November 2020 | 1
Clifford Chance
COVID-19: LANDMARK JUDGMENTS IN
NSW (AUSTRALIA) AND ENGLAND IN
BUSINESS INTERRUPTION INSURANCE
TEST CASES
Following a landmark ruling of the English High Court earlier
this year, a new judgment of the NSW Court of Appeal provides
further insight into the approach of common law courts on
COVID-19 business interruption insurance test cases.
Policyholders have won the first Australian test case brought by the insurance
industry to fortify its position on rejecting claims made through the COVID-19
pandemic.
On 18 November 2020, the NSW Court of Appeal handed down its much-
anticipated decision in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020]
NSWCA 296 ("HDI Global"). In a unanimous judgment, the Court found in
favour of insured businesses, ruling that insurers could not rely on certain
disease exclusion clauses to deny claims by policyholders for loss caused by
business interruption due to COVID-19.
The NSW Court of Appeal judgment comes after the English High Court's
judgment in The Financial Conduct Authority v Arch and Others [2020] EWHC
2448, handed down on 15 September 2020, which largely found in favour of
policyholders. There, proceedings were brought by the UK Financial Conduct
Authority in its capacity as a regulatory body to obtain court declarations in
respect of coverage and causation issues under 21 sample business
interruption policies. The High Court ruled that cover was available under most
of the wordings considered. The appeal subsequently 'leapfrogged' the Court of
Appeal and was heard by the Supreme Court in a four-day hearing which
concluded on 19 November 2020; a judgment is anticipated by January 2021.
Background to HDI Global
The first, second and third defendants were insured against interruption to their
tourist park business for the period 28 February 2020 to 28 February 2021 under
a business interruption policy issued by the first plaintiff, HDI Global. The retail
business of the fourth defendant was insured under a similar policy for the
period 11 May 2019 to 11 May 2020 issued by the second plaintiff, the Hollard
Insurance Company Pty Ltd.
The business interruption insurance policies provided cover for interruption or
interference caused by outbreaks of certain infectious diseases within a 20km
radius of the insured's premises, subject to an exclusion for "diseases declared
Key issues
• NSW and English judgments
present a victory for
policyholders who are likely to
turn to their insurance policies
to seek relief for loss arising
from business interruption
caused by COVID-19.
• The NSW and English courts
have shown that orthodox
principles of contractual
interpretation will be applied to
insurance contracts, even if the
outcome is not necessarily
commercially convenient.
• It remains to be seen whether
the NSW decision will be
appealed to the High Court of
Australia. Pending any appeal,
the insurance industry may be
on the hook for hundreds of
millions of dollars in COVID-
linked payouts.
• The UK Supreme Court's
decision in the English test
case is anticipated by January
2021.
.
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to be quarantinable diseases under the Australian Quarantine Act 1908
("Quarantine Act") and subsequent amendments" ("Exclusion Clause").
The Quarantine Act was repealed in June 2016 (i.e. before the commencement
of the policy period of cover and the outbreak of COVID-19), and replaced by
the Biosecurity Act 2015 (Cth) ("Biosecurity Act"). The Biosecurity Act did not
provide for declarations of quarantinable diseases by the Governor-General but
did provide for determinations of a "listed human disease" by the Director of
Human Biosecurity. On 21 January 2020, COVID-19 was determined to be a
listed human disease under the Biosecurity Act.
The defendant insureds claimed indemnity from their respective plaintiff
insurers for business interruption caused by COVID-19. These claims were
denied based on the Exclusion Clause. The insurers subsequently commenced
proceedings seeking declarations that the Exclusion Clause was to be
construed as including diseases determined to be a listed human disease under
the Biosecurity Act.
Two issues fell for determination by the NSW Court of Appeal:
1. whether the Exclusion Clause was to be interpreted as extending or
referring to diseases listed as human diseases under the Biosecurity
Act because: (i) the Biosecurity Act constituted a "subsequent
amendment" to the Quarantine Act; or (ii) references to the Quarantine
Act were obvious mistakes which should be construed as if they were
or included references to the Biosecurity Act ("Primary Issue"); and
2. if the answer to the first issue is yes, whether the Exclusion Clause
should be construed as referring only to diseases that had been
subject to a determination under the Biosecurity Act at the time of
entering into the policy or to diseases so determined during the life of
the policy ("Secondary Issue").
Summary of judgment in HDI Global
Taking an orthodox approach to contractual interpretation, the five judges of the
NSW Court of Appeal determined that on a proper construction, the terms of
the Exclusion Clause did not extend or refer to the Biosecurity Act. Therefore,
COVID-19 did not fall within the scope of the Exclusion Clause so as to exclude
the plaintiff insurers' liability with respect to business interruption caused by the
pandemic.
