Australian Insurers Latest to Seek BI Clarity

As underwriters and policyholders in the UK await the judgement from the test case on a range of business interruption insurance clauses, insurers in Australia have launched a bid for legal clarity for the validity of their exclusions.

The Insurance Council of Australia (ICA) has begun proceedings in the NSW Supreme Court to test the application of certain infectious diseases exclusions in business interruption policies.

It comes as ICA CEO Rob Whelan said insurers had neither considered or priced cover for the impact of a pandemic.

“The Insurance Council initiated this test case on behalf of insurers that sell commercial property policies with business interruption cover,” he explained. “The ICA believes this test case is an important step towards providing greater clarity to insurers and small business customers in the treatment of pandemic-related claims.

“The industry wishes to have the case heard as quickly as possible, given the challenging times being experienced by the small business sector because of COVID-19, the past season of natural disasters and the recession.

“Most insurers have never contemplated coverage for pandemics in their policies and did not price pandemic risks into premiums. They believe pandemic-related exclusions are appropriate but wish to provide greater clarity through engaging a superior court process.” 

Lawyers representing the ICA have submitted pleadings to the court for a combined test case. The test case consists of two separate small business claims that were lodged with the Australian Financial Complaints Authority (AFCA) as part of its dispute resolution process.

The case involves claims against policies written by Hollard and HDI Global Specialty with the ICA saying it hopes the process will “assist the whole insurance industry in reaching a better understanding of how the infectious disease exclusions in policy documents respond to the unique circumstances of the COVID-19 pandemic”.

The ICA said it recognised globally, insurers have designed and priced their policies on the basis that pandemics are not insurable due to the magnitude of potential losses, and the challenges of modelling the risk and ensuring coverage affordability.

The ICA has chosen two insured businesses whose claims form the basis of the test cases and will assume the legal costs for the hearing.

It added that the association “will not pre-empt legal arguments that will be put forward and encourages all parties and interested persons to allow the legal process to take place unencumbered by speculation or commentary”.

The ICA said it was fully aware that the AFCA will use the outcomes of the test case in determining complaints arising in respect of business interruption claims with the infectious disease exclusion.

Richard Enthoven, CEO and founder, The Hollard Insurance Company said the issue remained that the industry had not designed their policies to respond to a global pandemic.

“We remain of the clear view that business interruption coverages do not cover pandemics,” he added. “However, we volunteered to be part of the test case process so that the court system can clarify for our policyholders, Hollard and the industry how to handle this important issue.”

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