Business interruption insurance for COVID-19 – do you have a valid claim?

From the outset of the COVID-19 pandemic, insurers’ position was that their insurance policies did not respond to business interruption losses caused by COVID-19, as their policies did not cover losses caused by a pandemic.

Given the number of claims, and the extent of the disputes between policyholders and insurers, in 2020 and 2021 test cases were commenced by agreement between certain insurers, the Insurance Council of Australia (ICA), and the Australian Financial Complaints Authority (AFCA) to seek clarification regarding insurance coverage for losses suffered because of COVID-19 and related government restrictions and orders. The test cases were selected by the insurers and the ICA.

In October 2022 they got their answer, when the High Court declined applications for special leave to appeal certain aspects of the Full Court’s judgment in the second test case (subject to one claim which is still before the Federal Court).

The net effect for policyholders is a mixed one, with one door open and another closed.

The clauses in your insurance policy that will (and won’t) respond to a COVID business interruption claim

Those with a “disease clause” will likely have cover for losses caused by an outbreak of COVID-19 in the area around their premises. A “disease clause” provides cover for interruption to the business caused by an outbreak within a specified radius of the premises (usually 20 kilometres). A policyholder will generally be covered if there was an outbreak within the relevant radius and the business’s loss was caused by that outbreak.

Further, if the policy does contain a disease clause, insurers cannot deny or limit cover by relying on exclusions which exclude diseases declared under the repealed Quarantine Act 1908 or make any deduction from claims for JobKeeper payments received by the business.

On the other hand, the effect of the test cases is that cover for COVID-19 related losses will most likely not be available under clauses in the policy that extend cover for losses caused by “prevention of access” or a “catastrophe”, or similar type clauses.

Option 1: claim on your policy

Policyholders with a disease clause who can establish that a COVID-19 outbreak within the specified area of their premises was a cause of their losses should press their insurer to promptly assess and pay their claim. In some cases, insurers are continuing to maintain their rejection of claims under disease clauses (due to a misapplication of the test case findings around disease clauses) and if your policy contains a disease clause you should seek advice regarding your position.

Since January 2021 claims handling has been classified as a “financial service”, so insurers, brokers, and any other party that provides claim handling services are subject to the duties in the Corporations Act, including the duty to act efficiently, honestly, and fairly, when handling claims. If an insurer refuses to pay a claim under a disease clause, a policyholder can lodge a complaint with AFCA. AFCA has advised that it will now resolve all the complaints before it that were put on hold pending the outcome of the test cases. However, it is important to remember that the maximum amount of compensation that AFCA can award is $542,500. Accordingly, if a policyholder’s claim is for more than that amount, they should consider pursuing their claim outside of AFCA.

Option 2: class actions

Class actions have also been commenced in the Federal Court against QBE, Hollard, Insurance Australia Limited, and Lloyd’s Syndicate 2003 regarding COVID-19 business interruption cover. These class actions were also put on hold pending the outcome of the test cases. Following completion of the test cases, insurers have indicated an intention to apply to “de-class” some of those class actions, which would mean the policyholders would have to individually pursue their claims.

In any event, policyholders who are presently affected by the class actions, but do not want to await their outcome, can take steps to opt out of them and pursue their claim through AFCA or a Court.