Clarity over business interruption claim impacts as a result of the COVID-19 pandemic is likely to be “some time off” as legal battles continue over wordings and other considerations, AM Best says.

Insurers are yet to decide if they will appeal an initial NSW Court of Appeal test case decision which found insurers could not rely on wordings citing the repealed Quarantine Act 1908 to exclude cover for COVID-19 disruptions.

“This test outcome remains only one piece of a much larger puzzle, with a number of other BI contract triggers yet to be evaluated ahead of understanding the full liability for insurers,” AM Best says.

“In particular, outstanding policy matters include proximity and prevention of access triggers, which are expected to also face a legal test cases in the same manner as the first.”

AM Best says there’s also further uncertainty on how any claim settlements for COVID-related shutdowns would be calculated.

“This is also likely to be a highly complex area for determination given that disruption borne by prevention of access, for example, would only be to the detriment of the business in the context of the pandemic operating environment, which in itself may be at a far weaker level as compared to the pre-pandemic position,” it says.

Insurers have announced provisions for business interruption claim exposures and some have launched capital-raisings to boost solvency positions.

AM Best says the ability to make recoveries from reinsurance programs will be a key factor and overall a mixed impact is expected for insurers in the Australian commercial segment.

Loss exposures are likely to be most significant for the largest insurers in Australia in absolute terms, but they are also the type of companies typically best placed to raise additional capital.

smaller commercial insurers’ exposure is likely to correlate to their market share.

“However, this could still be significant for earnings and in some cases could drive solvency deteriorations,” AM Best says.

“Unlike the largest participants, some smaller insurers exhibit limited financial flexibility due to their ownership structures and therefore may have less ability to raise significant additional capital if required.”