WHEN IT COMES TO CONTRACTS, THERE’S NO SUCH THING AS JUST ‘FINE PRINT’

Christian Chenu

On Friday, the High Court of Australia set the cat among the pigeons for the insurance industry in a decision that the rest of the business community should be closely watching.

In a matter concerning the application to Covid-19 of exclusion clauses in insurance contracts, the High Court has declined to grant special leave to appeal an earlier decision of the New South Wales Court of Appeal that held these exclusion clauses to be ineffective.

What’s the issue?

The proceedings in question relate to Business Interruption coverage, and specifically recent policies that sought to exclude pandemics as insurable events. In Australia, until 2016 insurance policies were drafted to exclude liability for declared pandemics under the Quarantine Act 1908. In 2016, the Quarantine Act was repealed and replaced with the Biosecurity Act 2015. Significantly, not all insurers updated the wording in their policies to reflect the change.

As a consequence of these legislative changes, Covid-19 was never declared a pandemic under the now-repealed Quarantine Act (it is instead a ‘listed human disease’ under the Biosecurity Act). A question therefore arose as to whether exclusion clauses that relied on declared pandemics under the old Act were consequently ineffective.

In a test case, insurers had argued that the wording in their policies, which contained references to ‘subsequent amendments’, should be deemed to include any repeal of the Quarantine Act and replacement with equivalent legislation. The New South Wales Court of Appeal (HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA) held that the exclusion clauses, including the words ‘subsequent amendments’, were to be given their ordinary meaning. That is to say: no declared pandemic, no exclusion.

The Insurance Council of Australia sought leave from the High Court to appeal this decision. On Friday, leave was denied.

This means that insurers will no longer be able to rely on exclusion clauses in recent policies that refer to the Quarantine Act. Many insurers have historically not priced pandemics into their premiums, operating in the belief that their exclusion clauses were effective and that the risks of pandemics were remote. The financial consequences of how their policies are drafted may now be severe.

It should be noted that a separate Business Interruption test case, which relates to businesses’ proximity to outbreaks, is currently running in the Federal Court.

What does this mean?

The first and most obvious lesson is that Covid-affected businesses should review their Business Interruption coverage to see if they can make a claim. Insurers are generally holding off on processing claims pending the outcome of the second test case, but it doesn’t hurt to dig up your policy and have a read.

The second lesson is a little more abstract. Some media coverage has characterised this dispute as being about contractual “fine print”, as if that label suggests that these types of clauses are separate to the commercial bargain that is struck in a contract.

In reality, all parts of a contract have a role to play in allocating risk and benefits. Every clause in a contract has a job to do. Although the temptation may be to dismiss large parts of an agreement or other document as legal jargon, it is important to recognise that those clauses have been drafted to address specific issues, and have generally been crafted in response to actual disputes that have made their way through the courts. Those provisions towards the end of your document have a purpose, and ignoring or removing those clauses may have consequences.

Loch Legal is able to help you with all of your commercial legal needs. Please call Sophie Cohen (sophie@lochlegal.com.au) on 0411 866 505 or Christian Chenu (christian@lochlegal.com.au) on 0417 015 997 to arrange a meeting to discuss your matter.

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