Property Insurance Update - COVID-19 not excluded in policies referring to the “Quarantine Act”
In a unanimous decision, the NSW Court of Appeal held that an exclusion in the infectious diseases extension for quarantinable diseases under the “Quarantine Act 1908 (Cth) and subsequent amendments” could not be construed as meaning listed human diseases under the Biosecurity Act 2015 (Cth).
As “coronavirus with pandemic potential” was declared a listed human disease on 21 January 2020 under the Biosecurity Act, policies with exclusions which contain the outdated reference to the former Quarantine Act, will not apply to COVID-19 claims.
The 2019-nCov acute respiratory disease (COVID-19) pandemic has caused major business disruption in Australia. This test case, initiated by the Insurance Council of Australia, addresses the exclusion in the infectious disease cover.
HDI and Hollard (the insurers) in HDI Global Specialty SE v Wonkana No.3 Pty Ltd1 sought declarations that references to Quarantine Act 1908 (Cth) (the Quarantine Act) in the exclusions contained in their respective policies should be construed to refer to the Biosecurity Act 2015 (Cth) (the Biosecurity Act). This construction would be in accordance with the intention to exclude communicable diseases that are sufficiently serious to attract a public health response and to overcome the mistaken assumption by the insurers that the Quarantine Act referred to in the policies was still in force.
The case was filed with the NSW Supreme Court, but due to its wider significance, it was heard by the Court of Appeal. By a unanimous verdict, the NSW Court of Appeal found in favour of policyholders and that the policy only applied to exclude diseases listed under the Quarantine Act. In consequence of this decision, COVID-19 (which is not listed under the Quarantine Act) will not be excluded in these or similarly worded policies.
HDI and Hollard issued policies of insurance on 11 May 2019 and 28 February 2020 with infectious disease cover in reasonably similar terms each providing cover for business interruption caused by outbreaks of infectious disease within 20 kilometres of the insured’s premises. Relevantly, the cover was restricted by an exclusion:
“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.”
The insurers were not aware at the time of issuing the policies that the Quarantine Act, upon which the operation of the exclusion relied, had been repealed and effectively replaced by the Biosecurity Act on 16 June 2016. This put the operation of the exclusion in respect of COVID-19 claims in issue, as “coronavirus with pandemic potential” was not declared under the Quarantine Act but was a listed human disease under the Biosecurity Act.
The insurers denied the claims by the policyholders and sought declarations that the words “declared to be a quarantinable disease under the Quarantine Act 1908 (Cth)” should be read as or as including “determined to be listed human diseases under the Biosecurity Act 2015 (Cth).”
The insurers submitted two constructions of the policy that would have resulted in COVID-19 claims falling within the exclusion:
- The Biosecurity Act constituted a “subsequent amendment” to the Quarantine Act; and/or
- The references to the Quarantine Act should be construed as if they were or included references to the Biosecurity Act.
The insurers contended that the wording of the exclusion anticipated the evolution of the statue referred to (the Quarantine Act) which included its repeal and replacement by another enactment which may be differently named but has the same substantive function (the Biosecurity Act). Insurers also referenced section 10(b) of the Acts Interpretation Act, which provides that a reference to one Act, which has been re-pealed and re-enacted with or without modifications, should be construed as meaning the re-enacted Act. Based on this, it was argued that the Biosecurity Act was no more than a re-enactment of the Quarantine Act.
Further, the insurers argued that to construe references to the Quarantine Act as references to that Act alone would be absurd as:
- The Quarantine Act had been repealed and replaced by the time the policies were entered into, and the parties could not have intended to refer to a statute incapable of being amended because it had been repealed;
- The parties intended the policies to refer to the operative legislation in force which dealt with quarantinable diseases at the time of the policies and during the cover; and
- It was irrational and commercial nonsense for the parties to have excluded diseases determined pursuant to repealed legislation but not listed human diseases determined under the equivalent legislation in force at the time the policies were issued and during the cover period.
Notably, although the insurers made submissions in respect of the reference to the Quarantine Act instead of the Biosecurity Act being a mistake, the insurers did not make any application for rectification of the policy wording.
