Market slams insurers after shock test case ruling

Shares in listed insurers have been hit as the sector reels after a judgment could pave the way for hundreds of millions of dollars in Covid payouts to business.

Insurers could now be on the hook for business interruption claims. Picture: NCA NewsWire / David Crosling

Shares in listed insurers have been sold off as the sector reels after the shock judgment which could pave the way for hundreds of millions of dollars in Covid payouts to business.

The NSW Court of Appeals on Wednesday found in favour of two insured businesses in a test case brought forward by the Insurance Council of Australia that could see the industry on the hook for business interruption payouts.

The case centred over policies which referred to the Quarantine Act (1908) which was abolished several years ago.

In its judgment released this week the court found COVID-19 was not to be considered a disease declared to be quarantinable under the quarantine act and exclusions under the respective insurance policies were “not delivered”.

If the judgment stands, the outcome of the case could see insurers forced to pay significant sums to thousands of businesses that have had their operations interrupted by the pandemic.

Insurance Australia Group placed its shares in a trading halt as it mulls a capital raising of up to $500m, to cover potential payouts. Suncorp shares fell 3 per cent and QBE Insurance was off 4 per cent.

In a market announcement IAG requested the halt remain in place until Monday unless a further announcement is made “regarding the financial impact of the judgement and (IAG’s) capital position” or a further statement is made “regarding the completion of the capital raising”.

The Australian’s Dataroom column noted on Thursday IAG is preparing to raise $400-500m through Goldman Sachs to fund costs.

IAG has been tight lipped about the potential cost of any judgment, but chairman Elizabeth Bryan in October said the insurance industry was never “designed, structured, or capitalised” to cover losses arising from pandemics.

“We have provided support to businesses, but we are not able to step in and respond to all the issues they face as a result of the impact of COVID-19,” she said.

But investors in the business have been pushing for months for the business to come clean about any potential exposure.

Macquarie analysts estimate IAG may be on the hook for almost $225m in relation to losses from business interruption.

“We believe neither IAG nor Suncorp would need to raise capital and, given further certainty, we believe both stocks would re-rate higher,” analysts said.

“We believe losses are manageable (within current excess capital levels) and even on our

conservative estimates (noted above) would not require capital raises,” they said.

Suncorp has previously announced provisions of $195m to cover potential claims arising from the judgement.

“The decision does not mean that business interruption policies referencing the Quarantine Act will automatically respond to COVID-19 claims,” Suncorp said, warning that there were further legal tests needed.

“When assessing whether a business interruption claim may be triggered, each policyholder’s individual circumstances will need to be considered against the various other clauses relevant to their policy.”

However, Suncorp’s provision, announced on Monday, “does not allow for further material COVID-19 outbreaks or shutdowns”.

On Thursday South Australia entered the first of a six-day lockdown that has shut many businesses across the state.

However, due to the size of the South Australian market it is believed that any further impact of business interruption claims arising from the shutdown would be minor.

But the insurer said the net cost of its claims in Australia would likely be limited to $5m.

“This is subject to contributing losses (after recoveries under the groups main catastrophe and quota share price reinsurance treaties) not exceeding the Group’s catastrophe aggregate reinsurance treaty limit of $500m,” QBE said.

QBE also pointed to further steps from the Insurance Council of Australia to “fund and progress a further test case through AFCA to provide clarity on whether policy coverage triggers in certain business interruption policies”.

The ICA said it was in discussions with insurers, the Australian Financial Complaints Authority and other stakeholders to consider a new test case that explores questions around proximity and prevention of access, related to business interruption insurance.

Funding for both sides in the new case would also come from the industry.

“The industry seeks to progress a court resolution of these matters quickly, and regardless of any decision around an appeal on the first test case,” an ICA spokesman said.

“The Insurance Council will continue to work with all stakeholders and government to provide clarity for all parties and the industry.”

“It will provide an update on these matters as soon as they are settled in coming weeks.”