Should BI insurance cover pandemics?

Should BI insurance cover pandemics? | Insurance Business Australia

Should BI insurance cover pandemics?

The Federal Court’s decision in the second COVID-19 business interruption (BI) insurance test case could be announced this month. The judgement will help determine if BI policies cover losses caused by the COVID-19 pandemic. Tens of thousands of claims could hang in the balance.

Whatever the ultimate verdict, insurance companies are busy explicitly excluding pandemics like COVID from new policies.

“When you’ve seen some of these new wordings, there’s not a cigarette paper, or a crack of sunlight in some of these revised infectious diseases wordings through which someone could even dream that a claim would be possible,” said Nicholas Scofield (pictured), chief corporate affairs officer for Allianz Australia.

“Everybody is tightening that up. There won’t be much doubt when the next pandemic comes about whether there’s cover or not. I don’t think it will warrant a test case,” he said.

Read next: ICA, AFCA to seek clarity via business interruption test case

For the policies that are the subject of the second test case, some insurance industry insiders have said there is unlikely to be any final outcome until at least 2022. According to the ICA, this second test case will decide matters including the meaning of policy wordings around disease definition, COVID outbreak proximity and the impact of government mandates.

Whatever the verdict, many new BI policies are not covering pandemics.

“Pandemics are uninsurable because they basically breach one of the foundation stones of insurance and that is the principle of large numbers - a large number of people put a premium into the pool and in any year only a small number of people take out in terms of a claim. When you have a pandemic then everybody, if there was cover, everybody would be taking it out,” said Scofield.

The test cases are the result of many insurers trying to exclude cover for pandemics in BI policies through an outdated reference in these policies to the Quarantine Act. However, the Quarantine Act of 1908 was repealed in 2015 and replaced by the Biosecurity Act. While COVID-19 is a listed human disease under the Biosecurity Act from January 2020, it wasn’t in the Quarantine Act.

Last year, the insurance industry lost the first business interruption case. An appeal against that ruling failed.

Scofield said the issue of pandemic coverage in policies is impacting the general wording in policy documents around infectious diseases.

“The broader question is, should there be pandemic cover for business interruption insurance? The answer is, that’s a question for the government because the fundamental uninsurability means there needs to be some sort of government partnership solution. I mean government could provide the whole solution, they could provide pandemic BI insurance if they wanted to,” he said.

Scofield referred to other countries grappling with the same pandemic insurance issue.

“What they’re doing in other countries like the UK or in Europe, and at least there’s been talk in the US, is looking at putting in place what are effectively reinsurance types of facilities backed by the government for business interruption cover against pandemics,” he said.

Scofield questioned whether Australia would get that far.

“Will we get that far in Australia? I suspect probably not. I don’t know if there’s much appetite for that. But, you know, it’s a conversation worth having,” he said.

He suggested that the government would likely deal with any upcoming pandemic in Australia in the same way as this one.

“The government may make a conscious decision that they’re happy to effectively leave that as an area where insurance cover is unavailable and then if there’s another pandemic they’ll probably be forced to deal with it in the same way they did this one, which of course is through massive grant schemes to help workers directly through things like JobKeeper, or to businesses, or to both,” he said.

Read next: Federal Court opens access to COVID-19 BI documents

The second COVID-19 BI insurance test case was filed by the Insurance Council of Australia (ICA), the Australian Financial Complaints Authority (AFCA) and participating insurers. The case consists of a number of COVID-19 related claims lodged by small businesses. The insurers represented are Allianz, IAG, Chubb, Guild, and Swiss Re International SE. The hearing ended last month.

Last month, in response to public interest, the Federal Court established an online file with unrestricted and free access to court documents in the case.