Business interruption insurance test case confirmed by regulator

The case will be closely watched as a finding against the industry could trigger hundreds of millions of dollars in pandemic-linked payouts.

The AFCA test case will follow the end of arguments of a separate test case in the UK by Britain’s insurance regulator on Thursday. Picture: AFP

Insurers and industry ombudsman the Australian Financial Complaints Authority have pulled the trigger to launch a test case around business interruption insurance after weeks of speculation.

Late on Thursday, the ICA said the case would seek a decision from a court on whether references to a quarantinable disease under the Quarantine Act 1908 should be considered as the equivalent of a listed disease under the Biosecurity Act 2015.

Many business interruption insurance policies reference the 1908 act, which was abolished in 2016, while others reference “the act as amended” and it is likely the case will feature this as a point of contention.

The likelihood of a test case has been looming for several weeks as issues emerged surrounding wording of insurance policies, but Thursday’s announcement is a signal that the case will go ahead.

The case will be closely watched as a finding against the industry could trigger hundreds of millions of dollars in pandemic-linked payouts. Until now the industry has maintained it is not liable for pandemic-linked claims.

Details of which insurers or policies will feature in the test case are yet to be revealed.

The ICA will seek to have the matter heard as an expedited matter on behalf of all insurers and will fund costs.

ICA chief executive Rob Whelan said a decision from a superior court would assist insurers.

“Insurers believe the intention of pandemic and communicable human disease exclusions are clear. However, a judicial determination will provide insurers and AFCA with greater legal ­certainty on this issue,” Mr ­Whelan said.

It is likely that the case will ­either appear in the Federal Court or NSW Supreme Court. However, some legal analysts suggest the Federal Court may knock it back given the challenge relates to contractual wording and interpretation as opposed to a law itself.

AFCA lead ombudsman John Price said the regulator would proceed with the case following discussions with the insurance industry, the corporate regulator and Treasury.

“Resolution of this threshold issue is important to assist AFCA in its dispute resolution role,” Mr Price said.

AFCA has so far received 30 complaints regarding business interruption insurance in recent weeks, with indications pointing to the regulator proceeding with two cases for this test case.

“The outcome of the case will provide some clarity for all stakeholders, in particular small business and insurers,” Mr Price said.

The AFCA test case will follow the end of arguments of a separate test case in the UK by Britain’s insurance regulator on Thursday.

The Financial Conduct Authority’s case does not relate to a similar legal issue as the Australian case, but is likely to inform the second component of an Australian test case relating to what extent businesses have been affected.