9 minute read
Courting trouble
Courting trouble
Australian insurers have lost a crucial test case over business interruption cover as more legal battles loom
Advertisement
By Wendy Pugh
What is absurdity? In the view of NSW Court of Appeal judges, it’s not insurers declining pandemic claims by relying on exclusions that refer to an old quarantine law that they didn’t know was replaced four years ago by new legislation.
Appeal judges, it’s not insurers declining pandemic claims by relying on exclusions that refer to an old quarantine law that they didn’t know was replaced four years ago by new legislation.
The Insurance Council of Australia (ICA) brought a test case to the Appeal Court to remove any lingering doubts that wordings citing the Quarantine Act 1908 “and subsequent amendments” should include the replacement Biosecurity Act 2015.
While the Acts had different names, they had essentially the same purpose and function, insurers contended. The policy wording allowed for legislative changes that might evolve over time and it would clearly be absurd to base an exclusion around a law that no longer exists.
The matter was considered important enough for five judges to hear the expedited case, but unfortunately for insurers, they ruled 5-0 in favour of policyholders in a decision handed down on November 18.
The judges, taking slightly differing paths to reach the same conclusions on some of the issues, took a literal reading view when it came to the words.
Justices Anthony Meagher and Michael Ball said it was “many steps too far” to suggest the Biosecurity Act, which has differences to its predecessor, could be considered a “subsequent amendment” under the ordinary meaning of the words.
The other problem for insurers is that diseases declared under the Quarantine Act until its 2016 repeal still exist and could still be covered by the exclusion. The list includes avian influenza in humans, Severe Acute Respiratory Syndrome (SARS), cholera and yellow fever, but not COVID-19, which emerged late last year.
While it would have made more sense to use the current law to ensure new diseases are also excluded, the wording was not a clear mistake, and it did not “rise to the level of absurdity”, Justice David Hammerschlag said.
“In a commercial context, absurdity is more than just lacking in genuine commercial good sense. It entails commercial nonsense,” he said.
Insurers have until mid-December to decide on an appeal to the High Court, but lawyers contacted by Insurance News have suggested overturning the NSW court’s ruling may be difficult, even if the matter is heard as a matter of public interest.
“It looks like a pretty solid judgment, I have to say, on basic contractual interpretation principles, and it was five-nil,” Herbert Smith Freehills Partner Mark Darwin says. “There are no obvious points of appeal that leap off the page.”
ICA is also consulting on the possibilities of running a second test case that explores issues such as proximity and prevention of access, as the industry digs in for more battles over COVID-19 pandemic cover.
A victory in the first case for insurers could have knocked out a large number of potential claims, but for policyholders the win simply keeps the door open, with more hurdles still to be cleared before any payments are agreed.
The two policies examined in the test case still require the loss to be caused by an infectious or contagious disease occurring within 20km of the premises.
Berrill & Watson Lawyers Principal John Berrill says the first test case was narrowly focused and the other issues, which have already been examined in a UK action, have been left “swinging in the breeze”.
“The problem in Australia is we are doing test cases by drip-feed at the moment. That’s what it looks like, and it is stringing it out,” he told Insurance News.
Mr Berrill says the two main avenues to claim under policies are via an infectious diseases clause or a prevention of access clause, and exclusions referencing the quarantine or biosecurity legislation really only apply to the former in most policies.
“With one exception, I have not seen any policy where the exclusion clause applies to the prevention of access cover; it only applies to the infectious diseases cover,” he said.
The insurance industry globally has been arguing all year that pandemics are meant to be excluded as there is no risk diversification for an event that can affect all regions and industries at once.
Paying all claims would be beyond the industry’s capital resources and would lead to bankruptcies, they say.
Mr Berrill notes potential losses from business interruption claims would be curbed by one-year timeframes, sub-limits and reinsurance arrangements.
While insurers are holding firm, the economic toll of the COVID-19 pandemic and policyholder anger over claim denials has fuelled legal actions around the world including in the UK, the US, Europe and South Africa.
In the UK, the regulator has taken the lead in seeking clarity, with the Financial Conduct Authority (FCA) bringing together 21 policies from eight insurers to tackle many key issues at the same time in a single case.
The matter was heard in the UK High Court in July, with the judgment backing policyholders on the majority of key issues, according to the FCA. Appeals from both sides have since been heard in the Supreme Court, the UK’s highest jurisdiction, in an expedited process and a decision could be delivered as soon as this month or early next year.
