Key Takeaways

Life insurers must take extreme caution when drafting policies. This NSWCA decision shows that courts will not depart from the clear wording of a policy despite an apparent oversight or error by the insurer in its choice of policy terms. In this case, the Court held the insurer's references in their policies to defunct legislation (which had been repealed and replaced with essentially identical legislation) meant that the exclusion clauses, which should have referred to the new legislation, were ineffective.

In particular, when so much contractual significance turns on a finding or outcome under a specific piece of legislation, policy wording must anticipate and deal with the possibility that such legislation could be repealed and replaced over time and a more generalised wording is probably appropriate here.

Brief Facts

In this general insurance case, the multiple insureds were tourism and hospitality businesses, who held policies of business interruption with two insurers. The two policies issued to the insureds contained cover for disease outbreaks but also contained an exclusion in the following (effectively identical) terms:

The cover … does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.

The insureds made COVID-19-related business interruption claims under their policies of insurance, but the claims were declined by both insurers.

The disputed claims were initially lodged at AFCA however, given that the subject controversy affected many other insurers and insureds, it was agreed between the parties (and AFCA) that the controversy should be determined by a superior court.

In this regard, the two insurers commenced proceedings against the insureds, seeking declaratory relief that COVID-19 fell within the above exclusion clause despite the Quarantine Act 1908 (Cth) (the Quarantine Act) having been repealed on 16 June 2016 – well before cover commenced, and well before the existence of COVID-19. Again, given the significance of the matter, the proceedings were subsequently removed into the NSWCA without having been determined by a lower court, pursuant to r 1.21(1)(b) of the NSW UCPR 2005.

The Biosecurity Act 2015 (Cth) (the Biosecurity Act) replaced the Quarantine Act on 16 June 2016, and whilst the Quarantine Act provided for ‘declarations of quarantinable diseases’, the Biosecurity Act also allowed for the Director of Human Biosecurity to determine a disease to be a ‘listed human disease’.

On 21 January 2020, COVID-19 was in fact determined to be a listed human disease under the Biosecurity Act. It was not declared to be a ‘quarantinable disease’ under the Quarantine Act.

The insurers argued that the Biosecurity Act amounted to a ‘subsequent amendment’ of the Quarantine Act, as contemplated by the exclusion clause (the First Argument). They argued in the alternative that the references to the Quarantine Act in the exclusion clauses were obvious mistakes, and such references should be interpreted to include the Biosecurity Act, as well as any ‘listed human diseases’ under that act (the Second Argument).

Judgment

The NSWCA held unanimously that the words of the exclusion clause should not be read to include ‘listed human diseases under the Biosecurity Act’, and therefore COVID-19.

After a helpful discussion of the principles of construction that apply to contracts of insurance, the NSWCA held in relation to the First Argument, that:

• the phrase ‘and subsequent amendments’ is not ambiguous and only describes amendments to the Quarantine Act – ‘the repeal and replacements of that legislation with other legislation is not within the ordinary meaning of those words’;
• the word ‘subsequent’ in the phrase ‘subsequent amendments’ is not redundant (as contested by the insurers, in arguing that the phrase means something more than, for example, ‘as amended’, and specifically is intended to capture a ‘repeal and replacement’). Rather, the word ‘makes clear that there may be amendments to the Quarantine Act within the policy period.’ In other words, the Court held that ‘and subsequent amendments’ has the same meaning as ‘as amended’;
• even if the word ‘subsequent’ in the phrase ‘subsequent amendments’ is redundant, that is not sufficient to give it the expansive meaning of ‘encompassing changes that amount to a repeal and replacement of the Quarantine Act with legislation that has the same substantive purpose and function’; and
• the insurers did not choose to use language which reflected that ‘the purpose of the provision in question may be to exclude diseases which are sufficiently serious to attract a public health response’. Rather, the insurers chose a ‘specific mechanism’ under the Quarantine Act and ‘to suggest that the words ‘and subsequent amendments' include the enactment of the Biosecurity Act is many steps too far’.

In respect of the Second Argument, the Court reiterated that in cases of contractual ‘mistake’, the ‘intention against which the literal meaning of contractual language is to be measured must be capable of being discerned objectively from the language itself’. In other words, it is only ‘errors of expression’ that can be corrected by construction. Additionally, whereas for cases of contractual mistake there must be absurdity, there was no absurdity in the literal meaning of the exclusion clauses in this case.

The Court held:

The difficulty in this case is that nothing has gone wrong in the relevant sense with the provisions of the policies in question: they correctly express the intention they objectively disclose. The mistake was at an anterior stage. It would have been logical, had the insurers realised that the Quarantine Act had been repealed, for the policy wording to have referred instead to 'diseases determined to be listed human diseases under the Biosecurity Act 2015'. But to conclude as much is not to hold that by their language they are to be taken to have conveyed an intention to refer to listed human diseases under the Biosecurity Act. That they did not was not a problem with the language they chose, or a misdescription of the legislation to which they objectively intended to refer, any more than it would have been had the Quarantine Act been repealed and replaced early in the policy period rather than in 2016. The Court has no power to correct an agreement to reflect what might have been agreed, or even what would have been agreed, had the parties, or the relevant party not assumed the Quarantine Act remained in force. (Our emphasis added).

Implications

While this is a general insurance case, it clearly has ramifications for life contracts in that it confirms that words will be given their ordinary meaning and effect and when such meaning is clear, there is no need to move to the more nuanced remedial principles of contractual construction.

In other words, courts will not rewrite the clear words of a contract to retrofit it to what one party says was the clear contractual intention of the words in question. If an insurer intends a certain thing to happen in certain circumstances, it needs to say it clearly and unambiguously.

This decision serves as a reminder to life insurers to ensure that critical policy wording is:

• robust enough to achieve its desired purpose regardless of change to legislation and other linked external circumstances; and
• frequently reviewed to ensure it remains fit for its purpose.