This week, the High Court rejected insurers’ submission to shield themselves from claims from up to 250,000 businesses claiming costs on business interruption policies.
Shine Lawyers general manager of loss recovery Tracey Ryan said this could have a massive impact on the insurance industry and businesses alike.
“It has been estimated by the Insurance Council of Australia that 250,000 policy holders will have combined losses exceeding $10 billion dollars and this may need to be paid by insurers,” she said.
Insurers say the aforementioned business interruption policies were originally intended for events like blackouts and floods, with a clause excluding pandemics. However, the clause referred to an outdated piece of legislation; the Quarantine Act, which was repealed in 2016 by the Biosecurity Act.
After losing in a Federal Court case, insurers argued that the policies clearly referred to pandemics in general and that the specific legislation or words in the contract shouldn’t matter, but the High Court declined to overturn the previous decision. It cited that there wasn’t “sufficient doubt” within the Federal Court ruling to warrant another hearing.
“This means insurance companies can no longer say the coronavirus is not a quarantinable disease. This shuts the door to one of their major excuses to decline small businesses their interruption insurance claims,” Ms Ryan said.
“Many small business owners now have far greater prospects of success with their respective insurance claims.”
This decision only affects businesses with contracts that have outdated wording in the pandemic exclusion clause.
“There is no doubt insurers will amend future policies to ensure this loophole does not have an impact in the future, however, given the expected influx of claims, it is likely the cost of business interruption insurance will significantly increase and in some cases could become unaffordable for already struggling business owners,” Ms Ryan added.
In a statement, the Insurance Council said that the majority of payouts would have to wait for the result of a second test case in front of the Federal Court to examine other parts of the business interruption policy documents and contracts. Ms Ryan said the second test case could mean insurers will no longer be allowed to deny certain business owners claims.
“The second test case will determine the meaning of policy wordings in relation to the definition of a disease, proximity of an outbreak to businesses and the government mandate preventing access to businesses,” she said.
“If the court makes the findings Shine Lawyers submits it should, it will mean insurers will no longer be able to deny thousands of claims. In the meantime, we strongly encourage business owners to take steps to calculate their loss and collate their supporting documents so they are at the front of the queue for what will be expected to be thousands of claims being lodged at once.”