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A messy business: court action looms over BI wording

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As wrestling over coronavirus business interruption coverage, or the lack of it, ramped up in the US and UK, the Australian insurance industry was able to watch from a position of relative comfort.

People are a bit more sensible in these parts, so the theory goes, and understand why pandemic exclusions are necessary for the industry to operate effectively.

But we may be coming to the party after all, due to outdated policy wordings contained in many Australian business policies.

It’s become apparent that many exclusions still refer to “quarantinable diseases” under the Quarantine Act 1908, which was repealed and replaced by the Biosecurity Act 2015.

As a result, some law firms are advising clients with denied claims that they should continue to fight for a payout, believing the issue could be heading for a very expensive and drawn-out court battle.

It’s important to understand that business interruption usually complements commercial property insurance and is triggered by physical loss.

Infectious disease cover is offered as an extra, but there must still be an impact on the insured’s business premises, and it is not intended to cover diseases with pandemic potential.

Despite this, law firm Clayton Utz believes policies which have broad infectious diseases cover, with exclusions that refer only to the Quarantine Act, should respond.

“Where the policies simply require that the outbreak occur within a specified radius of the premises, the insurance policy should respond, as it is likely that the business will be able to establish that the outbreak is present within that area,” Partner Mark Waller says.

Special counsel Chris Erfurt explains further.

“Our view is that it is not correct to interpret the exclusion as applying to COVID-19,” he says.

“For one thing, the Quarantine Act was repealed nearly five years ago, so it does not apply to COVID-19.”

Some policies refer to the Quarantine Act “as amended” or “and subsequent amendments”, but the firm says this gives no protection.

“While some of the subject matter the repealed Act covered is now contained in the Biosecurity Act 2015, that Act is not a ‘subsequent amendment’ to the Quarantine Act,” Mr Erfurt says.

“In any event, a listed human disease under that Act – which does include COVID-19 – does not fit within the description ‘quarantinable disease’ under the exclusion, as that is a distinct concept under the repealed legislation.”

As reported last week by insuranceNEWS.com.au, the Insurance Council of Australia (ICA) and its members argue that the “the intention of stated exclusions was clear”, regardless of which Act is referred to.

insuranceNEWS.com.au understands ICA sought legal advice, which advised that precedent in similar cases suggests the exclusions will hold up.

However, overall there is a resignation that this matter will end up in court – probably the High Court – and there are no hard and fast guarantees which way it will go.

“I can’t see this being decided outside a court, and it will take quite a while,” one source said.

If Australian insurers were forced to pay out all business interruption claims, it has been estimated that this could result in claims of $30 billion for just a three-month period.

The Quarantine Act issue would not account for the whole of this figure – far from it. But it is believed to be a significant problem, with most IAG and Allianz policies, and some QBE polices, affected.

Mr Waller has little faith in ICA’s legal advice, and says insurers would be better to pay out the claims and avoid litigation.

He told insuranceNEWS.com.au the “intention” of one party is not legally relevant.

“[The customer] did not have that intention,” he said. “Legally, what one party asserts to be their intention does not matter.”

He says that “at best for insurers” the wording is ambiguous, which would lead to them not being able to rely on the exclusion.

Clayton Utz is not the only law firm with opinions on the matter, and others have expressed differing views.

An article on Piper Alderman’s website says that as the Biosecurity Act replaces the Quarantine Act, “an argument that an exclusion referring to the Quarantine Act does not apply is not likely to succeed”.

Mills Oakley agrees that “the insurer’s intention to exclude cover for such notifiable diseases is clear to the insured, and the effect of the exclusion is the same, regardless of the Act referred to”.

However it adds that a risk remains that “these exclusion clauses may be successfully challenged by insureds”.

Colin Biggers & Paisley lines up with Clayton Utz, saying “it is unlikely that exclusions, which only refer to the Quarantine Act 1908, will operate to exclude cover for COVID-19 as the Biosecurity Act 2015 is unlikely to qualify as amending legislation”.

The first determination on the issue could come from the Australian Financial Complaints Authority (AFCA), rather than a court.

This is a concern to insurers, as AFCA rulings are binding on them but not consumers, and it has an increasing propensity to land on the side of “fairness”.

AFCA declined to offer a view on the issue when contacted by insuranceNEWS.com.au, saying only that it has three current complaints relating to business interruption and COVID-19, and investigations are ongoing.

Whichever way this goes, it’s not good for insurers. It could be time-consuming, expensive, and damaging to the industry’s reputation.

And, while it’s easy to say in hindsight, it was presumably relatively easy to avoid.

insuranceNEWS.com.au has asked the major insurers why so many exclusions still refer to an Act that was repealed almost five years ago.

Not one has given an answer.

Whether inexplicable error, or understandable oversight, the effect is the same – a very messy business that is going to run and run.