The Australian Financial Complaints Authority (AFCA) has supported consideration of a UK-style legal test case model for issues with wide-ranging impacts, amid scrutiny over the insurance industry’s approach to business interruption matters.

AFCA says it has considered the test case procedure used by the UK Financial Conduct Authority to resolve business interruption issues, and proposes the model could be explored in Australia.

“In some cases, regulators are more appropriately placed to institute a test case in the public interest, rather than AFCA’s test case procedure being used,” it says in a submission to a Treasury review.

If the UK model was considered for adoption, it would require significant consultations with the government, regulators and other stakeholders, it says.

The Government is completing a first scheduled review of AFCA, which began operating in November 2018 and which has used its test case procedure for the first time in relation to business interruption disputes.

Under the procedure, insurers can request that a dispute that goes to AFCA be decided instead by the courts as a test case. AFCA is not a party to the case, but monitors the outcome and applies the decision to similar complaints.

Australian Securities and Investments Commission (ASIC) Deputy Chairman Karen Chester told a parliamentary committee last month that the regulator was not able to facilitate test cases in the same way as in the UK, where the FCA test case has been finalised, and was monitoring local progress.

“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,” she said.

Ms Chester said there was a “noodle bowl of insurance policies and clauses” and tens of thousands of businesses may be eligible to make a claim.

ASIC in the second half of last year reviewed 392 policy wordings. Its data collection shows that as of December 31 80% of lodged claims had been declined, about 4% had progressed to external dispute resolution and 1.2% had been accepted or settled.

Insurers have agreed not to apply claim time limits or seek to avoid liability where a policyholder is insolvent, given the passage of time associated with waiting for an outcome of the two test cases.

ASIC has encouraged small business to contact their broker or insurer and ask whether their policy may cover COVID-19-related losses, depending on the outcomes.