the Melbourne suburb of Maribyrnong.
In both cases, the objective is to resolve uncertainty about the outdated wording related to pandemic exclusions.
AFCA has reported a number of complaints from policyholders alleging that insurers have unfairly declined claims by applying an exclusion incorrectly. AFCA will be relying on the outcome of the test case in forming its response to the complaints.
The NSW Court of Appeal Full Bench delivered its decision on 18 November 2020. It ruled against insurers in the hearing on business interruption policy exclusions that cite repealed legislation.
The court found that:
On their proper construction, the words “and subsequent amendments” do not extend to or include the Biosecurity Act, which was a separate Act:
- 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 Acts Interpretation Act 1901 (Cth) does not support the insurers’ argument, either directly or by analogy.
It was held, therefore, that Covid-19 is not a disease declared to be a quarantinable disease under the Quarantine Act 1908 and accordingly claims were not excluded from the disease benefit clauses.
What does this mean for you?
This is a positive development for Insureds. If you have had a claim declined, or you have not submitted a claim, on the grounds of a Quarantine Act exclusion, the recent decision from the NSW Court of Appeal is cause to revisit that claim.
There are, however, many other terms and conditions that may be found in an insurance policy, which could also be relied on by an insurer to decline or limit a claim. For example:
- Many policies require that the outbreak has occurred at the premises or within a specified radius.
- Many policies contain an ‘adjustments’ clause, which is designed to put the policyholder back in the same financial position as they would have enjoyed, but for the loss. This may be relied on by insurers to adjust a claim settlement for any impact of a general downturn in the economy or other factors not related to the lockdown.
- Insurers may also take into account any savings made by the business as a result of the closure, such as rent, utilities and wages. It has also been raised that JobKeeper payments may be considered by an insurer as loss mitigating factor relevant to their assessment of a claim.
The insurance response to Covid-19 losses is complex, and although some issues have been dealt with on a test case basis each claim will be considered on its merits. Accordingly, if you have a claim it would be prudent to lodge the claim with insurers and seek independent advice from an expert.
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