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SMEs could get their hands on millions following BI test case ruling

Businesses that have suffered a financial setback as a result of COVID-19 restrictions could now look to their insurers for hefty payouts, after the NSW Court of Appeal ruled that pandemic exclusions in business interruption (BI) policies are invalid.

SMEs could get their hands on millions following BI test case ruling
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  • Maja Garaca Djurdjevic
  • November 20, 2020
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Insurers could be looking at millions of dollars in claims from businesses that suffered financially as a result of COVID-19 restrictions, after the New South Wales Court of Appeal rejected the industry’s argument that COVID-19 falls within the “quarantinable disease” exclusion under the Quarantine Act 1908 and subsequent amendments.

The ruling comes after insurers IAG, QBE and Suncorp repeatedly insisted that pandemic exclusions should stand, meaning that the court’s decision has now exposed insurers to hundreds of millions of dollars in claims.

The test case revolved around two plaintiffs — HDI Global Specialty SE and the Hollard Insurance Company — and four defendants from the tourism and retail sectors. It was launched by the Insurance Council of Australia (ICA) to seek formal clarification on whether insurance claims need to paid to small businesses impacted by the COVID-19 pandemic, following several complaints to AFCA by businesses whose claims had been denied.

“We remain of the clear view that business interruption coverages do not cover pandemics,” Hollard Insurance Company chief executive Richard Enthoven said in a statement at the time.

“However, we volunteered to be part of the test case process so that the court system can clarify for our policyholders, Hollard and the industry how to handle this important issue.”

Earlier this year, law firm Clayton Utz explained that while BI policies are generally triggered by property damage, policies may also contain extensions for business interruption losses caused by human infectious disease.

Clayton Utz partner Mark Waller said at the time that these policies usually respond where there is an outbreak of the disease either at the business premises or within a specified radius — 20 kilometres, for example — or where the government has ordered the premises to be closed or evacuated as a direct response to there being infectious disease at the premises or within the specified radius.

Special counsel Chris Erfurt argued at the time some businesses are being mistakenly led to believe that their policies will not cover them for COVID-19 because it falls within the “quarantinable disease” exclusion, which applies to “quarantinable diseases under the Quarantine Act 1908 and subsequent amendments”.

“Our view is that it is not correct to interpret the exclusion as applying to COVID-19,” Mr Erfurt said. “For one thing, the Quarantine Act was repealed nearly five years ago, so it does not apply to COVID-19. While some of the subject matter the repealed act covered is now contained in the Biosecurity Act 2015 (Cth), that act is not a ‘subsequent amendment’ to the Quarantine Act. 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.”

Following the court’s ruling, the ICA has issued a short statement, setting out its course of action.

“The ICA, in consultation with its members and legal representatives, 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.”

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