COVID-19 BI test case: "Really disappointing outcome" for businesses

COVID-19 BI test case: "Really disappointing outcome" for businesses | Insurance Business Australia

COVID-19 BI test case: "Really disappointing outcome" for businesses

This week, the Federal Court handed down its judgement in five appeals concerning business interruption insurance (BI) policies and the pandemic. This ruling in the Second COVID-19 insurance test case substantially upholds the ruling in October by Judge Jayne Jagot.

“This is a really disappointing outcome for most Australian businesses, a lot of whom have been brought to their knees by the pandemic and continual interruptions to their businesses,” said Poppy Foxton (pictured), national head of corporate insurance and risk solutions for Honan Insurance Group.

Foxton and legal experts said the judgement reinforces the position adopted by insurers that BI policies are not intended to provide pandemic cover. This latest decision, said legal experts, also makes it more likely that insurers will avoid paying out billions of dollars for pandemic related BI insurance claims.

“Added to this is the protracted legal battle after businesses saw glimmers of hope in the first test case, only to be disappointed by the second test case,” said Foxton.

Read more: Federal Court announces appeal ruling in second business interruption test case

In the first test case the High Court of Australia denied insurers’ application for special leave to appeal an earlier judgement of the NSW Court of Appeal that found in favour of policyholders. That test case concluded in June 2021.

Foxton said if this appeals judgement in the second test case had favoured policyholders, payouts would have been expected.

“Had the decision gone the other way and the full Federal Court upheld the appeals and subject to no changes to that decision by the High Court the insurers would have paid out the claims,” she said.

However, she said this would have created considerable uncertainty across the insurance industry and destabilized rates that have only just begun to settle in recent quarters.

“Ultimately, Australian businesses would have felt the impacts of this action down the track through steep premium increases. Insurance policies aren’t designed to cover pandemics or terrorist attacks and we need to look for other solutions beyond insurance alone,” she said.

“It’s a pretty disappointing outcome for policyholders,” Mark Darwin, partner at Herbert Smith Freehills’ insurance practice told the Australian Financial Review. The practice represents insurance policyholders although none of them were in this case.

Nonetheless, the issue of BI policies and possible pandemic coverage is not over yet. The parties involved in these proceedings have 28 days to apply for special leave if they wish to appeal to the High Court.

In a news release responding to the ruling, Insurance Australia Group (IAG) said it was reviewing the judgement to determine whether to seek leave to appeal any aspect of the ruling.

“At this stage, there will be no adjustment to IAG’s $1,222 million net provision for potential business interruption claims,” said the release.

However, IAG said it will refine this prediction of ultimate claims costs “as the legal position becomes more certain and claims experience emerges.”

IAG said, subject to the outcomes of the appeal process, “current indications are that a release from the provision will occur and is likely to be recognised over time.”

In its news release responding to the judgement, the Insurance Council of Australia (ICA) said the ruling “provides further clarity on key issues in respect of the wordings in business interruption policies such as disease definition, COVID-19 outbreak proximity, the impact of government mandates and other policy wording matters.”

Read more: Judgement announced in COVID-19 BI test case

“These matters are not clearcut and we acknowledge that this has been a long but necessary process that will ultimately provide important guidance on how business interruption policy wordings are to be interpreted and applied,” said the ICA’s CEO Andrew Hall.

The Full Court did reach a different view to Justice Jagot on what it called “certain subsidiary issues.” One main difference was around whether the insured would need to account for certain payments or benefits received from third parties, such as JobKeeper payments.

John Berrill, insurance lawyer with Berrill and Watson, told the AFR that these rulings on JobKeeper would boost potential payouts. Berrill, whose firm represents businesses in dispute with their insurers, also told the AFR that a significant number of claims would still be viable.

“We hope that the matter can be brought to a close as soon as possible,” noted the ICA’s CEO.