NSW Court of Appeal Decision
The Court noted that the interpretation of the wording in a policy is determined objectively by reference to its text, context, purpose, and what a reasonable person would have understood the wording to mean.
However, if on the face of a written contract, an error has been made, the literal meaning of the words will not be applied if it would bring about an absurd result. Although, if the literal meaning of the words simply brings about an inconvenient or unjust (but not absurd) result then the Court does not have a mandate to rewrite an agreement so as to depart from the language used by the parties merely to give the wording more commercial sense.
Re-enactment and “subsequent amendments”
The Court held that “subsequent amendments” was not ambiguous and did not comprehend a reference to an entirely new Act, they were merely a reference to the Quarantine Act as it stood. The Court stating:
“whilst from the insurer’s perspective the purpose of the provision in question may be to exclude diseases which are sufficiently serious to attract a public health response, it has not chosen that language to describe the exclusion or how it is to operate. The exclusion adopts a specific mechanism provided for under the Quarantine Act, and no other. The possibility of that Act being repealed was real and would have the consequence that the machinery at least may not have any ongoing operation from the time of its repeal. The wording does not address that possibility. To suggest that the words “and subsequent amendments” include the enactment of the Biosecurity Act is many steps too far”.
Relevant to the Court’s determination was the wording “declared to be a quarantinable disease”, which could not be read as referring to the Biosecurity Act as diseases are not “declared” under this new enactment. The word “subsequent” was also not redundant on this construction as contended by insurers, as it referred to amendments being made to the Quarantine Act during the policy period.
The Acts Interpretation Act also did not apply as it concerned statutory, not contractual, construction and interpretation.
Construction where absurdity
Regarding the insurers’ submission that interpreting the policy wording as only referring to the Quarantine Act is absurd, the Court noted that in a commercial context absurdity is more than just lacking in genuine commercial good sense. It entails commercial nonsense, to the point where it is obvious that the parties did not mean what they said and obvious what they meant to say.
The Court held that the words used in the policy were not incoherent, and the exclusion still has work to do because declared quarantinable diseases under the Quarantine Act were still identifiable. It was also held that it was not clear from the language used that that the parties intended to allow for an ambulatory, rather than a static, list of excluded diseases or that the parties intended to pick up replacement legislation.
The Court referred to fact that the intention of the parties must be discerned from the language in the contract itself, and as such, “correction” by construction is concerned with errors of expression. That is to say, something must have gone wrong with the language. The Court indicated that the difficulty in this case was not the error in expression, but the assumption underlying it that the Quarantine Act was still in force.
Accordingly, notwithstanding the repeal of the Quarantine Act, the exclusion still had a sensible, albeit limited, operation in respect of diseases declared under that Act at the time of its repeal. That result may have been unintended, sub-optimal or uncommercial, but it was not absurd.
The Insurance Council of Australia has indicated that it will urgently review the determination and specifically the grounds on which it could seek special leave to appeal against the decision to the High Court of Australia. An application for leave to appeal must be made by 18 February 2021.
Implications for Insurers
The outdated reference to the Quarantine Act remains in many policies and is likely to be a significant issue for those insurers. While the risk has been underwritten and priced on the basis that cover is not provided for pandemic diseases, insurers may now be exposed to large-scale claims for business interruption loss during COVID-19. Insurers are likely to carefully consider any appeal, and may also consider rectification of policy wordings in equity.
Insurers will otherwise need to consider the other COVID-19 coverage issues which could arise when determining their response. These issues include:
- When COVID-19 is considered to have occurred or ‘manifested’ at a premises;
- The causal connection between government restrictions and the manifested disease. Noting that the restrictions in Australia will largely be state or territory based in contrast to the UK; and
- The geographically defined ‘vicinity’ of the policy.
These issues are yet to be tested in an Australian Court, but have been considered in the context of the United Kingdom policy wording and government response, with the United Kingdom High Court largely finding in favour of policyholders. Our updates on that decision can be found here and here but we note that the decision has been appealed, with the judgment likely to be delivered in late December or January 2021.
The case will otherwise have broader implications for insurers that have outdated legislative (and any other) references in their policies which if altered, would impact the risk being underwritten. This may involve legislative monitoring and or policy revisions.
  NSWCA 296.