There are significant developments in respect to Business Interruption Insurance coverage for loss of income due to COVID-19 lockdowns. As recently reported in the Australian Financial Review, the Australian insurance sector is potentially facing a $1 billion exposure to COVID-19 losses.
With the Victorian Andrews government enforced lockdowns continuing to wreak economic pain, the question of insurance for loss of profits is becoming a burning issue.
Insurers have continued to maintain their hard line that business insurance policies with Business Interruption coverage will not respond to loss of profits arising from COVID-19. The message has been consistent from the Insurance Council of Australia and all Australian insurers since the COVID-19 outbreak began and the subsequent government-enforced lockdowns.
The Insurer’s Position
Insurance companies argue they do not have the financial strength and resources to cover the catastrophic losses a pandemic can cause on such a widespread basis. They claim that whether the policy contains an exclusion relating to the Quarantine Act 1908 or Biosecurity Act 2015, the intention is clear – this being that Business Interruption Insurance was not designed to cover loss of income arising from a pandemic disease that is listed under either Acts of Parliament.
The Customer’s Position
The argument from a policyholder’s perspective is that the Quarantine Act 1908 was repealed when the Biosecurity Act 2015 came into place. The current wording mentioning the Quarantine Act should be null and void as it doesn’t exist anymore – therefore, any current policy wording which contains an exclusion referencing the Quarantine Act is not relevant nor enforceable.
The Key Question
For policyholders, the big question is whether an insurer can enforce this exclusion as the Quarantine Act was replaced by the Biosecurity Act 2015.
Many businesses initiated a loss of profits claim under their Business Interruption policies only for their claim to be denied based on the exclusion relating to a disease being listed under the Quarantine Act or Biosecurity Act.
Several businesses with policies that had exclusions which referred to the Quarantine Act, decided to take their case to the Australian Financial Complaints Authority (AFCA).
This resulted in the AFCA and the ICA agreeing to file a test case to consider whether references to the Quarantine Act 1908 should be construed as a reference to the Biosecurity Act 2015.
The Test Case
The insurer’s position is now being tested in the NSW Supreme Court and is due to be heard on the 2nd October 2020. The basis of the test case is whether the policy exclusions which insurers are relying on to deny coverage can be legally enforced.
The big problem for insurers is that the Quarantine Act was replaced by the Biosecurity Act in 2015. When this happened, many insurers failed to update their policy wordings to reflect this important change.
The Future Impact of the Test Case
The outcomes of the test case will be used by AFCA in determining future complaints that are brought before them in respect of COVID-19 Business Interruption claims. Therefore, this test case has massive implications for the many businesses who have suffered financially due to forced government lockdowns due to COVID-19.
In the UK, the lead insurance regulator is the Financial Conduct Authority (FCA). The FCA recently ran a similar test in front of the UK High Court. In a landmark judgement, the High Court largely ruled in favour of insurance losses being paid out under the Business Interruption policies.
It is important to note however that The FCA test case was far broader than AFCA’s case and focused on the broader policy wording as opposed to the application of a specific exclusion as in Australia’s test case. The FCA case did not examine the specific issue of the enforceability of an out of date Act of Parliament such as the Quarantine Act.
If the test case goes the way of the customer
The reality is that most standard Business Interruption insurance policies only provide limited cover for loss of income due to an infectious disease.
Firstly, the cover is generally limited to $250,000 to any one claim.
Secondly, the loss must occur due to a closure of your premises by order of government authority due to an outbreak occurring within a 20km radius. The grey area here is what will be deemed to have been an outbreak occurring within a particular radius. Will it have to be a recorded case occurring within 20km and if so, how will this be established?
The key consideration is that even if the test case falls in the favour of the policyholder, there are still other factors which will need to be satisfied to trigger a claim under the policy.
Unfortunately, this means that there may be other test cases to further test Business Interruption policy wordings and any cover available. Any possibility of financial compensation under your Business Interruption policy for COVID-19 losses should be treated with caution at this early stage of proceedings.
In conclusion: is it worth making a claim?
Our message to all our clients is to watch this space. The determination of coverage available under Business Interruption will likely take many months if not years to determine through a number of test cases. Our view is that clients should continue to monitor these events closely and consider making a claim once these important test cases have unfolded.
We will be keeping you informed with updates on the outcome of the test case as soon as they develop.
This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
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