COVID 19 Business Interruption Update

We are writing to provide our clients with an update on matters relating to any potential cover for COVID 19 Business Interruption losses, the extent of cover under insurance policies, and the recent test cases heard by the NSW High Court.

BACKGROUND

In 2005-6, the global insurance industry introduced general exclusions for losses relating to quarantinable or infectious diseases, following the SARS virus which spread through Asia.

It is important to have a long term viable and sustainable global insurance industry which would not be destroyed due to a single event impacting every business. If that were to occur there would simply be insufficient funds within the industry to meet so many claims simultaneously. 

Insurers have always designed and priced their policies on the basis that pandemics are not insurable due to the potential magnitude of losses and the challenges of modelling the risk and ensuring coverage affordability.

Most current business policies are likely to contain exclusions relating to losses caused by notifiable, quarantinable or infectious diseases.

In many policies Insurers mistakenly referred to the Quarantine Act, which was repealed in 2015 and replaced with the Biosecurity Act.

TEST CASE BOUGHT BY THE INSURANCE COUNCIL OF AUSTRALIA

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 was to determine

  • If the Quarantine Act carve-out is found to exclude COVID-19, then cover will not be available under an infectious disease 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 disease 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.

TEST CASE RESULT

  • On November 18, 2020 the NSW Court of Appeal delivered its judgement. 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-out in the infectious disease benefit is not enlivened.

  • On December 8, 2020 the Insurance Council of Australia advised it will seek leave from the High Court to appeal a decision that found business interruption exclusions citing the Quarantine Act are not valid in rejecting COVID-19 related claims.

The ICA says it remains of the view that pandemics were not contemplated for coverage under most business interruption policies and it will request the matter be heard as quickly as possible if special leave to appeal is granted.

IMPACT FOR AB PHILLIPS POLICY HOLDERS:

The decision by the NSW High Court doesn't necessarily resolve the issue of whether the business interruption coverage is available for COVID losses. This is due in part to the following:

  • Insurers are most likely to appeal this to the High Court of Australia.

  • All insurance policies contain several other exclusions and conditions relating to business interruption claims and how they apply to infectious diseases and the like. In many cases we suspect these other conditions and exclusions may also exclude cover for this event.

  • 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.

John Berrill, an insurance lawyer with Berrill & Watson, said the ruling could bring out "tens of thousands" of claims. But he said it did not automatically mean claims would be successful.

"You've still got to prove you had a COVID-19 outbreak, you've got to prove you suffered loss, and that you suffered loss as a result of the outbreak. And that has not been dealt with here," he said.

He said insurers had used the exclusion as "a quick knock-out blow, and that strategy has not worked". Other areas in which insurers are likely to refuse claims include proximity of an outbreak, and access to the business.

WHAT HAPPENS NOW?

Naturally we are totally supportive of our clients and if there is any possibility of us being able to achieve a positive result for a Business Interruption claim we will try every angle.

AB Phillips will continue to monitor the situation and provide further updates as matters progress.

To get in touch with us to discuss your situation, please reach out to your Account Manager or call 1300 242 136.

Nicky Manngeneral