The covid-related business interruption test cases have concluded – but insurers haven’t heard the last on the issue

By Wendy Pugh

Legal test cases to determine business interruption cover for pandemic losses have finally ended, with the High Court shutting its doors to further appeals. But while the decisions have narrowed the scope for successful claims, the industry hasn’t emerged completely unscathed.

The second test case resolution clears the way for claims and complaints to move ahead, as the three-year mark from the arrival of covid in Australia approaches.

Class actions in the wings are restarting, while regulators have called for insurers to improve their processes after their “sloppiness” with outdated wordings and the complexity of business interruption policies and systems.

The Insurance Council of Australia (ICA) acknowledges the length of time taken to complete the industry-backed legal process, but counters that the cases have provided the guidance needed to facilitate fair and consistent claims determinations.

“[The] decision by the High Court marks a significant milestone in a process that at its heart has been about understanding the extent to which business interruption insurance provides cover under the unprecedented conditions we experienced over the past two-and-a-half years,” Chief Executive Andrew Hall said.

“Insurers and brokers will be communicating directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

In the first test case, the NSW Court of Appeal found against the insurers, ruling exclusions that cited the Quarantine Act 1908 “and subsequent amendments” were not valid for covid, given the replacement Biosecurity Act 2015.

That case was filed in 2020 and ended in June last year.

The second test case, which was filed in the Federal Court in February last year, appealed in the Full Court and then wrapped up before the High Court on October 14, looked at a range of issues including disease, prevention of access and hybrid clauses. Insurers had a win overall.

The industry has avoided crippling payouts and a deluge of claims, after insurers warned last year in an unsuccessful appeal application on Quarantine Act wordings that 250,000 policies and some $10 billion could be at stake.

Reserves are now being released. IAG said in October it was reducing a provision to $615 million from $975 million at the end of June. The insurer last year announced a pre-tax total of $1.2 billion. Suncorp and QBE are also reducing provisions after setting aside smaller amounts.

The Australian Financial Complaints Authority (AFCA), which has a jurisdiction extending to small businesses but not larger enterprises, registered 340 disputes as of mid-October, of which 306 remained open.

Melbourne-based insurance law specialist John Berrill suggests only a small percentage of valid claims have been filed, for reasons that may include JobKeeper support payments and the passage of time. He says businesses affected by covid restrictions should look at their policies and the circumstances and seek advice.

“The insurance industry ran this line that ‘we don’t cover pandemics’,” Mr Berrill tells Insurance News. “That is simply not right – they do cover pandemics in certain circumstances.”

Lawyers say that despite the insurers’ successes in the second test case, some policies will still respond, a number of matters were not covered by the judges and class actions will pursue some of the issues remaining as well.

An example includes a clause judged valid for cruise specialist Meridian Travel, based in suburban Melbourne. The firm’s ability to claim losses was questioned in the second test case, given its circumstances. But lawyers say others may be successful.

Slater & Gordon Class Actions Associate Ruby Haynes says the test cases didn’t deliver outright victories for insurers and they haven’t escaped responsibility for claims under their business interruption policies.

“There were favourable findings for insureds, including that JobKeeper payments do not have to be offset against insureds’ losses, and the findings in relation to Meridian Travel under its infectious disease clause,” she says. “We consider that cover is available under both infectious disease clauses and hybrid clauses in certain circumstances.”

Slater & Gordon and Gordon Legal have each filed two class actions in the Federal Court, which after the High Court decision scheduled a case management hearing for December 6. Claimants include a swimming school, gym, opal retailer and bar owner.

Gordon Legal says issues include how claims will be determined for some businesses affected by local or site-specific lock down orders, such as in metropolitan Melbourne in July 2020.

“There may still be thousands of businesses in that undetermined category, who may well have valid and arguable claims, and whose claims will be progressed through the class actions that have been already issued,” Commercial Law Partner James Naughton tells Insurance News.

Questions also remain about how businesses with viable claims will be permitted to quantify their losses, which may be resolved through the class actions, he says.

