The Insurance Council of Australia (ICA) has provided a summary of current legal action aimed at clarifying COVID-19 business interruption claims – including more detail about the proposed second test case.

As insuranceNEWS.com.au has reported, the NSW Court of Appeal found in favour of policyholders following a test case last year, saying pandemic exclusions that refer to the now repealed Quarantine Act are not effective.

The insurance industry is seeking leave from the High Court to appeal the verdict, but ICA says even if this is unsuccessful there are other issues that need to be resolved “in order to determine whether policyholders will ultimately be covered”.

“That is why the ICA and its members are working with the Australian Financial Complaints Authority (AFCA) on a second test case to test the application of these further issues of pandemic coverage in business interruption policies,” ICA says.

“It is proposed that the second test case will determine the meaning of policy wordings in relation to the definition of a disease, proximity of an outbreak to a business, and prevention of access to premises due to a government mandate.”

ICA says it understands the frustration of potential claimants but there are “several reasons” why certain legal principles need clarification.

“First, many business interruption policies envisage events, including pandemics, as having a direct impact on a policy holder. That is, a fire, road closure, flood, or outbreak of a disease occurs in or very close to a business and it is not possible for that business to operate as normal.

“Thankfully, for most Australian businesses this has not been the case with the COVID-19 pandemic and the impact has been felt largely because of secondary actions, such as those taken by governments or government authorities.

“Second, it is relatively straightforward to assess physical damage on a business, like the impact of a fire on a property, but far more complex to assess non-physical damage, such as to earnings, reputation, or value.

“The unique nature of this pandemic means that in many cases businesses were able to operate but under changed circumstances, for example a restaurant could provide take away but not dining. This complexity is compounded when governments have already provided some compensation for damage to businesses, like the JobKeeper program.

“Third, while many business interruption policies contain common terms these are generally not off-the-shelf policies like those for home and contents, but are bespoke arrangements prepared by a broker for a business’s particular circumstances.”

ICA says insurers aim to include a spread of businesses and locations to ensure the second test case is as comprehensive as possible. They have also undertaken to file proceedings for the second test case by mid-February.

The industry will meet the costs of policyholders in the proposed second test case and any appeal, as it did in the first test case.

Click here to read the ICA’s summary.