Herbert Smith Freehills suggests the UK judgment will be relevant to how Australian courts approach causation and payment calculation issues, although there are legal and factual differences, particularly given differing pandemic experiences in the two countries.
Mr Darwin says the rapid disease spread by the time of UK lockdowns was reflected in a map put up for the UK court of confirmed COVID cases that showed a sea of red dots across the country.
“If you did that here, it would be a much different-looking map,” he says.
Australian lockdowns occurred when there were relatively few cases, adding to complexities about disease proximity and the actual causes of the disruption.
“You have questions about, if the Government did something because of an outbreak, is the cause of the loss the outbreak or the Government action,” Mr Darwin said.
ICA says the industry intends to again meet the costs of policyholders and insurers in any legal process for a further test case. The cases are brought in conjunction with the Australian Financial Complaints Authority
(AFCA), which provides free dispute resolution for consumers and small business.
The other legal avenue that provides affordable access to justice for small firms is through potential class actions, which are being investigated in Australia and internationally.
Separate actions, launched independently to the ICA test case approach, are also being closely watched.
In Victoria, the Federal Court is considering a case brought by an Oakleigh café and restaurant over a claim denial that was based on an exclusion wording citing the Biosecurity Act.
At the large end of town, The Star Entertainment Group, which operates casinos in Sydney, the Gold Coast and Brisbane, is also pursuing a Federal Court case over losses, with a two-day hearing scheduled for late April.
US insurers, meanwhile, have faced a stream of lawsuits since March in multiple jurisdictions over business interruption claim denials, with many of the disputes coming from food services and drinking venues.
The COVID Coverage Litigation Tracker, produced by Insurance Law Analytics, shows the number of cumulative case filings was at 1289 by early October, and business income coverage was sought in nearly all of those.
“In the United States insurers have been largely successful in court challenges,” Insurance Information Institute Chief Actuary James Lynch told Insurance News from New York.
“Many if not most policies specifically exclude losses caused by virus, and virtually all policies require direct physical damage to property to be activated.”
The institute launched the Future of American Insurance & Reinsurance (FAIR) campaign in May to explain why pandemics are uninsurable and how only the Federal Government has the financial capacity to provide the relief small and large businesses need.
With legal tussles set to continue, Australia’s listed insurers have provided updates to the market to keep investors informed on potential exposures.
IAG said following the Appeal Court decision that it expects to make an after-tax provision of $865 million, or $1.2 billion before tax. The insurer noted it had about 76,000 business interruption policies and half of those had been using the Quarantine Act wording earlier this year.
The provision includes $150 million for possible claims under prevention of access extensions, which the firm says cover property damage events where an authority makes an order preventing or restricting access to a premises, if that would pose a risk to either persons or property.
“There is in the minds of some a bit of confusion as to whether or not cover is afforded under that extension,” retiring IAG Chief Executive Peter Harmer told the full-year results briefing in August.
“Our view in relation to our policies – and I understand this is the position of the industry – is that the pandemic exclusion applies broadly across the entire cover and is not able to be selected as to which part of the cover it applies to.”
Suncorp has topped up its provision by $125 million, taking it to $195 million in total pre-tax, while QBE, which is also involved in the UK test case, has said previously its exposure will be limited by reinsurance.
“The net cost of any business interruption claims in Australia is likely to be limited to $US5 million per occurrence,” QBE says in an update after the NSW court decision.
“This is subject to contributing losses (after recoveries under the group’s main catastrophe and quota share reinsurance treaties) not exceeding the group’s catastrophe aggregate reinsurance treaty limit of $US500 million.”
Citigroup insurance analyst Nigel Pittaway says in a research report that the Appeal Court ruling could have “significant impacts” for the industry and it’s possible those may be greater for unlisted insurers compared to the listed firms.
Nevertheless, S&P Global Ratings says Australia’s general insurance industry is still on track to achieve “a good solid return” and it’s early days in relation to how particular policies will respond.
In the wake of the Court of Appeal decision, Finlaysons Lawyers have suggested insureds should not just accept rejection of claims at face value and explore appeal avenues, such as through AFCA.
Courts are not particularly interested in the broad arguments maintaining that pandemics were never meant to be covered, but they are interested in whether policies as written are being correctly applied.
Absurd or not, Australian insurers have tripped at their first hurdle, with legal battles still having a long way to run.
