“A lot of money is hanging on these [BI] test cases”

Either way you look at it, there will be losers coming out of the business interruption (BI) debacle – with the sheer amount of claims, the impact on insurers, brokers, and insureds will be “very significant,” says insurance lawyer Timothy Chan (pictured).

Last year, the New South Wales Court of Appeal heard the test case that was focussed on the Quarantine Act (which had been replaced by the Biosecurity Act) exclusion. The court ruled in favour of policyholders, in that providers cannot rely on references to the obsolete law to deny liability.

The High Court upheld the decision in June by denying the insurance industry’s application for special leave to appeal. More on that here.

The second test case, meanwhile, will be heard by the Federal Court of Australia in late August. According to the Insurance Council of Australia (ICA), it will examine other policy wording matters including those surrounding government mandates, disease definition, and COVID outbreak proximity.   

As for its implications for the industry, Norton Rose Fulbright Australia’s Chan pointed to two sides of the coin.

“There’s the broker side,” he told Insurance Business. “So, the brokers are acting for the customers – the policyholders who might have a claim. They’ll be looking at the court decisions and seeing where there might be potential policy coverage for the insureds and helping those insureds put together a strong claim submission to the insurers for consideration.

“And business interruption claims can be quite technical, because they need to look at the finances and how they were impacted. That all takes time, and you might need experts to be involved.”

As noted by the ICA in a July update, complexities in the issue of coverage include the fact that BI policies, many of which contain common terms, are generally not off-the-shelf agreements. Instead, they are prepared by brokers based on clients’ respective circumstances.

“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 trade body also said previously.

“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.”

With the test cases, the goal is to secure the needed court determinations that will provide insurers, as well as the Australian Financial Complaints Authority where applicable, clear direction and guidance when assessing claims.

Meanwhile Chan stated: “On the insurer side, the large amounts of claims will require significant resources to be utilised to assess claims efficiently, honestly, and fairly. And I believe that some of the insurers are using technological capabilities to assist with the assessment.

“A lot of money is hanging on these test cases.”

Earlier this month, Insurance Australia Group reported a full-year net loss after tax of $427 million, reflecting the impact of unusual items including a $1.15 billion BI pre-tax charge.