Warren Buffett famously said that “only when the tide goes out, do you discover who has been swimming naked”, which neatly captures the idea that it is only when there is a contractual problem, do you discover whether your contractual drafting has given you the protection that you need. In a series of cases against insurers arising out of the COVID pandemic, it has appeared that the insurers had been swimming, if not naked, then at least wearing the wrong swimmers. Those cases (in parrticular, one delivered by the Full Federal Court on 31 August 2022) provide some important lessons about contractual drafting (and contractual updating) more broadly.
The “wrong swimmers” problem was that many insurance policies in operation at the commencement of the pandemic excluded losses arising from diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth). This Act was, however, repealed in 2016. As a result, when the pandemic struck, the declarations were made not under the repealed Act, but under the Biosecurity Act 2015 (Cth). The NSW Court of Appeal made (and the High Court declined to disturb) a finding that the declaration made by the Federal Government under the Biosecurity Act did not engage exclusion clauses which named the wrong Act.
Some of the insurance policies which wrongly referred to the Quarantine Act 1908 (Cth) did, however, contain a “life preserver”. In the policy considered in the Full Federal Court, a clause entitled, “Conformity” (and which consisted of what lawyers would usually describe as “boilerplate”, such as “the singular includes the plural and vice versa”) included the following words:
References to a statute law also includes all its amendments or replacements.
The Full Federal Court yesterday confirmed that because the purpose of the words quoted above was to maintain the currency of the policy wording, it was not necessary that the Quarantine Act and the Biosecurity Act be exactly the same in order to find that the latter was a “replacement” of the former. Rather, what was necessary was to look at the particular context of the statutes in relation to the insurance policy. In each case, the statute operated as the fact determining the exclusion of the operation of the policy by reference to particular diseases. As a result, because of the “life preserver” (or perhaps “currency preserver”) in the boilerplate, the insurers were able to rely on the exclusion even though the wrong Act was specified in the policy wording.
Two lessons arise from this – the first lesson is that if your organisation uses standard form contracts, you will need to review the policy wording regularly (not just for updates to legislative references, but also for other issues such as unfair contract terms (given the current attention being paid to that subject by the ACCC) and dispute resolution clauses). The second lesson is that this review should not exclude the “boilerplate” provisions because “that is the stuff no-one ever reads”. In particular, any party whose rights under a contract are delineated by the terms of a particular named statute should include the “life preserver” provision which was so important in the Full Federal Court.
This should help you avoid the expensive lesson learned by the insurance industry (the Insurance Council of Australia has estimated that its members face liability in the order of $10 billion in respect of policies which refer to the wrong Act without the “life preserver”). That is not quite as much money as Warren Buffett has, but more than enough money to buy you a pretty snazzy swimming costume, we would have thought.
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