IAG will make an estimated $865 million provision and raise additional capital as a result of the NSW Court of Appeal judgement that found against insurers on business interruption exclusions related to COVID-19 impacts.

The financial year post-tax provision reflects policies referencing the outdated Quarantine Act, which was the subject of the court case, as well as those with prevention of access extensions that are also expected to be legally tested.

“We have undertaken quite a comprehensive and rigorous process to come up with a potential exposure here around the outcomes of these adverse findings,” CEO Nick Hawkins told a briefing today.

“Of course, we were building this out as a contingent plan, and it was not our expectation that we would be having this meeting today.”

IAG said it had about 76,000 policies with business interruption coverage and about half of those had included the Quarantine Act references. The wordings for renewals are being changed as they fall due, in a process that will continue into the June period next year, while the changes have been made on new policies issued.

Mr Hawkins described the court decision as “disappointing” and said IAG was liaising with the Insurance Council of Australia (ICA) on a possible High Court appeal on the test case, which centred on policies issued by Hollard and HDI Global Speciality.

IAG says if an appeal proceeds, an outcome would not be expected until next year and its provision takes a conservative position in assuming the outcome is unsuccessful.

The firm’s view is that pandemic exclusions also apply in the prevention of access extensions used on certain broker platforms, but it has included $150 million for those policies as part of the total.

The provision is estimated to have a net after-tax impact on fiscal 2021 full-year earnings of about $805 million.

IAG will raise up to $750 million in new equity to strengthen its capital position in response to the judgment, with the raising to include an institutional placement of $650 million at a fixed price of $5.05 per share and a retail offer of up to $100 million.

Mr Hawkins said the impact of the case could feed through to higher premiums, given there has been an industry loss.

“Like other losses, when they occur, the industry needs to reflect on that, and part of that will then be reflected in pricing,” he said. “We have seen that when other events have occurred.”

IAG also said today that there would be a pre-tax charge in the half-year results of $70-90 million related to customer refunds for multi-year pricing issues, and reserve strengthening for long-tail classes.

Mr Hawkins says the underlying business is performing well and trends in gross written premium and margin performance reported at the annual meeting have continued into October.