Business Interruption Policies – What is it all about?

December 15, 2020

You may have seen in the press recently the decision handed down in the NSW Court of Appeal in a test case run by the Insurance Council of Australia (ICA) and Australian Financial Complaints Authority (AFCA), with the court ruling in favour of the policyholders.

It found that the quarantine disease cover restriction in business interruption policies that referred to the now repealed Quarantine Act, does not exclude cover for listed human diseases under the Biosecurity Act 2015.

Will there be an appeal?

“The Insurance Council of Australia (ICA) will seek leave from the High Court to appeal a decision that found business interruption exclusions citing the Quarantine Act are not valid in rejecting COVID-19 related claims.” (ICA pursues High Court appeal on BI exclusion)

Determinations on claims will only be made once the legal process is finalised.

What is Business Interruption Insurance?

As the name suggests, Business Interruption Insurance provides cover for the loss of income caused by the interruption of your business from an insured event. It can help you pay ongoing costs of the business and protects profit margins until the business is back on its feet trading again at the same profit level as before the interruption.

The Business Interruption section relates to loss of income as a result of physical damage to the premises that would prevent a business from trading eg. fire or storm destroying the shop or office so the business cannot operate.

So, if it relates to property damage, why was there a test case for a disease?

Where a Business Interruption insurance provides cover for loss of access to premises, the application of the exclusion for quarantinable disease could be highly relevant to many policyholders.

Many business policies in Australia have an “additional benefits” section that relates to Murder, Suicide and Disease at the premises. Whilst pricing for a pandemic clearly was not included by Insurers, the drafting of the exclusion is being tested.

As an example, one commonly used Policy Wording has an additional benefit that reads:

Murder, Suicide or Disease

The occurrence of any of the circumstances set out in this additional benefit which shall be deemed to be Damage to Property used by You at the situation.

a) Murder or suicide occurring at the situation.

b) Injury, illness or disease caused by the consumption of food or drink provided and consumed at the Situation

c) The outbreak of a human infectious or contagious disease occurring within a 20 kilometre radius of the Situation

d) Closure or evacuation of Your Business by order of a government, public or statutory authority consequent upon:

           i) the discovery of an organism likely to result in a human infectious disease at the

              situation ; or

          ii) bomb threat; or

          iii) vermin or pests at the Situation; or

          iv) defects in the drains or other sanitary arrangements at the situation.

          e) Shark or crocodile attack occurring in a 20 kilometre radius of the Business Premises during the period of insurance

Cover under additional benefits c and d (i) does not apply in respect of highly pathogenic avian influenza in humans or any other diseases declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments.

Whilst this “additional benefit” for Infectious diseases was intended to exclude quarantinable diseases, there is a dispute over whether declarations of quarantinable disease under the new legislation enlivened the exclusion when the exclusion referred expressly to the old legislation. The Quarantine Act 1908 (Cth) was replaced in 2016 by the Biosecurity Act 2015 (Cth) and, as previously mentioned, the NSW Court of Appeal ruled that the exclusion was not enlivened to exclude cover for listed human diseases (including COVID 19) declared under the new act.

However, there is also the issue of was the loss of income caused by the outbreak occurring within a 20 kilometre radius of the business? These are just some of the areas that need to be worked through.

What do you need to do?

Whilst it is very early days and these things take time, brokers are continuing to monitor developments. If you wish to discuss your individual circumstances please contact your account manager or Gow-Gates on 1300 469 428, as every individual case will be different.

Please remember, the decision only dealt with whether the insurer could rely on an exclusion which referred to the Quarantine Act. The court did not deal with whether any claim falls within the insuring clause.

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