Earlier this month, the Australian Financial Complaints Authority (AFCA) issued its first decisions in cases of COVID-19 business interruption insurance (BI) complaints. An AFCA media release said these two decisions – both in favour of the insurer - had been “on pause” while test cases settled the interpretation of policy wordings in regard to the COVID 19 pandemic.
The regulator said it currently has 200 open COVID related BI cases.
Gareth Horne (pictured above), partner with Clyde & Co and faculty member with the Australian College of Insurance Studies (ACIS), has followed the ongoing saga of the COVID-19 BI test cases.
“These decisions are good news for insurers when looking at it from the perspective of the individual results,” said Horne. “It reflects the long-held view in the insurance industry that pandemics were not underwritten by the BI market.”
However, he said, in Australia, COVID BI disputes “are largely wrapped up at this point.” Horne said the test cases that went through the Federal Court last year “answered most of the critical questions of relevance to policy construction.”
He said at a more general level, the determinations in these two AFCA cases are important because they validate the process under the AFCA rules for having test cases on issues of particular industry or public importance.
“This sets a good precedent in that regard,” said Horne.
The Clyde & Co legal expert said the two AFCA decisions have very similar factual scenarios, both involving dental practices closing as a result of recommendations made by the Australian Dental Association (ADA) in March 2020.
“AFCA found, in both cases, that it was not satisfied that the insureds had established a valid claim within the terms of the policy,” said Horne. “The recommendations made by the ADA were not mandatory obligations, nor is the ADA considered a competent authority for the purposes of the limitations set out in the test cases.”
He said as no valid claim was established within the terms of the policy, both decisions were made in favour of the insurer.
Horne said these two decisions were closely tied to the tests case guidance.
“AFCA found, having regard to the wording before it, that the insured must establish that the closure of business was due to orders made by a competent government, public or statutory authority,” said Horne. “Such orders must have been made as a result of an outbreak of an infectious human disease at the premises or within 20 kilometres of the premises.”
He said these requirements were applied in both decisions.
Horne said every BI case AFCA considers will likely present a different claim scenario. That raises the possibility, he said, of “novel issues” arising from upcoming cases.
“It is therefore worth monitoring AFCA’s announcements in relation to future decisions,” he said. “Though the outcome of the test cases gives a pretty good indication of how most of the complaints are likely to be determined in a general sense.”
Horne said a handful of insureds have also started litigation through various courts to test the boundaries of the test cases, and whether any “unique issues” are unresolved.
“This includes four class actions filed in the Federal Court,” he said.
These class actions, he said, are listed before the Federal Court in late July 2023.
“This will be an opportunity for the court to consider whether the class action regime is the best mechanism for the management of COVID BI claims, particularly given the legal guidance already provided by the Federal Court through the test cases, and the unique factual issues attending to each claim,” he explained.
Horne said AFCA will continue working through its 200 COVID BI complaints, “so long as it does not cut across existing litigation before the courts.”
Arguably, the critical judgment in these COVID-19 related BI insurance cases came last year.
In October, the High Court of Australia refused applications for special leave to appeal in the second industry case involving business interruption insurance (BI) policies and the COVID-19 pandemic.
“With the exception of the one case that might go back before the Federal Court, the High Court’s rulings on these matters draws to a close the formal test case process concerning COVID-19 related business interruption matters,” said the Insurance Council of Australia (ICA) in a statement responding to the ruling.
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