Conformity clauses do the heavy lifting for insurers: When can Business Interruption policies referring to the Quarantine Act exclude claims arising from COVID-19?

28 March 2022

The Federal Court found that a conformity clause in a business interruption policy operated so that exclusions referring to quarantinable diseases under the Quarantine Act could be interpreted as referring to listed diseases under the Biosecurity Act (and so could be relied on by Insurers to exclude claims arising from COVID-19).

In Issue

  • The Federal Court of Australia was asked to consider whether an insurance policy that excluded claims for quarantinable diseases under the Australian Quarantine Act could be interpreted so as to exclude listed human diseases under the Biosecurity Act by virtue of a conformity clause.

The background

The respondent in these proceedings operated a Snap Fitness gym franchise in Dural, NSW. The gym held a policy of insurance with the applicant Insurers.

That policy relevantly provided cover for business interruption arising from:

…the outbreak of human infectious or contagious disease occurring within a 20 kilometre radius of Your Situation; or

Closure or evacuation of Your Business by order of a government, public or Statutory Authority consequent upon:
… the discovery of an organism likely to result in a human infectious or contagious disease…

The Policy however included an exclusion which relevantly stated that “…Cover under… this extension of cover does not apply in respect of Highly Pathogenic Avian Influenza in Humans or other disease declared to be quarantinable diseases under the Australian Quarantine Act’.

The Policy also contained a ‘Conformity Clause’ that relevantly provided that “…references to a statute law also includes all its amendments or replacements”.

The gym made a claim for business interruption losses due to COVID-19 under the Policy.

There have been a number of recent high-profile cases touching on the legislative history and interaction of the Quarantine Act and the Biosecurity Act in the context of COVID-19.

Those cases made it clear that an exclusion clause that excluded liability by reference to the Quarantine Act could not be interpreted as applying to COVID-19 because it is not a quarantinable disease under that Act – it is a listed human disease under the Biosecurity Act. However, the policies dealt with in those cases did not contain a Conformity Clause such as the one described above.

The Insurers in this case applied to the Federal Court for a declaration that the Conformity Clause would apply so that the words “any other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908” ought to be interpreted as “or other listed human diseases under the Biosecurity Act”.

Justice Jagot of the Federal Court agreed with Insurers and made that declaration noting that the construction of the policy would need to be interpreted in line with the fundamental principle that the issue is “not what each of the parties meant to say, but rather what is the objective meaning to be attributed to the words they have used to express what they have agreed”.

Her Honour rejected any interpretation of the term “statute law” used in the Conformity Clause that tried to distinguish between primary legislation (ie. laws made by a Parliament) and subordinate legislation (made by a person or body authorised by primary legislation) or legislative and non-legislative instruments. Such technical and legal distinctions should not be applied.

Justice Jagot found that while they dealt with it in very different ways, the Quarantine and Biosecurity Acts addressed substantially the same subject-matter (being the identification of human diseases so as to enable the taking of steps by public officials to control and eradicate the identified disease).

Her Honour considered that a reasonable reader giving business efficacy to the Conformity Clause would understand it as operating to ensure the parties did not have to scrutinise all amendments and replacements to statute law to ensure that all such references were up to date as at inception of the policy. Another purpose would be to ensure the references remain current throughout the life of the policy.

On that basis her Honour found that the words used in the exclusion (“other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908”) ought to be read as referring to the statute law which replaces the Quarantine Act, being “other listed human diseases under the Biosecurity Act”.

Implications for you

Her Honour’s decision is a timely reminder that a well-drafted and sufficiently broad Conformity Clause can be used in a policy to avoid ambiguity that might arise from laws and legislation being superseded.

The decision also reinforces the importance of reading the whole of the policy and giving objective meaning to the words used.

Updated 9 September 2022: An appeal by the insured was dismissed in August 2022.

Certain Underwriters at Lloyd’s of London v Dural 24/7 Pty Ltd [2022] FCA 206

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