Insurance companies win test case on COVID business interruption payouts

Businesses intending to rely on their insurance policies to cover the impact of COVID-19 have been dealt a significant blow in a test case that means insurance companies may avoid paying billions of dollars in claims.

As the pandemic broke out in the early months of 2020, interrupting everything from travel to trade, many businesses went looking to see if their business interruption insurance policies would cover them for their loss of income, but the insurance industry pushed back, saying pandemics were not intended to be covered under most business interruption policies.

The matter went to the NSW Court of Appeal last year in a test case lost by the insurance industry.

On Friday, 8 October, in a second case, the Federal Court ruled in favour of the insurance companies, meaning Australia’s biggest insurers will not have to pay billions of dollars in compensation to clients suffering COVID-19-related losses.

Not all legal avenues have closed, and there’s still a Full Federal Court appeal to be heard, but Allinsure director Peter Chamberlain said the outcome of the case was a surprise.

“Many local Canberra businesses are affected by this, particularly those in hospitality, health, beauty and fitness,” Mr Chamberlain said.

The case was seen as a significant test case that will govern how thousands of insurance claims for losses incurred in the pandemic are handled.

In the case before the court, a group of small businesses were fighting some of Australia’s major insurers: Allianz, Chubb, Guild, IAG, QBE and Swiss Re, who claimed that businesses disrupted by COVID-19 did not qualify for compensation because their losses were not sufficiently linked to virus outbreaks or government restrictions.

Justice Jayne Jagot ruled on Friday that the insurers were not liable for the payouts claimed by their clients in this matter.

She said that clauses in the businesses’ insurance policies covering infectious diseases, catastrophes or prevention of access due to lockdowns were narrow enough to exclude the circumstances in which their work had been interrupted.

She said while businesses had been barred from their shops and offices, the fact that this was not because of any outbreak specifically on their premises meant the policies did not cover the losses stemming from it.

She also said that as not all the businesses were ordered to close by the government, the insurers argued that some did so because it was not viable to stay open during lockdown, meaning they were not specifically required to close as required for a successful payout.

Conscious of the repercussions of the case, the court has promised the appeal process will be wrapped up by the end of the year.

Mr Chamberlain said, “We are hopeful the outcome of the appeals process will provide some level of cover for our clients. It would be a welcome Christmas surprise.”

Justice Jagot said that if her decision was overturned on appeal, then any claims by the businesses should be reduced by government support geared at reducing business interruption losses.

“We are continuing to remind businesses that if you think you are eligible to claim a loss of income, contact your broker to make a lodgement,” Mr Chamberlain said.

In a statement, the Insurance Council of Australia said, “While the insurance industry understands the frustration of policyholders who may be waiting for a determination of their claim or resolution of a dispute, these matters are not clear cut and there is a need to clarify the legal principles used to resolve any disputes.

“The way in which the COVID-19 pandemic has impacted most businesses in Australia has not been direct, but rather largely as a result of secondary actions such as those taken by government authorities.

“Insurers and the Australian Financial Complaints Authority want these issues determined by the courts as soon as possible. The Federal Court has anticipated and planned for the decision to be appealed given the complex nature of the matter and has already set aside time in the second week of November 2021 to hear any appeals that may be filed by insurers or policyholders. The insurance industry will continue to meet the costs of policyholders in any appeal process.”