In a decision that is anticipated to have wide ramifications, the New South Wales Court of Appeal handed down a decision on 18 November 2020 in the case of HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296 in which it had to consider the operation of two insurance policies providing business interruption cover.

Those policies each contained an exclusion clause concerning the outbreak of diseases.  The case considered the applicability of those clauses in light of the repealed Quarantine Act of 1908 to which those clauses made reference.  The Court held that the exclusion clause did not apply and the insurer was required to provide cover for business interruption arising from COVID-19.

Facts

HDI and Hollard provided insurance to a number of businesses.  They issued similar insurance policies which provided indemnity in relation to, amongst other things, business interruption arising from the outbreak of certain diseases.  The relevant clauses in each policy provided:

HDI Policy:
The policy covered business interruption from ‘the outbreak of a notifiable human infectious or contagious disease occurring within a 20 kilometer radius of the location … the cover … does not apply to any circumstances involving “Highly Pathogenic Avian Influenza in Humans” or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments’.

Hollard Policy:
The policy covered business interruption or interference with the insured’s business due to ‘an outbreak of an infectious or contagious human disease occurring within a 20 kilometre radius of the Premises, however there is no cover for highly pathogenic Avian Influenza or any other diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments irrespective of whether discovered at the Premises, or out-breaking elsewhere’ (Clauses).

The HDI Policy insured the business from 28 February 2020 – 28 February 2021, and the Hollard Policy insured the business from 11 May 2019 – 11 May 2020.  Those standard form policy wordings had been adopted by the insurers on 1 January 2020 and 1 April 2019 respectively.

Each policy made reference to the Quarantine Act 1908 (Cth), and its subsequent amendments. However, that Act was repealed in 2016. Therefore, the insurance policies written by HDI and Hollard made reference to and relied upon non-existent legislation.

The Biosecurity Act 2015 (Cth) replaced the Quarantine Act. The difference between those two pieces of legislation was the categorisation of diseases. Under the Quarantine Act, a ‘quarantinable disease’ was any disease proclaimed by the Governor-General to be a quarantinable disease, whereas under the Biosecurity Act, a human disease may only be a ‘listed human disease’ where it is communicable and causes significant harm to human health.

On 21 January 2020, COVID-19 became a listed human diseases under the Biosecurity Act, but because the Quarantine Act had been repealed, it was not declared a quarantinable disease.

Relying on the exclusion clauses in their policies, HDI and Hollard refused to indemnify the businesses they insured as a result of the interruption caused by COVID-19. In doing so, they contended that the wording ‘and subsequent amendments’ included ‘listed human diseases under the Biosecurity Act’.

Issues for The Court

The Court considered two arguments:

  1. Whether the meaning of the words ‘and subsequent amendments’, included the repeal and replacement of the Quarantine Act (First Issue); and
  2. Whether the reference to the Quarantine Act in the insurance policies was an obvious mistake which should be corrected by the Court in order to give effect to the objective intention of the parties (Second Issue).

Held

First Issue

The Court employed the ordinary principles of contractual interpretation when construing these policies.[1] Those principles included:

  • The Court considered the policies should be construed by reference to how a reasonable person in the offeree’s position – i.e. the insured’s position – would have understood those terms;[2]
  • Focussing on the words used by the parties to ascertain what they agreed, and not to ascertain their subjective intentions;[3] and
  • Where an ambiguity arises in the insurance policy, the Court will interpret the policy in a manner favourable to the insured because the insurer as the author of the policy is in the better position to look after its own interests.[4]

Having regard to those factors, the Court held that the reasonable person would interpret the words ‘and subsequent amendments’ to the Quarantine Act as meaning amendments to that Act alone, which did not include the enactment of different legislation – i.e. the Biosecurity Act – which used different mechanisms for identifying diseases that would not be covered by the insurance policy.[5] Therefore, the insurers’ argument that the words ‘and subsequent amendments’ extended to the application of the Biosecurity Act, thereby triggering the operation of the exclusion clause, was rejected by the Court. Consequently, the cover otherwise provided by the policy applied.

Second Issue

Meagher JA and Ball J also employed the ordinary principles of contractual interpretation when considering whether to construe the reference to the Quarantine Act in the insurance policies as a mistake that should be corrected by the Court.[6] It was accepted by the parties that neither of them were aware of the correct situation.[7] Accordingly, their Honours construed the policies without regard to that fact,[8] and held that the mistake could therefore only be corrected by the Court, when the meaning in the contract is inconsistent with the parties’ intention which can be ascertained objectively.[9] In other words, because the parties were not aware of the mistake at the time of entering the insurance policies, the Court could not correct the ‘mistake’ to reflect what the parties might or would have agreed upon when entering into the contract had they known. The Court contrasted this with a situation where the language used in a policy does not, as a matter of English expression, reflect what the parties clearly and objectively intended.  In those situations, there is no impediment to a Court correcting an error.

Comment

This decision is important for many insurers and policy holders. While it has been a long established position that where there is an ambiguity in an insurance policy, the Court will interpret it in a manner that is favourable to the insured, because the insurer is usually the author of the policy and has the greater bargaining power, this case concerns a situation where words have been used which are clear, but refer to a situation which is out of date.

It is not known at the time of writing whether the two insurers will launch an appeal of this decision to the High Court of Australia.  It would have to be seen as a distinct possibility that such an appeal will be lodged.

Leaving that issue to one side, it is highly likely that many situations will arise of business interruption claims being made under insurance policies arising from the effects of the Covid 19 pandemic.   If you hold a policy that has the same or similar wording to that discussed in this article, please feel free to contact us about your position if your insurer declines a claim.  We have lawyers who have practiced in the insurance law field for over 30 years, who would be very happy to help you.

 

[1] HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296, [18]ff (Meagher JA and Ball JA), [114] (Hammerschlag J).
[2] Ibid, [18]-[21] (Meagher JA and Ball J).
[3] Ibid, [28] (Meagher JA and Ball J).
[4] Ibid, [30] (Meagher JA and Ball J).
[5] Ibid, [36]-[45] (Meagher JA and Ball J); [119]-[122] (Hammerschlag J, where his Honour considered this analogously, but not by reference to interpretation of a reasonable person, but the ‘correct constructional choice’).
[6] Ibid, [53].
[7] Ibid, [55].
[8] Ibid, [55]-[60].
[9] Ibid, [61]-[65]. Hammerschlag J’s judgment did not deal with the ‘mistake’ in the same manner, and rather treated it as a suspicion that there was a mistake: see [123]-[128].