Last week’s NSW Court of Appeal judgment in a test case over business interruption cover for COVID-19 comes as a first-round loss for insurers in a fight that has a long way to run, and which is opening up on multiple fronts.

The decision means insurers can’t say wordings citing the repealed Quarantine Act 1908 and subsequent amendments also include the current Biosecurity Act, and therefore they can’t use that clause to deny business interruption claims triggered by the coronavirus outbreak.

John Berrill, Principal at Berrill & Watson lawyers, says insurers were hoping to knock out a number of potential claims with the case. The move wasn’t successful, and in addition key issues are still “swinging in the breeze” and yet to be tested.

“It has got to be said that this is the end of the beginning, not the beginning of the end,” he told insuranceNEWS.com.au. “What the decision means is basically everything is still alive and on the table.”

The Insurance Council of Australia (ICA), which facilitated the test case with the Australian Financial Complaints Authority (AFCA), is considering a High Court appeal, and must make a decision on going ahead within 28 days of the NSW judgment.

The High Court would first consider if it will hear an appeal at all. If it does take on the case, any decision may not be made until well into next year.

Insurers, who were confident the test case would go their way, could face an uphill battle to have it overturned given the decisive 5-0 judgment in favour of policyholders in the lower court.

Appeal Court justices Anthony Meagher and Michael Ball said wordings citing the Quarantine Act “and subsequent amendments” are unambiguous in referring to that law, and substituting in later legislation is not within their ordinary meaning.

“To suggest that the words ‘and subsequent amendments’ include the enactment of the Biosecurity Act is many steps too far,” they said.

The judges were also not persuaded by the insurers’ second argument, which maintained it would be “absurd” for the wording to only mean the Quarantine Act legislation, and it was an obvious mistake.

Justice David Hammerschlag says while it would have made more commercial sense not to refer to a law repealed four years earlier, the matter “did not rise to the level of absurdity” and it’s not sufficient to simply suspect a mistake was involved.

The problem for insurers is that diseases referred to under the Quarantine Act still exist – and COVID-19 is not one of them.

“The dividing line between that which lacks commerciality and that which is absurd may not always be a bright one,” Justice Hammerschlag said.

“This is particularly so where, as is the case here, the words used are not incoherent and the exclusion still has work to do because the diseases declared under the Quarantine Act to be quarantinable diseases were still identifiable.”

Many of the other wording disputes now coming to the forefront of attention are already being examined in the UK, where legal action was instigated by the regulator.

A test case brought by the UK Financial Conduct Authority (FCA) scrutinised 21 sample wordings from eight insurers relating to disease clauses, prevention of access and hybrid wordings.

The FCA has said the initial judgment mostly favoured policyholders, but final outcomes are yet to be determined in the wake of an appeal hearing in the UK Supreme Court last week.

Australian policies referencing the Quarantine Act won’t be automatically paid as a result of the NSW Court of Appeal judgment, and ICA is talking with insurers, AFCA and other stakeholders about another test case that explores issues such as proximity and prevention of access.

There is also the potential for a class action, given that many of the problems concern struggling small businesses, with Gordon Legal exploring the possibilities.

At the larger end of town, The Star Entertainment Group is pursuing a court case over its business interruption losses in the Federal Court.

Herbert Smith Freehills suggests the Supreme Court appeal decision in the UK could be relevant to how Australian courts approach issues around causation and calculation of potential payments.

In the meantime, insurers are taking stock, with market updates released last week by listed IAG, Suncorp and QBE, which is also involved in the UK matter.

Citigroup insurance analyst Nigel Pittaway says in a research report the ruling could have “significant impacts” for the industry, with IAG the most exposed listed insurer at face value.

“It is possible that the impact of the ruling may be even greater in the unlisted sector than in the listed sector, with some insurers’ viability potentially challenged as a result of the ruling,” he says.

S&P Global Ratings says claims costs will vary by firm and specific policy cover, payments may be subject to further legal avenues, and the ruling probably won’t be a major interruption for insurers.

“Our expectation is that while there will be a hit to current year earnings, the impact on ratings is negated by conservative reserving, reinsurance protection and maintenance of robust capital buffers,” it says.

South Australia’s recent coronavirus outbreak and escalating problems in Europe and the US show the issues are not going away soon, even amid the race for a vaccine.

It remains a mystery why insurers didn’t have processes in place to make sure policies clearly referred to the latest legislation, and it remains to be seen if they are more successful on other issues.

Australian courts will likely be kept busy with disputes over business interruption cover for some time yet.