Australia’s insurance sector could face $1b exposure

Eufemia Didonato

It began the process by asking more than 50 insurers to provide information by May 1. This prompted a number of insurers to admit they were liable, after previously arguing they weren’t liable. It then lodged a test case to give clarity across a broad range of policies. Even if […]

It began the process by asking more than 50 insurers to provide information by May 1. This prompted a number of insurers to admit they were liable, after previously arguing they weren’t liable.

It then lodged a test case to give clarity across a broad range of policies. Even if the insurers appeal the judgment, there will be a final resolution within months.

In contrast, Australian businesses face a long slog in the courts and potentially years of uncertainty.

Instead of following the UK regulator’s lead, the Australian Financial Complaints Authority has been left to sort out the mess by joining forces with the peak insurance lobby group, the Insurance Council of Australia, to initiate a test case in the NSW Supreme Court.

Strength of exclusions

The test case, bankrolled by the ICA, will be heard on October 2. It involves insurance giant Hollard Insurance and a caravan park operator in Tamworth, NSW.

The Australian test case is basically limited to deciding whether the Biosecurity Act 2015 is an amendment to the Quarantine Act 1908 and would therefore apply the pandemic exclusion to COVID-19 even in policies that reference the Quarantine Act, which was repealed in 2016.

The test case is narrow, mainly aimed at testing the strength of particular exclusions, in contrast to the British test case which looked at complete wordings across 21 different policies.

The upshot is that whatever the verdict is, businesses will still have to seek clarification on a myriad policies outside of the remit of the test case.

With so much uncertainty, it raises the question, why is the Australian test case so narrow and fail to cover multiple insurers and multiple policies?

The Australian authority told The Australian Financial Review that unlike the FCA in the UK, the AFCA is an independent external dispute resolution body, not a regulator. It says it cannot initiate its own test case or pay the legal costs incurred in a test case.

“Once agreed, AFCA does not have any direct involvement in the running of the test case.”

Broader issues

The AFCA says the UK regulator has jurisdiction to bring a test case to determine issues of policy coverage against a broad group of insurers.

“The FCA could shape the scope and nature of any such action and was a party to the proceedings. But under the AFCA rules, other than in the case of superannuation disputes, a financial firm must request AFCA’s consent to have the complaint treated as a test case,” it says.

It has 10 disputes that cover broader issues than the October 2 test case and if an insurer wants to treat one or more as a test case, it would consider the request.

In other words, clarification in the Australian market will be a long drawn-out affair.

For instance, John Berrill from Berrill & Watson Superannuation and Insurance Lawyers has 15 claims on foot under eight different business interruption policies. Each claim involves issues outside the Australian test case, which means he will need the courts to provide guidance on these other issues.

Berrill analysed the 150-page UK judgment and compared it with the Australian test case and was disappointed.

“It smacks of the ICA trying to project manage the risk by getting a quick judgment and in their terms shutting down the controversy,” he says.

He says the broader UK test case dealt with a range of issues that are relevant to all insurance policies, including Australia.

Proof of loss

It dealt with the meaning of disease clauses and prevention of access clauses as well as the so-called doctrine of proximate cause – for example, whether COVID-19-related shutdown orders caused the loss of profit or other factors.

The British test case also dealt with whether the disease insurance clause covered only localised outbreaks or included broad pandemics.

And it looked at the issue of proof of loss which included whether businesses such as restaurants that moved from dine in to takeaway had suffered losses from a lockdown/prevention of access and the effect of “trend clauses” which put the insured in the position they would have been had the insured event not occurred.

The Australian Financial Review obtained a series of small business insurance policies from leading insurers and brokers, including Hollard, QBE, CGU, Aon Australia and Steadfast, which include clauses in some policies that could save thousands of businesses from collapsing if their insurers paid them out.

One business interruption policy states: “We will pay for loss of income that results from an interruption of your business that is caused by any legal authority preventing or restricting access to your premises or ordering the evacuation of the public as a result of damage to or the threat of damage to your property or persons within a 50km radius of your premises.”

The critical part is how it refers to “threat of damage to property or persons”. The word “persons” is why it could respond to COVID-19.

Until now, the Australian insurance industry has been in lockstep, refusing to pay business interruption claims.

But some have been quietly paying out some policy holders who yell or threaten legal action. A condition of settlement is a non-disclosure agreement, or gag order.

ASIC and APRA have previously said they are “monitoring the situation”. But given the narrow test case on foot and limited powers of AFCA, someone needs to step up and give businesses the clarity they need. For some bars, restaurants, gyms and cafes, it could be the difference between survival or collapse.

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