The Insurance Council of Australia (ICA) has released a detailed explanation of the industry’s response to COVID-19 related business interruption claims, following criticism of lengthy test cases which compare unfavourably with a similar process in the UK.

As previously reported, the first test case – which dealt with the issue of exclusions referring to the now repealed Quarantine Act – went against insurers but arguments are yet to be heard on a High Court appeal.

A second test case will deal with issues such as the definition of disease, proximity of an outbreak to a business, and prevention of access due to government mandates, and is heading for a Federal Court trial later this year.

Some believe it could be the end of next year before all hearings and related appeals are completed, but ICA has a more optimistic view, hoping for clarity before the end of this year.

An article in the Australian Financial Review this week asks “why things have gone at a snail’s pace in Australia”, while the UK court process is complete with many claims already paid out.

And as reported yesterday by insuranceNEWS.com.au, the Australian Securities and Investments Commission (ASIC) has also criticised the process here.

“We have been frustrated with the time that it has taken for the first test case, which perhaps was not as broad as it could have been, such that we find ourselves in a world of a second test case,” ASIC’s Deputy Chairman Karen Chester said.

ICA, however, released a detailed statement highlighting several key points, including:

- Pandemics were not considered for coverage under most business interruption policies and premiums were not collected

- All parties recognised additional test cases would likely be required beyond the Quarantine Act issue, but at that early stage an insufficient range of complaints had been submitted to AFCA

- The UK Financial Conduct Authority (FCA) has the power to bring hypothetical claims to the court process, but ASIC does not. Instead test cases must be based on actual complaints lodged with AFCA

- The industry wants to bring clarity to claimants as soon as possible and stands ready to act swiftly on court rulings.

“As soon as the courts make their final determinations the general insurers impacted have plans and resourcing in place to move quickly on processing whatever claims then become eligible for payment,” an ICA spokesman said.

“As an industry we are also considering possible options that would assist in the fast resolution of BI claims, for example a centralised database identifying where outbreaks of COVID-19 have occurred.”

The ICA statement in full:

BI test cases

Pandemics were not considered for coverage under most business interruption policies and premiums were not collected to reflect the cost of cover for pandemics. In addition, reinsurance is not generally available for pandemic cover.

In mid-2020 the ICA agreed to take a coordinating role for the impacted insurers to have the BI issues determined together and as quickly as possible to create certainty for the benefit of insurers and the policyholders. Although not a party to the proceedings, the ICA engaged closely with AFCA to get agreement on both test cases and its members are funding costs for policyholders.

The Quarantine Act exclusion was the threshold issue in dispute impacting the overwhelming majority of claims that had been advanced under infectious diseases clauses in BI policies issued in Australia. ICA supported the position that the first test case should be limited to the construction of the Quarantine Act exclusion issue for this reason.

At that time all parties recognised additional test cases would likely be required to address other substantive policy issues arising in BI policies issued to small businesses, beyond the technical issue of the construction of the Quarantine Act exclusion issue. But the threshold issue could be advanced without the need for a broad range of AFCA complaints, negotiations on the relevant facts of those complaints and a first instance hearing.

Industry subsequently worked with AFCA and policyholders to identify specific complaints that contained examples of these issues in order to commence the second test case, even though the appeal to the High Court on the Quarantine Act exclusion was still to be heard. The second test case was filed in February 2021 – meeting the deadline set by regulators - and has been expedited by the Federal Court.

Australia vs the UK

The position in the UK is very different to Australia in a number of ways.

First, the policies in the UK generally did not contain a carve out to infectious disease cover such as the Quarantine Act or Biosecurity Act exclusionary language used in Australia. Secondly, the court process is different in that the UK FCA was able to bring hypothetical claims which raise issues of general importance to financial markets, without the need for an actual specific dispute and agreement with the insureds. Here ASIC does not have that power; rather AFCA has the discretion to agree that a financial firm can treat a complaint as a test case, where there is an important question of law to be resolved. But a test case can only be brought where AFCA has such a complaint before it and at the time of the first test case there were fewer than 20 BI complaints before AFCA (more complaints were needed to field the full range of policy wordings to be tested, and these were eventually forthcoming). Thirdly, in contrast to the UK, it is well established that Australian courts cannot consider abstract questions of law without the right or duty of a person being involved.

In Australia, any test case must ultimately be agreed to by AFCA , as it has the sole discretion under the AFCA Rules to treat a complaint as a test case failing which it can reject the request and proceed to make a determination on that complaint.

Lodging and assessing a claim

Business owners are able to lodge a BI claim now or at any time. If a claim gives rise to one of the issues to be considered by the courts in the test cases, the insurer will inform the policy holder that it will not finalise the claim at that time but will do so once final test case determinations have been made. Insurers have waived insolvency and claim-lodgement time-limits for BI claims related to the pandemic.

As soon as the courts make their final determinations the general insurers impacted have plans and resourcing in place to move quickly on processing whatever claims then become eligible for payment. As an industry we are also considering possible options that would assist in the fast resolution of BI claims, for example a centralised database identifying where outbreaks of COVID-19 have occurred.

In Australia, regulators regularly track claims management data of general insurers following significant events. Regulators also set out their clear expectations to insurers over claims management. Over and above legal requirements, insurers are committed to applying relevant principles in an efficient, transparent, fair and consistent way when dealing with policyholders and assessing claims.