- Link to BI Frequently Asked Questions
The insurance industry is committed to an efficient, transparent, and consistent claims process that is fair to all policyholders and ensures the sustainability of the insurance industry, which is a vitally important sector of the economy.
Although the unprecedented impact of the COVID-19 pandemic has created the need for court determinations on key aspects of business interruption (BI) cover, there is nothing preventing policyholders from lodging claims with their insurer at any time.
If policyholders are dissatisfied with their insurer’s decisions they can first pursue their claim through their insurer’s dispute resolution process, and if still not satisfied can make a complaint to the Australian Financial Complaints Authority (AFCA) at no cost. AFCA can make decisions on consumer and small business claims up to $1.085 million and if accepted by the complainant its rulings are binding on insurers with no avenue for appeal.
What has happened so far?
The insurance industry has long maintained that pandemics are not intended to be covered under most business interruption policies. Premiums were not collected by insurers to reflect the cost of cover for pandemics, reinsurance was generally not available for pandemic cover, nor were reserves established for pandemic-related claims.
Many business interruption policies in Australia sought to exclude cover for pandemics through a reference to the Quarantine Act, however the Quarantine Act was repealed in 2015 and replaced by the Biosecurity Act.
A test case on this issue was heard in 2020 in the NSW Court of Appeal, which ruled in favour of policyholders. This judgment was upheld in June 2021 when the High Court denied insurers’ application for special leave to appeal.
Although the first test case was decided by the NSW Court of Appeal the decision is relevant to all Australian claims regardless of location.
What happens next?
Because of the High Court’s decision insurers cannot rely on references to the Quarantine Act to deny liability in policies written in the same terms as the policies considered in the first test case.
However, there are further interpretations of aspects of business interruption policies that need to be resolved to establish whether policyholders will ultimately be covered.
That is why insurers and AFCA agreed to a second test case in the Federal Court of Australia. The Federal Court will commence hearing the second test case on 6 September 2021.
This second text case will determine the meaning of policy wordings around disease definition, COVID outbreak proximity, the impact of government mandates, and other policy wording matters.
To allow for a comprehensive review of many of the outstanding policy issues the second test case is made up of nine small business claims from a range of business sectors and locations, lodged with AFCA as part of its dispute resolution process.
The vast majority of BI claims will not be able to be finalised until further clarity is provided by the second test case. The industry will meet the costs of policyholders in the second test case, as it did in the first test case.
Why does this require further court determination?
While the insurance industry understands the frustration of policyholders who may be waiting for a determination of their claim or resolution of a dispute, these matters are not clear cut and there is a need to clarify the legal principles used to resolve any disputes.
The way in which the COVID-19 pandemic has impacted most businesses in Australia has not been direct, but has been largely because of secondary actions such as those taken by government authorities.
The unique nature of this pandemic has also meant that in many cases businesses were able to operate but under changed circumstances, and governments have also provided support and compensation such as JobKeeper.
Additionally, while many business interruption policies contain common terms they are generally not off-the-shelf documents but are prepared by a broker for a business’s particular circumstances.
Because of these complexities court determinations are required to provide the clear direction and guidance required for decisions to be made in a fair and consistent way, either by AFCA or insurers.
Insurers and AFCA want these issues determined by the courts as soon as possible, and the Federal Court has agreed to a timetable for the second test case which will see proceedings in that court concluded by the end of 2021.
What about class actions?
Some class action law firms have claimed the High Court’s decision to deny insurers’ appeal in the first test case only has implications for customers of the two insurers involved in that test case, Hollard and HDI.
This is not correct.
Insurers have committed to AFCA and the Australian Securities and Investments Commission (ASIC) they will follow the rulings of the courts in both BI test cases in a consistent way when assessing BI claims. This also applies to claims that fall outside AFCA’s jurisdiction (ie, are valued at more than $1.085 million).
Given the current test case process agreed to by AFCA and insurers it is not necessary for policyholders to join a class action.
It is highly unlikely issues to be covered in any class action will be significantly different from the issues in the first test case, which has already been resolved in favour of policyholders, or the second test case that is currently in the Federal Court. This is demonstrated by the class actions which were commenced in July 2021 against insurers QBE and AXA XL in respect of business interruption claims. The Federal Court will hear an application in October 2021 to suspend these class actions until there has been a final determination in the second test case, given the overlap of issues.
Anyone who seeks to resolve a claim through a class action will have to pay substantial fees of up to 40 per cent of any payout to litigation funders and lawyers, whereas AFCA can make binding decisions on claims up to $1.085 million free of charge for policyholders.
Generally, a class action takes between one and three years to resolve, whereas the second test case proceedings in the Federal Court will be concluded by the end of 2021. This means that insurers will have the clear direction and guidance from the second test case to process BI claims long before any class action is resolved.
How does this apply to small businesses claims?
Agreements have been signed by the ICA, AFCA and participating insurers that AFCA will follow the reasoning of the final judgments of the test cases when dealing with other similar complaints. Insurers have also committed to applying the reasoning of the final judgments of the test cases in an efficient, transparent, and consistent way when assessing claims.
Small businesses can lodge a business interruption claim at any time and insurers will respond to those customers on a case-by case basis. If a claim gives rise to one of the issues to be considered by the courts in the second test case, the insurer will inform the policyholder that it will not finalise the claim at that time but will do so expeditiously once a final determination has been made in the second test case.