Insurers face AFCA legal test over tough line on pandemic payouts

Regulators are scrambling for a court ruling to clarify if businesses are covered by insurance if they’re forced to close during lockdown.

A closed sign is displayed outside the ClimbFit gym in Sydney in March. Picture: Getty Images

The Australian Financial Complaints Authority will seek an ­urgent Federal Court ruling on the insurance industry’s ability to ­exclude pandemics such as COVID-19 from their business ­interruption policies.

AFCA, the nation’s one-stop shop for financial complaints, is in discussions with the industry to identify at least one test case, which it would be able to invoke in future determinations.

Lead AFCA insurance ombudsman John Price said a superior court ruling was needed to clarify if businesses were covered by their insurance if they were forced to close during the pandemic lockdown. “The confusion arises from policy wording related to federal legislation covering pandemics,” Mr Price said.

“The government invoked the Biosecurity Act 2015 to enforce the national lockdown, but many businesses have insurance policies that exclude ‘quarantinable diseases’ under the old Quarantine Act 1908.

“AFCA is consulting industry and consumers to consider what a test case might cover, and to ­ensure it achieves the required clarity for consideration of this significant matter.”

While AFCA has only received a small number of complaints in relation to rejected claims, Mr Price said the insurance industry had indicated there were a lot of matters on hold because of the likelihood of a test case.

A number of complaints, he said, had been identified as worthy test cases, and a decision was likely in the next week or so.

‘The government invoked the Biosecurity Act 2015 to enforce the lockdown, but many businesses have insurance policies that exclude diseases under the Quarantine Act 1908.’

The Australian reported in April that casino group Star Entertainment was the first listed company to lodge a business interruption insurance claim as a result of the government-enforced shutdowns of non-essential businesses such as gaming venues, theatres and clubs in an effort to halt the pandemic.

Star’s claim emerged as it stood down 8500 workers, or 95 per cent of its workforce. Like smaller businesses, the casino giant must find a way through policy exclusions for pandemics.

The issue of business interruption arose on Wednesday as ­bancassurer Suncorp unveiled a business and management restructure. Chief financial officer Jeremy Robson said there had been a significant focus on policy wordings related to the now-­repealed Quarantine Act, but Suncorp believed the intention of its policies was clear.

“Prior to COVID-19 we had updated the majority of our policy wordings to reflect the current legislation,” Mr Robson said.

“While we still do have policies which refer to the Quarantine Act, we remain confident in the underwriting intention,” Mr Robson added. “We note that there is an industry test case which is expected to be presented to the courts in August to consider the matter further.”

QBE has also landed in a legal quagmire over pandemic exclusions from its business interruption policies, albeit in the UK.

In a test case brought by UK financial regulator the Financial Conduct Authority, the insurance giant has been named as one of 16 providers. QBE announced in May it had set aside $115m for potential losses.

JPMorgan analyst Siddarth Parameswaran said at the time that, despite insurers intending not to cover claims related to pandemics, loose wording could leave them liable in some cases.

“The thing about these circumstances is that you try to make it very clear what you’re going to cover and what you’re not going to cover, but what can happen is there could be some things you unknowingly end up covering,” he said. “At the end of the day, no one knows what these claims will cost.”