Insurance industry dealt High Court blow over pandemic payouts

Insurers may now face billions in claims from pandemic-hit businesses after the High Court refused leave to appeal a key ruling.

Insurers are bracing for potentially billions of dollars in claims from businesses hurt by Covid-19 shutdowns, after the High Court knocked back an appeal from the industry attempting to close the door on pandemic-linked payouts.

The High Court on Friday rejected arguments put forward by the insurance industry looking to overturn a decision in the NSW Court of Appeal over claims for business interruption insurance arising from the pandemic lockdowns.

While payouts directly linked to this case are minor the decision could influence several larger and more complicated basket of legal tests currently before the courts.

The industry had taken its fight to the High Court after a 5-0 loss in the NSW Court of Appeal in November last year, which found that because of faulty wording, some businesses were not excluded from making claims.

Industry figures suggest as many as 60 per cent of business interruption policies sold prior to the Covid-19 pandemic referenced the defunct Quarantine Act which was abolished by parliament in 2015.

The insurance industry had long argued policies were never priced to cover pandemics, bringing forward the first test case to determine whether businesses could make claims for interruption to their operations arising from the pandemic.

Lawyers had argued exemptions in policies which referenced the quarantine act would exclude claims arising from Covid-19 in the same way as those that referenced the Biosecurity act.

Seeking leave to appeal to the High Court, lawyers acting for the Insurance Council of Australia argued in December that the appeal outcome left the industry open to $10bn in potential claims.

The industry had hoped to overturn the NSW Court of Appeal decision that the term “subsequent amendments” in many policies was broad enough to encompass a reference to the Biosecurity Act, the successor to the Quarantine Act.

“Contrary to the view of the Court of Appeal, the words ‘subsequent amendments’ are broad enough to encompass not merely alterations to the text of the Quarantine Act but its repeal and replacement by a different Act,” the appeal from the ICA said,

“If the Quarantine Act were amended to insert into its provisions from a second Act, and that second Act repealed, this would plainly be an amendment to the Quarantine Act and, hence, could still engage the exclusion.”

The ICA said it accepted the decision of the High Court, noting insurers would now respond on a case-by-case basis to claims.

‘Certainty?’

ICA chief executive Andrew Hall said while he was disappointed with the outcome of the court’s decision it now provided certainty.

“Once finalised, insurers are committed to applying the courts’ decisions in both test cases in an efficient, transparent, and consistent way when assessing claims,” he said.

However, Gordon Legal have argued the outcome is only binding to insured businesses with policies sold by Hollard and HDI Global Specialty SE, and others would need to now fight their insurers to make claims, something industry figures reject.

Gordon Legal partner Andrew Grech said businesses should now seek to make a claim to their insurers without delay.

“After months of preparation we will commence a class action against two major insurers imminently,” he said.

“Regrettably it is now clear that the only way to force insurers to do the right thing by their customers in the shortest time possible is through the strength in numbers and collective power of a class action.”

Suncorp, which had provisioned $214m to cover potential business interruption claims arising from Covid-19, said it didn’t expect to be further impacted as a result of the High Court decision.

“Suncorp continues to monitor legal developments in relation to business interruption, including the second ICA BI industry test case which is due to be heard later in the 2021 calendar year,” the insurer said in a market update.

Speaking on Friday at the House of Representatives Standing Committee on Economics Insurance Australia Group chief executive Nick Hawkins said the insurer would pay claims as quickly as possible.

The loss in the first test of insurance policy wording comes as the hearing date draws nearer for the second round of test cases brought forward by insurers in the wake of the November loss.

The insurers brought forward the nine claims, covering policies from five insurers, in February, seeking to clarify conditions that may expose them to further claims.

QBE has also thrown its hat into the ring, bringing forward its own challenge in the federal court after missing out in the test cases brought forward by the ICA.

The listed insurer is seeking to clarify whether a statutory provision in Victorian property law engages an exemption via the Biosecurity Act.

The Australian Financial Complaints Authority welcomed the progress from the High Court decision, but noted another test case was in store.

Industry sources note senior AFCA figures wrote a testy letter to the ICA in December last year bemoaning the lack of progress in reaching an outcome in the business interruption insurance saga.

The long legal battles in Australia come at odds with the outcome in the United Kingdom, where the Financial Conduct Regulator launched an omnibus case in the early days of the Covid-19 outbreak testing multiple issues all at once.

UK insurers, including QBE’s British arm, have started paying policyholders, with more than £756m ($1.388bn) paid out.