The COVID-19 business interruption test case in Australia, initiated by the Australian Financial Complaints Authority (AFCA) and the Insurance Council of Australia (ICA) recently concluded. What does this mean for those with Business Interruption cover?
Business interruption test case - important background information
Business interruption cover may protect a business for a financial loss incurred because it cannot trade for a period due to loss or damage to the business itself, from an interruption covered by the policy.
In 2005-6, the global insurance industry introduced general exclusions for losses relating to quarantinable or infectious diseases, due to stress testing on the financial sector for pandemic scenarios following the SARS virus.
Most current business policies are likely to contain exclusions relating to losses caused by notifiable, quarantinable or infectious diseases. Insurers have designed and priced their policies on the basis that pandemics are not insurable due to the magnitude of potential losses, and the challenges of modelling the risk and ensuring coverage affordability.
COVID-19 has brought the exclusion, in place with many insurers, into question. In August 2020, the Insurance Council of Australia supported the commencement of proceedings in the NSW Supreme Court to test the application of certain infectious diseases exclusions in business interruption policies.
The test case, once finally resolved, will provide certainty for insureds and insurers on the threshold question as to whether a policy, containing a carve-out referring to the Quarantine Act, will provide cover for losses arising due to COVID-19.
- If the Quarantine Act carve-out is found to exclude COVID-19, then cover will not be available under an infectious diseases benefit for losses arising from COVID-19.
- If the Quarantine Act carve-out does not apply, then cover may potentially be available under an infectious diseases benefit for loss arising from COVID-19. In these circumstances, the customer would still need to satisfy other policy trigger requirements under the infectious disease benefit. To finalise the determination of any such claim, the customer would be required to provide further information as to how COVID-19 affected the business.
Key takeaways from the test case
- The NSW Court of Appeal delivered its judgement on 18 November 2020. It determined that COVID-19 is not a disease declared to be a quarantinable disease under the Quarantine Act and therefore, the Quarantine Act carve-put in the infectious diseases benefit is not enlivened.
- The parties are currently considering the decision and have until 16 December 2020 to seek special leave to appeal to the High Court of Australia.
What does this mean for my Business Interruption policy?
The next step for you is to remain in contact with your Insurance House Relationship Manager as this situation unfolds.
Insurance House politely reminds all our clients that whilst the update to the test case seems positive for some policies, it doesn't necessarily resolve the issue of whether or not business interruption coverage is available for COVID loses. This is due in part to the following:
- Insurers may well elect to appeal this to the High Court of Australia. Many legal commentators believe it likely that an appeal will be lodged, and we agree with this view.
- Even if an appeal is unsuccessful, insurers will still review each claim on its individual merits, and will assess claims against all policy terms and conditions. Potential losses for insurers will be significant, so we anticipate insurers adopting a strict approach, and the onus on proving the value of the loss will rest with the insureds.
What should I do now?
Insurance House will continue to monitor this situation and provide you with updates as they become available. If you wish to receive specific advice about your own business interruption loss or have pressing concerns, please contact your Relationship Manager on 1300 305 834 or email firstname.lastname@example.org.