BI & COVID-19 Australian Test Case Ruling Announced

PBF cover in action

On 18 November 2020, the NSW Court of Appeal announced its ruling against insurers in the business interruption test case heard last month.


Testing times for Business Interruption insurance


As the impact of COVID-19 began to hit in March this year, the Insurance Council of Australia (ICA) declared the pandemic an insurance disaster. Key product lines were identified as being impacted by the global outbreak, among them Business Interruption (BI), which covers loss of profits and additional costs a policyholder suffers, typically after physical damage to property, such as a fire or flood.


The ICA noted that most businesses with BI insurance would not be covered for losses stemming from COVID-19. The reason was that most BI policies typically cover disruption to a business because of physical damage to assets the business relies upon. And while some BI policies respond to the closure of a business by an authority for a number of risks, including infectious disease (e.g. Legionnaires’), the majority of BI policies written in Australia contain exclusions relating to losses caused by any disease notifiable under the Biosecurity Act 2015 or the Quarantine Act 1908. In short, quarantinable or infectious diseases, such as COVID-19, are generally excluded as a trigger for a claim in these policies.


On that basis, most BI policyholders have not been able to claim for financial losses incurred during the pandemic.


However, in August, a test case was brought before the New South Wales Supreme Court by the ICA and the Australian Financial Complaints Authority (AFCA) to resolve uncertainty about some outdated wording in pandemic exclusions.


The BI test case consisted of two separate small business claims that were lodged with AFCA as part of its dispute resolution process. The argument centred around whether policies that refer to the repealed Quarantine Act 1908 should respond to cover COVID-19 claims because the exclusions refer to legislation that no longer exists.


NSW Court Ruling


The NSW Court of Appeal has now ruled that COVID-19 is not a disease “declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments”, and “accordingly was not excluded from the disease benefit clauses”.


The Australian Securities & Investments Commission (ASIC) has issued guidance to insurers, Lloyd’s coverholders and general insurance brokers about handling COVID-related BI claims. Where policies do not contain a pandemic exclusion or contain a limited exclusion, assessment and payment (where appropriate) should be made in a timely manner. Where a pandemic exclusion exists that refers to the Quarantine or Biosecurity Acts, insurers are being advised to have a plan to address the outcome of the test case. 


What’s next?


While the test case ruling finds in favour of the insureds, not every BI claim will be accepted. Each claim will have to fall within the constraints and confines of the policy wording, and the trigger for the claim will have to be within those parameters. To that end, it is possible there will now be a second test case, which will aim to determine the correct position in relation to other trigger factors for BI coverage in time of a pandemic.


In the meantime, the ICA, in consultation with its members and legal representatives, intend to review the determination and specifically the grounds on which it could seek special leave to appeal the decision to the High Court of Australia.


We will keep you up to date on next steps as more information becomes available.


Until such time as the position on the policy ruling is clarified, please make sure that you keep any documents (that relate to the closure of your business and income and/or losses suffered during that period) safe and ready to be submitted to insurers. This may be the data you have on your business reporting system (like MYBOS or similar) or alternatively, data from your accountant that would enable you to prove an accurate figure of loss. The test case ruling may take time to reach a resolution stage and preserving evidence is important.


If you have any questions, or would like to discuss a possible claim, please feel free to contact your EBM Account Manager on 1300 755 112.


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