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QBE raises virus cost estimate after UK ruling

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QBE has made an extra $US185 million ($240 million) allowance for potential Australian business interruption claims after a UK Supreme Court ruling on Friday went against insurers.

The company says the UK judgment does not have a direct net profit impact but has a reinsurance effect that reduces downside protection available for Australian claims, leading to the risk margin strengthening.

“Given an already material gross Australian business interruption claims provision, substantial risk margins and significant reinsurance protection, including a modest amount of remaining aggregate protection, the group believes it has allowed for potentially severe Australian business interruption scenarios,” the company said today.

QBE’s total ultimate allowance for COVID-19 related costs has risen to $US785 million ($1 billion), with costs for the past financial year estimated at $US655 million ($850 million).

The Supreme Court ruling represents the final outcome for the UK business interruption test case after appeals were lodged in the nation’s highest court by insurers and the Financial Conduct Authority (FCA).

Insurers were unsuccessful in their main grounds for appeal while the court substantially allowed the FCA’s appeal on behalf of policyholders.

“The practical effect is that all of the insuring classes which were in issue on the appeal will provide cover for the business interruption caused by COVID-19,” FCA’s legal advisers Herbert Smith Freehills said.

Insurers participating in the UK appeal were QBE, Argenta Syndicate Management, Arch, Hiscox, Zurich, MS Amlin and Royal & SunAlliance.

'We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible,” FCA Executive Director, Consumers and Competition Sheldon Mills said.

“Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

The Insurance Council of Australia (ICA), which is seeking to appeal a NSW test case decision in the High Court, pointed to differences when looking at local implications.

The NSW Court of Appeal decision which went against insurers related to whether exclusions citing the repealed Quarantine Act, rather than the Biosecurity Act, are valid. A second test case is being considered that focuses on other issues.

“It is important to note that the wordings of the UK insurance policies which were the subject of that case differ in significant ways from many of the policy wordings that have been issued in Australia,” an ICA spokesman said.

Litigation funder ICP said today it planned to fund a class action on behalf of small businesses in the wake of the NSW test case, with law firm Clayton Utz to advise individual firms on whether they have a basis for pressing their claim.

ICP says UK precedents are relevant to Australian legal proceedings and the Supreme Court decision has bolstered the proposed class action.

“Our message to business owners is do not take your insurer at its word when it says you’re not covered for BI losses, check your policies closely and get independent advice,” ICP MD John Walker said.

Herbert Smith Freehills say the UK decision also has implications for the insurance industry more generally, as it determined that the Orient Express decision, which in some cases has limited business interruption payouts after catastrophes, was wrongly decided and should be overruled.

The UK decision is available here.