BI repercussions continue after High Court decision

The High Court of Australia decision against hearing appeals on covid-triggered business interruption cover largely concludes the industry test case process in favour of insurers but the resolution of claim disputes and other legal action may take some time yet.

From the policyholder side, the court on Friday rejected two applications related to the Insurance Council of Australia (ICA) test case focused on small businesses and also one filed by casino operator The Star Entertainment Group in its dispute with Chubb and other insurers.

Lawyers for Wotton + Kearney say The Star had sought to unlock billions in cover under a civil authority extension in an industrial special risks (ISR) policy, while it was acknowledged that there was no cover under the disease clause.

The Full Court had upheld a ruling that the civil authority extension didn’t apply, and that determination remains given the High Court decided against hearing any appeal to take the matter further.

“This is a significant decision for insurers generally and provides important guidance to the insurance industry on dealing with claims for Covid-19 related BI loss,” Wotton + Kearney says.

“In short, where policies contain a specific disease extension clause and other more general extension clauses, cover for disease claims will arise, if at all, only under the specific disease clause and not under the more general clause.”

The legal firm says the case is “also a genuine vindication” for Australian insurers, who were prepared to make the point that covid litigation in Australia does not need to mirror what has happened in the UK and other jurisdictions.

In the UK, where covid cases were much more prevalent, the Financial Conduct Authority test case largely went in favour of policyholders. Payouts resulting from that case have reached £1.5 billion ($2.7 billion).

Following Friday’s decision IAG has announced it has reduced its business interruption claims provision to $615 million from $975 million, while Suncorp expects to release most of a $179 million provision.

A negative from Friday’s decision for insurers was the upholding of a decision that means JobKeeper payments can’t be taken into account to reduce a payment on a responding policy.

ICA says claims will ultimately be determined based on the applicable principles of the judgments in the cases as well as the wordings of a particular policy.

The test cases were undertaken under protocol agreements between the ICA, insurers and the Australian Financial Complaints Authority (AFCA), which has been awaiting the final court outcome before considering disputes that would be affected by the decision.

Berrill & Watson Principal John Berrill says while the test case policyholders have mostly not been successful, the Full Court set out a road map that shows how businesses can demonstrate valid claims.

Businesses affected by covid lockdowns should look at their policies and circumstances and not be deterred by insurance sector commentary around the industry not covering pandemics, he says.

“That is simply not right, they do cover pandemics in certain circumstances,” said. “We think there are thousands of businesses that will still have viable claims.”

In one of the test case claims, for a Melbourne travel agent specialising in international cruises, it was found insuring clauses applied, but in fact most of its losses were likely caused by the international travel ban and not local area restrictions.

The travel agent is still entitled to bring its case back to the Federal Court to pursue the matter further.

Herbert Smith Freehills said in a note after the Full Court decision in February that not every policy wording has been tested against every business’ circumstance, so there remains some scope for policyholders to pursue a limited category of claims within the guidelines established by the test cases.

“For example, if the policy held by the Victorian travel agent had been held by, say, a bar or restaurant in the Melbourne CBD that was reliant on walk-ins not international travellers, then the outcome for the policyholder might have been different,” it said.

Government supports such as JobKeeper may have limited the potential number of insurance claims, while in other instances businesses may have failed since the start of the pandemic, or have simply moved forward.

It remains to be seen also whether four class actions over business interruption will progress after they were put on hold pending the High Court appeal application decision.

Separately, law firm Quinn Emanuel Urquhart & Sullivan this year filed a shareholder class action against IAG over its stock exchange disclosure in 2020 of potential impacts from pandemic-related business interruption claims.

Looking ahead, the business interruption legal saga and reputational impacts have put a spotlight on policy wording clarity and processes, particularly given the failures to update policies citing the repealed Quarantine Act. There’s also debate over Australia’s process for handling test cases and whether something along the lines of the UK’s regulator-led action could be faster and more effective.

The second insurance industry test case may have come to a close but it will take some time to work through the claims disputes, and the repercussions of the industry’s handling of pandemic exclusions and policy wordings will reverberate for some time yet.