New Business interruption legal challenge before the courts putting billions in balance

The insurance industry has filed the second test case on legal issues arising from pandemic related business interruption insurance claims.

'For Lease' signs on restaurant facades on Given Terrace in Paddington. Picture: AAP

Billions of dollars in Covid-linked insurance payouts hang in the balance after the insurance industry pulled the trigger late on Wednesday to launch a second test case on the wording of business interruption policies..

The outcome of the case could entitle tens of thousands of businesses – both big and small – to make claims against their insurers after being shutdown by government orders or outbreaks of COVID-19.

The proceedings, lodged in the Federal Court of Australia by lawyers acting for The Insurance Council of Australia will be carved up into tests on the wordings of nine separate policies of insured businesses.

The test case will seek to determine the meaning of policy wording, in particular the definition of a disease, proximity of an outbreak to a business, prevention of access to premises by government order, as well as policies with a hybrid of these types of wording.

Several of these issues were debated in a separate test case that took place in the United Kingdom which largely found in the favour of insured policy holders.

This second test case will be lodged with the Federal Court at the request of the Australian Financial Complaints Authority due to the range of jurisdictions represented by the nine claims. The industry is also seeking certainty over insurance policies after it has already set aside billions of dollars to cover potential payouts.

Policies from IAG subsidiary CGU, Swiss Re Corporate Solutions, Guild, Chubb, and Allianz will be tested by the courts.

But Berrill and Watson Principal John Berrill questioned why major insurers were lacking from the list for the second case. The nine claims have been whittled down from a review of 14 cases presented by insurers for consideration.

However, Mr Berrill said he was not sure the case captured all possible issues that may arise.

“One of the questions is does this case really cover all (insurers),” he said.

Mr Berrill said the launching of legal action by the ICA on Wednesday restarted the clock after the failed first test case, which is currently awaiting an appeal outcome.

“This is the start of a long process again,” he said.

The second test case comes as the insurance industry awaits the attempt by the Insurance Council of Australia to appeal the loss it was dealt in the NSW Court of Appeals.

The insurance industry lost in the first case after the NSW Court of Appeals found in a unanimous judgment references to the Quarantine Act, which featured in many policies but was abolished in 2015, entitled a business to make a claim under business interruption policies.

An attempt to be granted leave to appeal the defeat is currently before the High Court.

In a statement the ICA said the industry understood “the concerns of policy holders who may be waiting for a determination of their claim or resolution of a dispute”

“However these matters are not clear cut and there is a need to clarify the legal principles used to resolve disputes,” the ICA said.

The insurance industry will pay the legal costs of all policyholders before the courts.

ICA chief executive Andrew Hall said insurers were committed to “applying the relevant principles in an efficient, transparent, and consistent way” to claims by businesses once final rulings were made by the Federal Court in relation to the second test case.

“Insurers want this second test case brought to the court as quickly as possible so the process can be started to give certainty to policyholders and the insurance industry,” Mr Hall said.

AFCA chief ombudsman David Locke welcomed the new test case.

“We have been working with financial regulators and insurers to ensure these proceedings are brought to the court as soon as possible, recognising the importance of the case to small businesses and insurers themselves,” he said.

The latest test case comes after warnings were sounded by brokers to Australia’s largest businesses that potential big businesses were set to move on pandemic related insurance claims.

Marsh, an insurance broker to many of the top 200 companies said it was aware of at least six major business claims.

IAG, owner of CGU which will feature in the second test case, included a $1.15bn pre-tax earnings impact as a result of its provisioning for potential business interruption claims.

Suncorp, which will not feature in the latest case, topped-up its business interruption provisions to $214m.

While QBE, which is exposed to potential claims arising from Australia as well as the insurance industry’s partial defeat in a test case in the UK, has set aside $US785m ($997m) to cover pandemic-linked losses.