At the Federal Court in Canberra, appeals by both policyholders and insurers are underway in the second COVID-19 business interruption (BI) test case. A judgement delivered by Judge Jagot in early October ruled that in nine out of 10 cases the insuring clauses did not apply to pandemic coverage. This decision favouring insurance companies means they may avoid paying out billions of dollars for BI insurance claims.
The final verdict, when it comes, will have enormous ramifications for the insurance industry and their customers. Insurance Business is covering the case through interviews with insurance lawyers, insurers and brokers.
The issue has placed many brokers in a difficult position. Some of their clients are very upset that the BI insurance they bought off brokers is now looking unlikely to cover pandemic related losses.
In this tricky situation, some brokers say the key to navigating the test case issue with clients is communication.
“We contacted all of our clients that had BI cover that may have been eligible for a claim and discussed it with them and we have continually communicated with them and kept them informed of the court proceedings but never have we eluded that the policy would respond,” said Amanda Morris (pictured), managing director of ARMA Insurance Brokers in Maitland, NSW.
Morris said her clients had expressed appreciation for this approach and it had also helped them feel supported.
“In situations like this where the insurers are not sure and even the courts are not sure it is hard for us brokers to navigate with any sense of certainty,” she said.
She added that the best way forward with clients has, and always will be, truth and transparency.
“All that we have done is tell the client the truth: we will lodge a claim and see how we go – however, the wordings intent looks to be to exclude the risk [pandemics],” she said.
Morris said all her clients had been OK with that.
With possibly tens of thousands of BI claims up in the air, understandably, some brokers are worried about discussing how the situation is impacting their BI clients. One brokerage boss agreed to discuss the test case if his name and brokerage remained anonymous.
The broker agreed with Morris and said his brokerage also ‘got on the front foot.’ They informed clients that the BI cover for business losses due to the pandemic was being contested in court and that “at this stage” they were unlikely to have coverage for this loss.
“The first thing we told them was that the intention of their business interruption policies was to be triggered from a material damage event, or prevention of access as a result of material damage. And then some of the policies had extensions for hazardous infectious diseases as well, which would then trigger the policy as well,” he said.
The broker advised clients to, “hold off and let somebody else expend their resources and push the causes through to determine whether they could fall in behind or not.”
He said his firm was fortunate and most clients were happy with this advice thanks to their trusting relationship. Also, many of their clients are in the construction industry which wasn’t as gravely impacted by the pandemic as other industries.
“We’ve still got some hospitality clients around the country who were affected by it but unfortunately they haven’t got any indemnity out of their coverage,” he said.
One impact of the pandemic, he said, is that clients are now thinking much more seriously about the impact of a stop to their business.
“They’re certainly reconsidering now what would happen if their premises burnt down or if someone drove a truck into the front of their shop. And we are continually getting questions from people as to whether they can buy cover for it or whether we can change their programs to reduce costs because their trade’s changed,” he said.
Other clients, said the broker, were concerned about whether their BI policies would still give them coverage after so much time out of their offices due to lockdowns.
“So, we had to be on the front foot with that too, working with the insurers to make sure their policies would still respond for material damage losses,” he said.
He also said it’s very unlikely insurers will offer coverage for pandemics in the future. The policies would be too costly for most businesses he deals with.
“It’s very hard to rate for a pandemic because there’s no real underwriting information around when a pandemic would start and what the effects would be,” he said.
He explained that that’s why insurers look to exclude all these diseases that were under the Biosecurity Act or the Quarantine Act.
“Essentially the insurers can’t afford to pay a loss that effects everyone, so no-one would be willing to pay the premium for it,” he said.