Separately, IAG is defending a shareholder class action filed over alleged securities market disclosure failings in 2020, when insurers were fighting their ultimately unsuccessful battle over the Quarantine Act exclusions.

Australian Prudential Regulation Authority (APRA) Deputy Chair Helen Rowell says uncertainty around business interruption cover and claims, and related legal action, had the potential to seriously undermine insurers’ balance sheets as well as consumer confidence.

The regulator asked 10 insurers to complete risk self-assessments following alarms raised by the Quarantine Act wordings, and it has been blunt in its feedback.

“The problems were not isolated to sloppiness with outdated policy wordings,” Ms Rowell told the ICA annual conference. “Key themes included miscalculation or ignoring of the potential materiality of the risk associated with the pandemic, a lack of willingness to escalate matters of concern, and complexity in policies and systems.”

The multiplicity of policy wordings was identified as a problem, especially in the SME market where third-party distributors were used; and in some cases, “competitive drivers” overrode sound underwriting discipline.

“APRA will be closely monitoring to ensure insurers make the improvements they have committed to, and is prepared to adopt stronger measures if we don’t observe good progress,” Ms Rowell says.

Insurers that weren’t asked to undertake the initial self-assessments have been urged to consider completing similar reviews and to introduce changes as necessary.

Bugs in the BI noodle bowl

Australian Securities and Investments Commission (ASIC) Deputy Chair Karen Chester, appearing before a parliamentary committee, described a “noodle bowl” of policies and clauses, complexity and lagging systems. She also pointed to test case process shortcomings.

“We were very frustrated with the breadth of the first test case,” Ms Chester told the committee. “We were also very frustrated with the time it took for the second test case to be finalised and filed.”

ASIC is keeping tabs on industry responses, encouraging proactive and transparent communication with policyholders and the timely and efficient payment of valid claims.

The regulator is monitoring insurers’ and brokers’ conduct and will take action if there’s evidence legal requirements are not being met, a spokesperson told Insurance News.

Lloyd’s Regional Head of Australia and New Zealand Chris Mackinnon says insurance transactions are based on a promise, the reputation of the industry is therefore always on the line, and the business interruption experience showed the importance of clarity around those promises.

“It is nonsensical that we should be arguing what is it that we actually meant,” he told the National Insurance Brokers Association summit in October. “We need to ensure that wordings are crystal clear.”

The lengthy test cases contrast with the experience in the UK, where the Financial Conduct Authority (FCA) took the lead in a swifter process that concluded with a final judgment in January last year.

The FCA acted because it is able to initiate urgent test cases, without the need for a specific dispute between the parties, for an issue of general importance where authoritative legal guidance is needed.

In the Australian industry-led process, claims were drawn from those received by AFCA, with its consent. A protocol was agreed between AFCA, which wasn’t involved in the court actions, the insurers and ICA, with the industry paying policyholders’ costs.

Insurer selection of the matters has prompted scepticism, with suggestions several of the second test case claims were sure-fire industry wins, while scenarios that might have had a greater chance of policyholder success weren’t included.

ICA has flagged the potential for changes, proposing in a pre-election policy document released this year that the Federal Court Act be amended to allow a process similar to the UK’s.

“Finding suitable matters that were the subject of existing complaints before AFCA was a difficult process, and although cases were eventually identified, insurers were not fully satisfied they covered all the issues requiring the courts’ determination,” ICA says.

Policy wordings have been tightened since covid arrived in Australia in January 2020, while the position of insurers on pandemics remains the same: they are systemic global risks beyond the capital resources of the insurance sector.

Former ICA chief executive Rob Whelan said, in announcing the first test case, that “most insurers have never contemplated coverage for pandemics in their policies and did not price pandemic risks into premiums”. Still, an expected quick early court victory turned into a drawn-out process.

APRA’s Helen Rowell says the legal uncertainty has “largely abated” but the self-assessments show insurers “took their eye off the ball of sound insurance risk management”.

“The BI issue was a near miss for insurers and one which cannot afford to be repeated,” she says.