The Court of Appeal focused on the ordinary meaning of the words contained
in the Exclusion Clause, finding, amongst other things, that: (i) "and subsequent
amendments" were unambiguous and did not extend to an entirely new
replacement enactment; and (ii) "diseases declared to be a quarantinable
disease under the Quarantine Act" were not so flexible as to include diseases
determined to be a listed human disease under the Biosecurity Act.
As to whether there was a 'mistake', Hammerschlag J held that whilst there was
a suspected mistake on the part of the insurers in not amending their policies to
refer to the Biosecurity Act, suspicion was not enough to correct a mistake and
there was no basis to suspect that the insureds had overlooked anything.
Further, whilst the natural and ordinary meaning of the Exclusion Clause might
have an uncommercial effect, the terms still had a sensible, albeit limited,
operation in respect of diseases declared under the Quarantine Act prior to its
repeal. They were not sufficiently absurd to justify a departure from the
language of the contract.
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In slightly different (but inconsequential) reasoning, Meagher JA and Ball J
determined that on the face of the contract, there was nothing in the language
of the Exclusion Clause to reflect any 'mistake' in expressing the parties'
objective intentions. Whilst it appeared that the parties were not aware of the
repeal and replacement of the Quarantine Act at the time of entering into the
policies, an agreement could not be corrected merely because the parties'
intention (ascertained objectively through ordinary principles of contractual
interpretation) was formed and expressed based on an incorrect assumption
(i.e. that the Quarantine Act was in force). Rather, this simply meant that in
interpreting the Exclusion Clause, the Court could not have regard to the fact
that the Quarantine Act had been repealed and replaced by the Biosecurity Act.
In view of its conclusion on the Primary Issue, the Court of Appeal did not
consider it appropriate to determine the Secondary Issue on a hypothetical
basis.
The Insurance Council of Australia, the representative body for the general
insurance industry in Australia which funded the case, has announced that it
will urgently review the judgment and the grounds on which special leave to
appeal against the decision to the High Court of Australia might be sought.
Comparison against the English case
The NSW judgment, while of broad application to insureds across Australia, is
narrower in scope than the English case for several reasons. As it mainly served
to answer a preliminary coverage question, its effect is confined to policies
which contain the Exclusion Clause (or wording akin to it). Having surmounted
the exclusion hurdle, it is likely that policyholders affected by the NSW judgment
will next have to grapple with the same conditionality and causation issues that
have already been addressed by the English High Court. In this respect, the
declarations which have been issued by the English court may be of guidance.
In the English case, the High Court considered – beyond exclusions – the
substantive meaning of three categories of insuring clauses: (i) disease, where
cover is triggered by the occurrence of a notifiable disease within a defined area;
(ii) prevention of access, which cover prevention of use/access because of
government/relevant authority action; and (iii) hybrid blends of the first two
types. Each clause was analysed to determine the necessary triggers for
coverage as well as the causal link between said triggers and alleged loss – the
result is a comprehensive list of declarations that specify e.g. how the presence
of COVID-19 ought to have 'manifested', what amounts to a 'prevention' or
'hindrance' of access to premises, and whether trends clauses can operate to
reduce the value of cover, under individual policies.
Despite the expansive nature of the High Court judgment, parties argued in the
Supreme Court that some confusion remains in relation to certain declarations.
Given the complexity of the subject matter and the relative brevity of the NSW
judgment, it appears likely that more litigation is on the horizon for Australian
insurers and insureds.
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Key takeaways
• Both cases were treated expeditiously by the judiciary; the NSW case
was referred from the Commercial List of the NSW Supreme Court to
the Court of Appeal (with a larger bench no less) and the English one
'leapfrogged' its way to the UK Supreme Court. This reflects the
significance of business interruption insurance to the general public in
this pandemic; it is estimated that the wordings considered in the
English case could potentially affect some 370,000 policyholders alone.
• Judges in both cases heavily relied on orthodox principles of contractual
interpretation to reach their findings, with the English court in particular
holding that a proper construction of the policies rendered separate
consideration of causation questions unnecessary. Suggestions that
policies could be subject to rectification to cure some default or other in
the absence of absurdity were given short shrift.
• All of the policies considered provided cover for infectious diseases by
means of an extension to business interruption cover triggered by
physical damage. Accordingly, it remains the case that insureds who
did not purchase such extra cover will not, in the vast majority of cases,
be indemnified against their losses arising from the coronavirus
pandemic under business interruption insurance policies.
November 2020 | 5
Clifford Chance
CONTACTS
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Partner
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E cameron.hassall
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Partner
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E philip.hill
@cliffordchance.com
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Senior Associate
T +44 207006 8714
E baljit.rai
@cliffordchance.com
Christopher Ingham
Senior Associate
T +44 207006 4518
E christopher.ingham
@cliffordchance.com
Haeran Chung
Associate
T +61 2 8922 8092
E haeran.chung
@cliffordchance.com
Kengyi Kwek
Lawyer
T +44 207006 1633
E kengyi.kwek
@cliffordchance.com
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