Alert – Lloyds V Dural 24/7 – Quarantine Act Exclusions can still be effective on certain policy forms

12 March 2022

Yesterday, the Federal Court agreed with Insurers that a policy term providing: “References to a statute law also includes all its amendments or replacements” worked to allow a Quarantine Act exclusion1 to be read as referring to “listed human diseases under the Biosecurity Act“.

Impact and relevance

This decision is important for:

  1. Current claims – on policy wordings which have the term which was considered in this case.
  2. Future drafting – insureds, (re)insurers, and brokers wishing to avoid ambiguity arising from policy references to specific laws, which may be changed or repealed in the future.

Exactly what was this case about?

A Sydney-based gym made a claim for business interruption losses due to COVID-19 and the resulting government actions. Insurers brought proceedings seeking a declaration on the Quarantine Act exclusion in the gym’s policy (set out in orange text below).

You can use this link to read the full decision.

The relevant non-damage BI extension2 in the Gym’s policy provided:

7. Murder, Suicide or Disease
The Occurrence of any of the circumstances set out in this extension of cover shall be deemed to be Damage to Property used by You at the Situation.
a. …
b. the outbreak of human infectious or contagious disease occurring within a 20 kilometre radius of Your Situation; or
c. closure or evacuation of Your Business by order of a government, public or Statutory Authority consequent upon:
d. the discovery of an organism likely to result in a human infectious or contagious disease at the Situation…
Cover under b. and c. under this extension of cover does not apply in respect of … diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908. (Highlighting by us).

The policy gave cover for business interruption caused by Damage to Property – which explains the reference to that term in the opening sentences of the clause.

Importantly, the policy also contained the following term, which the parties in the case called the ‘conformity clause’ because of its heading:

In this policy… References to a statute law also includes all its amendments or replacements.

As we touched on in our earlier note on COVID19 BI claims, the Quarantine Act was repealed in 2016, several years before COVID-19 came along. Other recent Australian cases have made it clear that an exclusion referencing the Quarantine Act cannot be read as referencing the current Biosecurity Act. Those decisions render the common form of Quarantine Act exclusion inapplicable – because COVID-19 is not a quarantinable disease under the Quarantine Act. Rather, it is a listed human disease under the Biosecurity Act.

In the current case, Jagot J held that due to the conformity clause, the reference to “quarantinable diseases under the Australian Quarantine Act 1908could be read as referring to “listed human diseases under the Biosecurity Act“.

There was legal argument around whether the Biosecurity Act really did “replace” the Quarantine Act; whether the conformity clause could operate on Acts which had been repealed prior to the policy incepting and whether the fact that the Biosecurity Act uses a different term: “listed human disease rather than quarantinable disease”, affects the outcome.

In a typically well-reasoned, practical judgment, Jagot J resolved these issues in favour of Insurers, holding that a reasonable business person reading the policy would read the words in the conformity clause as being descriptive of the process by which the Quarantine Act was repealed and the Biosecurity Act was enacted. Her Honour commented that “the kind of technical, legal distinctions which exercise the minds of lawyers” around the processes and words used in the legislative process cannot drive the Court’s approach to policy construction. Her Honour held that Courts should apply the legally recognised test of how a “reasonable business person” looking to give commercial effect to the conformity clause in the context of the whole policy would understand it.

What about Test Case 1 and Test Case 2?

The short point is that the decisions in Test Cases 1 and 2 are not impacted by this current judgment. Jagot J put it well when she said: “it is necessary to recognise immediately that the issue of construction in this case was not considered in [Test Cases 1 and 2, which] considered the relationship between the Quarantine Act and the Biosecurity Act in contexts [of policy wordings] different from the policy in this case”.

Test Case 1 focussed solely on the Quarantine Act/Biosecurity Act issue and concerned a policy wording which included a Quarantine Act exclusion but not a separate term like the conformity clause. The same is true of the similar considerations in Test Case 2 (being the decision on 10 business interruption claims recently litigated in the Federal Court which included consideration of whether a specific Victorian law could effectively cause a Quarantine Act exclusion to be read as referring to “listed human diseases under the Biosecurity Act” – the Federal Court held it could not).

What this decision means for you

This decision reinforces that the first step in every insurance claim is to read and consider the specific policy wording.

For insureds, brokers and (re)insurers, the decision highlights the way in which clauses such as the conformity clause can be used to avoid ambiguity arising from references in a policy to specific laws. Jagot J gave some useful drafting tips here: holding that the conformity clause reference to “a statute law” was a broad, non-technical term sufficient to encompass “laws the source of which…is statute” – which would cover regulations. This is important as many sources of statute law (as opposed to common or Judge-made law) are in instruments which are not themselves, “statutes”. This is common in D&O policies (and others).

If you would like assistance to understand how these decisions relate to your insurance or your circumstances, please contact us. We are here to help.

This article was written by Andrew Gray, Partner and Michael Milton, Partner.

1 A Quarantine Act exclusion is an exclusion in a business interruption policy which purports to exclude liability by reference to the Quarantine Act 1908, which was repealed in 2016.

2 Non-damage BI extension is an insurance industry phrase which is used to describe a policy term in a business interruption policy by which Insurers agree to provide cover for business interruption caused by a peril which does not involve physical damage to property.

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