Judge Jagot’s ruling in the second COVID-19 test case early this month is a win for insurance companies. This Federal Court judgement means that insurers may avoid paying out billions of dollars for business interruption (BI) insurance claims. However, there’s still a long way to go. The court has said that appeals will be heard in the second week of November.
“The judgement, if upheld, is ultimately a good outcome for insurers as it broadly reinforces their understanding of how wordings that they issued should be construed,” said Gareth Horne (pictured), a partner with Clyde & Co and faculty member with the Australian College of Insurance Studies (ACIS).
Horne acted for one of the insurers in the test case.
“The judgement gives clarity in a complex field and provides a strong and comprehensive base for the Full Court to consider the issues on appeal,” he said.
Horne said, given the appeals in progress, all eyes are firmly fixed on the next stage of the judicial process.
Read more: Judgement announced in COVID-19 BI test case
“The main practical focus at present is for insurers to consider the implications of the policy trigger findings on their respective portfolios and planning for how to adjust and finalise claims efficiently to the extent that any might ultimately fall within cover,” he said.
Horne said like most in the economy and society right now, insurers are keen to draw a line under COVID-19 as quickly as possible and get on with business as usual.
“There is a real sense that insurers are keen to focus their attention on investment in supporting clients, including in the development of new products and addressing the challenges of emerging risks. To that end, a clear and swift resolution of COVID-19 BI claims is welcomed,” he said.
For business owners, Horne said, the judgement does give clarity.
“Although not the outcome that some policyholders were hoping for, the judgement does provide very clear guidance and ultimately certainty on policy response,” he said.
Horne said for business owners who are thinking of bringing a claim, or at least reserving their rights to do so, the main thing now is to ensure that they retain financial documents to prove loss in the event that it is ultimately determined on appeal that they can find cover under their wordings.
“It is important to recognise that there are a large variety of nuanced wordings in the market. While the core elements of the test case will have relevance to all policyholders, the reality is that each claim will turn on the specific wording issued and the unique factual circumstances of each insured,” he said.
Horne recommended that business owners discuss the judgement and its implications for them with their broker, particularly around the guidance on how savings and offsets are to be accounted for in adjustment with regard to stimulus initiatives such as JobKeeper and Cash Flow Boost.
Horne was impressed by the speed with which a judgement of this size and complexity was delivered.
“It highlights that the Federal Court understands the public importance of the decision, which has been evident through the pre-trial phases as well,” said Horne, referring to the live streaming of hearings and online public access to key court documents.
Horne said he wasn’t surprised by the judgement itself.
“The outcome itself is certainly not surprising to insurers. For the most part the reasons for judgement reflect the way in which insurers understood their policies to work when they drafted them,” he said.
Horne explained that first party property insurance does not get tested by the judiciary as often as liability insurance and so there is always the risk that the nuances of first party property cover are misunderstood. That is especially the case with a novel event like COVID-19 with its potential to create new laws as it has done in some overseas jurisdictions.
“However, what is apparent is that the Federal Court has quickly identified the key differences between the Australian experience with COVID-19 and the experience overseas. That point was reinforced early in the judgement in comparing the political and geographic differences with the UK, as well as the prevalence of COVID-19 in each jurisdiction, to underpin why the FCA v Arch decision is distinguishable on the facts,” he said.
Horne added this is a point that Australian insurers have been making for a long time but there is always some wariness about whether that will be understood until it is ultimately seen in a judgement.
He also said the test case came about through the cooperation of many stakeholders including policyholders, insurers and the Insurance Council of Australia (ICA).
“This has been acknowledged by the Federal Court which, from the outset, has recognised the public importance of the case. Each of those groups deserve recognition for their roles,” said Horne.
He said the judgement does have relevance beyond its COVID-19 business interruption context.
“That is particularly so when looking at issues such as section 54 of the Insurance Contracts Act, good faith and principles of causation and policy construction. We can expect to see plenty more commentary about that over the coming weeks and months as this judgement and the appeal are more fully analysed,” said Horne.