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Business Interruption update - 24 February 2021.
Latest media release: Second business interuption case
In the interests of updating policy holders, stakeholders and regulators, insurers, and the general public, the Insurance Council of Australia (ICA) provides the following updated summary of the insurance industry’s current efforts to seek clarity on the application of business interruption insurance to claims related to COVID-19.
As a matter of principle, the insurance industry is committed to an efficient, transparent, and consistent claims process that is fair to all policy holders 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 cover, there is nothing preventing policy holders from lodging claims with their insurer at any time.
If policy holders are dissatisfied with their insurer’s decision 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.
What has happened so far?
The insurance industry is of the view that pandemics were not contemplated for coverage under most business interruption policies. Premiums were not collected by insurers to reflect the cost of cover for pandemics and reinsurance was generally not available for pandemic cover, nor were reserves established for pandemic-related claims.
Many business interruption policies sought to exclude cover for pandemics through a reference to “a quarantinable disease under the Quarantine Act 1908 and subsequent amendments”, however, the Quarantine Act was repealed in 2016 and replaced by the Biosecurity Act.
In July 2020 insurers and AFCA agreed on a test case to determine whether references to the Quarantine Act in some business interruption policies excluded claims made as a result of the COVID-19 pandemic.
The test case was heard in October 2020 in the NSW Court of Appeal. In November 2020, the Court ruled that Quarantine Act references in policies did not exclude the two claims in the test case.
As part of the agreement to run a test case, insurers and AFCA agreed that the Court’s decision could be appealed. In December 2020 the ICA lodged an application with the High Court of Australia for special leave to appeal the judgment of the NSW Court of Appeal.
Although the first test case was decided by the NSW Court of Appeal, the decision is relevant to all Australian claims, regardless which state a business is located.
What happens next?
If special leave to appeal is granted, the ICA will ask for the matter to be heard by the High Court as quickly as possible.
If the High Court decides not to hear the appeal or does not allow the appeal, insurers will not be able to rely on the Quarantine Act exclusion to deny liability in policies written in the same terms as the policies considered in the first test case.
However, it is important to note that even if the High Court appeal does not succeed, there are other issues concerning the interpretation of business interruption policies that need to be resolved in order to determine whether policyholders will ultimately be covered.
That is why the ICA and its members have commenced proceedings in a second test case in the Federal Court of Australia to test the application of further issues of pandemic coverage in business interruption policies.
The second test case will determine the meaning of policy wordings in relation to the definition of a disease, proximity of an outbreak to a business, and prevention of access to premises due to a government mandate, as well as policies that contain a hybrid of these type of wordings.
The industry will meet the costs of policyholders in the second test case, as it did in the first test case and will for any appeal.
Why does this require a court determination?
While the insurance industry understands the frustration of policy holders 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 disputes.
Essentially, the courts’ determinations will provide the clear direction and guidance required for decisions to be made on similar issues arising in other disputes.
There are several reasons why these legal principles need to be clarified.
First, many business interruption policies envisage events, including pandemics, as having a direct impact on a policy holder. That is, a fire, road closure, flood, or outbreak of a disease occurs in or very close to a business and it is not possible for that business to operate as normal.
Thankfully, for most Australian businesses this has not been the case with the COVID-19 pandemic and the impact has been felt largely because of secondary actions, such as those taken by governments or government authorities.
Second, it is relatively straightforward to assess physical damage on a business, like the impact of a fire on a property, but far more complex to assess non-physical damage, such as to earnings, reputation, or value.
The unique nature of this pandemic means that in many cases businesses were able to operate but under changed circumstances, for example a restaurant could provide take away but not dining.
This complexity is compounded when governments have already provided some compensation for damage to businesses, like the JobKeeper program.
Third, while many business interruption policies contain common terms these are generally not off-the-shelf policies like those for home and contents, but are bespoke arrangements prepared by a broker for a business’s particular circumstances.
In light of this, the second test case consists of nine separate small business claims from a range of business sectors and locations lodged with AFCA as part of its dispute resolution process to allow for a comprehensive review of many of the outstanding policy issues.
How does this apply to small businesses claims?
Under the terms of a protocol signed by the ICA, AFCA and participating insurers and policy holders, AFCA agreed that it will follow the reasoning of the final judgment in the first test case when dealing with other complaints based on the same Quarantine Act exclusions. A similar protocol has been signed in connection with the second test case.
The industry is seeking to have matters relating to the interpretation of business interruption policies determined by the courts as soon as possible. If a claim gives rise to one of the issues to be considered by the courts in the test cases, the insurer will inform the policy holder that it will not finalise the claim at that time but will do so once final test case determinations have been made.
Insurers have agreed they will not rely on any policy time limits to lodge a claim or avoid liability where the policy holders is insolvent, because of the passage of time associated with waiting for an outcome on the two test cases. The ICA expects that all business interruption insurers will waive insolvency and claim lodgement timeframe clauses – not just the insurers that are party to the test cases.
Once final rulings have been obtained from the courts, insurers are committed to applying the relevant principles in an efficient, transparent, and consistent way when assessing claims.