Local holders of business interruption insurance look to UK insurance case

A big win by policyholders in a UK test case earlier this week could be key.

Analysts have said exposure to BI claims by local insurers are difficult to quantify. Picture: NCA NewsWire / David Crosling

Local holders of business interruption insurance could benefit from a big win by policyholders in a UK test case earlier this week on the impact of COVID-19, according to the law firm acting for the regulator which brought the case, the Financial Conduct Authority.

Herbert Smith Freehills said the High Court ruling was important for Australian policyholders, particularly those facing blanket rejection for their BI claims.

“Although not binding in Australia, and subject to a potential appeal by insurers, the decision is highly persuasive and effectively erodes a number of the more significant arguments insurers have for resisting or adjusting claims,” the law firm said.

Analysts have said exposure to BI claims by local insurers are difficult to quantify.

Consistent with previous estimates, QBE said in a statement after the High Court judgment that catastrophe reinsurance would limit the net cost of BI claims in its UK operation to $70m.

Goldman Sachs said IAG and Suncorp had been reticent to detail their exposures.

Suncorp, though, appeared to be confident that it had a much lower proportion of problematic policies.

There are currently two cases in the court system related to COVID-19 BI claims, including a NSW Court of Appeal test case brought by the Insurance Council of Australia and the Australian Financial Complaints Authority.

The other is a case brought by casino group Star Entertainment.

One of the key issues in the ICA/AFCA case, which starts next month, is whether policies which still reference the repealed Quarantine Act validly exclude human diseases listed under the Biosecurity Act.

COVID-19 became a listed disease earlier this year.

The insurance industry has argued that despite referencing the outdated legislation, the intent of the policy is still clear.

Herbert Smith Freehills special counsel Guy Narburgh said the outcome of the ICA/AFCA case would turn on the intent argument, which was not considered by the UK court.

However, there would be some overlap with the Star case.

“That’s why it’s a good time for a number of businesses, which might have been actively considering a business interruption case but thought it would be too tricky, should reconsider their positions,” Mr Narburgh said.

“It could be that the UK decision brings clarity to certain clauses and opens up the potential for claims.”

A key victories for UK policyholders related to the operation of so-called “trends” clauses.

The industry argued that the policies covered only the local occurrence of the disease, and that other effects of the pandemic including government measures could only be used as a business trend to reduce the size of the claim.

If the argument had been accepted, the result in practice would have been negligible insurance payouts. However, the court rejected it, adopting instead a broad view of what constituted the insurance peril.

ICA chief executive Andrew Hall has welcomed the fast-tracking of the Australian test case.

“In most cases, pandemic exclusions are a threshold issue in Australia given that most insurers have never contemplated coverage for pandemics, have not priced the risk or collected premiums for this risk,” Mr Hall said.

“Globally, insurers generally regard pandemics as uninsurable risks.”

The local test case consists of two separate small business claims lodged with AFCA as part of its dispute resolution process. AFCA will use the outcome to determine complaints in relation to BI claims with the infectious disease exclusion.

JPMorgan said individual policy wordings would be critical to the outcome of Australian cases. It nominated access to property as another issue in the UK which would also arise in Australia.