The ongoing saga of insurance policy response to COVID-19 business interruption claims reached an important intermediate point in the High Court of Australia on 25 June. Insurers have been unsuccessful in an effort to appeal a judgement from the NSW Court of Appeal.
This is one of two major Test Cases considering how Australian commercial insurance policies offering business interruption cover will respond to claims following COVID-19 interruptions.
This first Test Case considered exclusion clauses for infectious diseases which the Insurance Council of Australia argued would apply to exclude claims. In 2015, there was a substantial updating of Commonwealth legislation affecting biosecurity risks in Australia, resulting in the withdrawal of the Quarantine Act (1908). New legislation, the Biosecurity Act (2015) has far wider scope over the biosecurity of human, animal, and vegetable risks. Many insurance policies excluded losses where the triggering event was notified under the Quarantine Act (1908). For most policies in force in early 2020, these exclusion clauses had not been updated to refer to the new legislation.
The argument put to the NSW Court of Appeal (bypassing the NSW Supreme Court) by the Insurance Council of Australia (ICA) was:
- that the words ‘subsequent amendment’ refers to Acts which have been repealed and replaced; and
- that the reference to the Quarantine Act (1908) was so absurd and inconsistent with the intention of insurers that it should be replaced.
These contentions were rejected in a unanimous (Five-Nil) judgement in the New South Wales Court of Appeal in November 2020. Subsequently, the ICA sought Leave to Appeal this to the High Court. On 25 June, that Leave to Appeal was rejected by the High Court. The Court considered both written and oral submissions. The Court concluded that there was not sufficient doubt in the NSW Court of Appeal ruling to warrant a High Court appeal and the matter was dismissed.
A second Test Case is currently before the Federal Court, expected to be heard in September 2021 and focuses upon the manner in which claims under a sample of representative policies would be assessed. Judgements on similar topics have already been delivered in the UK, Ireland and USA, and those prior judgements may be persuasive to Australian Courts.
Experts across the Insurance Industry expect this second Test Case, which has considerable complexity, will also end up back at the High Court before the end of the year.
Australian Insurers sought early lodgement of claims, so they can gain some understanding of exposure. Insureds and brokers have been hesitant to lodge claims, given the legal uncertainty. Hence, there is little reliable information to aid insurers and claims professionals in understanding the number and timescale for claims, and the likely quantum. The High Court submissions suggest there may be up to 250,000 claims with a potential exposure of A$10bn. This will have major ramifications for the insurance industry.
Added complexity arises from an imminent class action against at least two Insurers, flagged by a Melbourne legal firm.
A major challenge for the industry will be securing the specialist skills needed to assess these business interruption claims. The few claims lodged to date suggest that a high proportion will be complex. Crawford & Company has been working with insurers to understand resourcing needs, increasing the size and skills of our business interruption team to help. We are also sharing our technical expertise with insurers to deliver optimal solutions to deal with this unique challenge.