On 18 November 2020 the Court of Appeal of New South Wales delivered an important judgement in relation to COVID-19 related business interruption losses.
Businesses who have business interruption insurance and who suffered losses due to COVID-19 may be able to claim compensation from their insurance company. The insurance industry is potentially now exposed to losses amounting to hundreds of millions of dollars.
Background: Business Interruption Insurance
As the name suggests, business interruption insurance is designed to compensate your business if there is an outside event that interrupts the normal functioning of your business.
Many businesses hold business interruption insurance. In many cases, the business interruption insurance comes in a “packaged deal” being part of a more comprehensive insurance policy that covers other things as well, such as theft, liability and so on.
So our first recommendation is that everyone should check if their insurance policy contains business interruption benefits.
COVID-19 Business Interruption
The COVID-19 pandemic has caused major business disruption all around Australia. COVID-19 is not an event which a business can control, so technically businesses should be able to seek their losses from their insurance company.
Many business interruption policies, however, contain a pandemic related exclusion clause. The idea behind the exclusion clause is to protect the insurance company so that, if for example, the loss is caused by a pandemic, then the insurance company does not have to pay.
However, the wording of the exclusion clause is very important.
Specifically, in this case the exclusion clause applies to “diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments. ” The COVID-19 pandemic has never been declared to be a quarantinable disease under the Quarantine Act. The reason for this is that the Quarantine Act was repealed on 16 June 2016 and it was replaced by the Biosecurity Act 2015.
Why did the insurers try to rely on the exclusion clause?
The COVID-19 pandemic is listed as a human disease under the Biosecurity Act 2015.
The insurers contended that the exclusion clause which refers to diseases under the Quarantine Act should be interpreted broadly to include diseases under the Biosecurity Act.
The court found that the interpretation which the insurance companies argued for is too broad.
The court determined that the exclusion clause does not apply to COVID-19. In other words, businesses that suffered losses due to COVID-19 and which have business interruption insurance can make a claim for compensation under their insurance policy.
This fight may not be over…
The insurance companies are currently considering whether they should file an appeal to the High Court.
At first blush, the position adopted by the insurance companies may seem understandable. What they had in mind is that they did not want to cover losses caused by a pandemic. It is true that the Quarantine Act had been repealed before COVID-19 even started to emerge, but the point is that it is still a pandemic which the insurers never wanted to cover.
However, on closer analysis, the court’s judgement is logical. The insurance policies were drafted by the insurance companies not the insured businesses. When the insurance companies drafted these policies, they wanted to exclude only those diseases which were declared quarantinable under the Quarantine Act. There was a specific mechanism by which a particular disease would be declared quarantinable under the old Quarantine Act. By contrast, COVID-19 does not fall into that category of diseases. Rather, it was determined under a different mechanism and under a different legislation to be listed as a human disease.
If the insurance companies had intended to exclude from coverage a broader range of disease then they should not have restricted their definition to specific diseases identified under a specific mechanism provided for in the Quarantine Act.
We recommend that you check your insurance policy to see if you might be able to claim insurance benefits for business interruption caused by COVID-19.