Businesses that have suffered a financial setback as a result of COVID-19 restrictions will now be looking to their insurers for hefty payouts, after the NSW Court of Appeal ruled that pandemic exclusions in business interruption (BI) policies are invalid.
In a unanimous decision, the NSWCA determined pandemic exclusions that refer to the Quarantine Act and subsequent amendments, rather than the Biosecurity Act, are not effective to exclude cover for losses associated with COVID-19.
The ruling came as a surprise to IAG and led to a trading halt on Thursday, as it rushed to settle potentially nervous shareholders.
In a notice posted to the Australian Stock Exchange, IAG said it will raise $750 million to meet the expected hundreds of millions of dollars in claims from businesses that suffered financially as a result of COVID-19.
“Given the NSWCA’s decision, IAG intends to recognise a post-tax provision of $865 million and is taking decisive action to strengthen its balance sheet via a fully underwritten institutional placement of $650 million and a non-underwritten share purchase plan to raise up to $100 million,” the insurer said.
IAG confirmed that while it has received a small number of business interruption-related claims to date, in light of the NSWCA’s judgment, it is expecting that number to grow.
The BI test case revolved around two plaintiffs — HDI Global Specialty SE and the Hollard Insurance Company — and four defendants from the tourism and retail sectors. It was launched by the Insurance Council of Australia (ICA) to seek formal clarification on whether insurance claims need to paid to small businesses impacted by the COVID-19 pandemic, following several complaints to AFCA by businesses whose claims had been denied.
“IAG’s view is that the intent of its business interruption policies is to not provide cover for any losses related to pandemics such as COVID-19,” the insurer said.
“As a result, IAG is in discussions with the Insurance Council of Australia to consider whether the insurers that were party to the action will seek special leave to appeal the NSWCA’s judgment to the High Court of Australia. If an appeal proceeds, an outcome is expected in calendar year 2021.”
It further clarified that the $865 million provision covers all policies with wordings that include the Quarantine Act and without specific reference to the Biosecurity Act, which replaced the Quarantine Act, and all policies with prevention of access extensions used on certain broker platforms which reference the Biosecurity Act.
IAG now plans raise up to $750 million of new equity capital from the combination of a fully underwritten institutional placement raising $650 million at a fixed price of $5.05 per new share, and a non-underwritten retail share purchase plan targeting up to $100 million.