British Covid business interruption ruling a blow for QBE and local insurers

QBE has been dealt a fresh blow in its fight against business interruption claims stemming from the coronavirus pandemic.

QBE is among the insurers that lost an appeal on business interruption insurance cover in the UK Supreme Court.

QBE has been dealt a fresh blow in its fight against business interruption claims stemming from the coronavirus pandemic, with the British Supreme Court ruling in favour of policyholders in a crucial test case that could prove influential in the local market.

The Supreme Court, Britain’s highest court, on Friday dismissed appeals by six insurers, including QBE, following the High Court’s ruling in September which found the majority of the disease clauses in the relevant policies covered losses connected to the pandemic.

“This is a very positive result for policyholders. It improves their position significantly beyond that which was already established by the UK High Court judgment,” Herbert Smith Freehills partner Paul Lewis said.

“Importantly also for the insurance industry, the judgment brings definitive guidance to how business interruption insurance wordings should operate in the context of the COVID-19 pandemic.”

Business interruption insurance covers the loss of income a business suffers if it is forced to close due to an event beyond its control such as a natural disaster. Insurers have vehemently argued that it should not cover business closures due to a pandemic.

Britain’s Financial Complaints Authority, which brought the test case, said 370,000 policyholders and 60 insurers could be affected by its outcome, with the value of claims estimated at over £1bn ($1.8bn). In the initial judgment Britain’s High Court ruled against six insurers, including QBE, finding that most of the disease clauses and certain prevention-of-access clauses in the sample policies provided cover and that the pandemic and the government and public response caused the business interruption losses.

QBE has previously estimated the ruling could cost it $US170m in claim payouts before allowing for recoveries under its reinsurance program.

The net cost of business interruption claims in the British insurance business would sit at $US70m, QBE said last year.

The final ruling from the British court on Friday came as Australian insurers awaited a decision on their leave to appeal a separate business interruption case taken last year by the Australian Financial Conduct Authority.

The local insurance industry in November suffered a stunning loss of the test case when the NSW Court of Appeal found in favour of two insured businesses which had seen their income crunched as a result of the lockdowns.

While the British judgment is separate to the Australian case and examined different issues related to business interruption cover, it is nonetheless a blow for local insurers and the Insurance Council of Australia, which has been mulling a second test case following the loss of the first.

The prospect of that second test case is now in doubt, Herbert Smith Freehills partner Mark Darwin told The Australian.

“The UK ruling won’t affect the issue that’s in the Australian test case, which is about whether an exclusion in the disease extension applies, notwithstanding the failure to update the reference to the current legislation.

“But the judgment rules against insurers on the causation issues, which the Insurance Council of Australia has been reported to be considering as a second test case. You would have to query whether that is really needed now,” he said.

“This judgment clearly reasons why the wider impacts of the pandemic which might have affected a business anyway cannot be used to reduce the coverage otherwise available under the policy.”

Mr Darwin said it was likely the High Court would grant the ICA leave to appeal, given the implications of the judgment. A decision is expected in the coming weeks.