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Business interruption appeal documents warn of $10 billion claims total

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The High Court should hear an appeal over business interruption exclusions due to the financial repercussions for insurers and the legal issues around contract language and correction of mistakes, documents filed by the industry argue.

The Insurance Council of Australia (ICA) is seeking to overturn a NSW Court of Appeal test case decision that found two policy wordings citing the now repealed Quarantine Act 1908 could not be used to exclude cover for disruptions caused by the COVID-19 outbreak.

“A similar issue affects over 250,000 business interruption policies in Australia and business interruption claims in Australia estimated at $10 billion,” the leave to appeal application filed yesterday says.

The document also points to last month’s announcement by IAG in highlighting the “general importance” of the issue.

“Indeed, the insurer IAG went into a trading halt, estimated a post-tax provision of approximately $865 million was required to reflect the potential impact of the Court of Appeal’s decision and embarked on a $750 million capital raising in consequence,” it says.

ICA argues the lower court erred in ruling that wording citing the repealed Quarantine Act “and subsequent amendments” applies only to diseases declared under that law and doesn’t encompass those listed under the replacement Biosecurity Act 2015.

The application says wordings can be “ambulatory” and notes mid-nineteenth century access easements citing “carriages” were later understood to refer to motor vehicles.

“The real question is one of substance: whether the relevant provisions of the Biosecurity Act are sufficiently similar to those of the Quarantine Act to be regarded as a ‘subsequent amendment’,” it says.

“Given that the Biosecurity Act was explained to be a replacement for the Quarantine Act, and the similarities between the relevant provisions of each, that question should be answered favourably to the insurers.”

The commercial purpose of excluding diseases so serious they cause governments to impose special quarantine restrictions is frustrated by the NSW Court of Appeal decision “freezing in time” diseases listed under an act repealed a number of years earlier, ICA says.

The appeal court judgment found that referencing the Quarantine Act was not an “absurdity”, even if it would have made more commercial sense to refer to the current Biosecurity Act, and was therefore not a clear mistake for correction.

ICA says there is also no foundation to conclude the parties knew of the Quarantine Act’s repeal and chose to refer to it rather than the Biosecurity Act, while there’s no doubting the objective intention in relation to serious and highly contagious diseases.

The application argues there’s no “universal requirement of absurdity” and the issue is not contract “rectification” but resolving the issue by looking at the contract construction.

It cites another court case decision that notes cases where “the spirit is strong enough to overcome the letter” and says if someone is convinced a literal or strict interpretation would “defeat the intention” they are “authorised and bound to construe the writing accordingly”.

“The Court of Appeal’s refusal to ‘correct’ the reference to the Quarantine Act 1908 and subsequent amendments’ by construing it as referring to the Biosecurity Act appears to have proceeded from three concerns. None was justified,” it says.