How to build a case for a business interruption insurance claim

Zilla Efrat | May 2021

This article was current at the time of publication.

Two test cases before the Australian courts should clarify whether businesses are eligible for business interruption (BI) insurance payouts to cover losses from the COVID-19 pandemic.

While these cases progress through the courts, practitioners are being advised to prepare their clients for any positive developments. 

Local test claim in the balance

The UK’s Supreme Court to a large extent allowed the appeal of the Financial Conduct Authority (FCA) on behalf of BI insurance policyholders last year. Specifically, widening the scope of policies in relation to coverage for losses caused by COVID-19.

In Australia, one test case is being funded by the Insurance Council of Australia (ICA) and coordinated by the Australian Financial Complaints Authority (AFCA).

It focuses on exclusions in many policies referring to “a quarantinable disease under the Quarantine Act 1908 and subsequent amendments”. However, that Act was repealed in 2016 and replaced by the Biosecurity Act 2015.

Most policies have been updated to refer to this Act, but some still reference the Quarantine Act 1908 and subsequent amendments. 

This test case is looking to establish whether policies that still refer to the Quarantine Act 1908 should be interpreted as an intention to include its replacement legislation, the Biosecurity Act 2015.

In the first instance, the test case went against insurers in the New South Wales Court of Appeal, but according to ICA, an application for special leave to appeal this ruling is expected to be heard by the High Court of Australia, in May or June 2021 at the earliest. 

Mark Darwin, a partner at global law firm Herbert Smith Freehills, believes this application for special leave will probably be successful because of the significance of the issue and that the appeal could be heard in the latter part of this year.

Test case two

A second test case comprises nine separate small business claims lodged with the AFCA covering a range of business sectors and locations. 

Darwin says this claim involves nine different insurers filing against nine different policyholders identified as being representative of issues happening in the industry. 

“These are being heard together and the ICA is coordinating it,” he says. “But there is no hearing date set and they haven’t even had a defence filed yet.” 

This case will determine the meaning of policy wordings concerning the definition of a disease, proximity of an outbreak to a business, and prevention of access to premises due to a government mandate, as well as policies with a hybrid of these types of wordings.

According to the ICA, these matters are not clear-cut and there is a need to clarify the legal principles used to resolve disputes. 

“Essentially, the courts’ determinations will provide the clear direction and guidance required for decisions to be made on similar issues arising in other disputes,” it maintains.

The representative body also says the second case is expected to be heard in the first half of September 2021 with any appeal to be dealt with by the Full Court of the Federal Court in the first week of November 2021.

Test case three

Yet another test case involves Star City Casino, who has lodged a claim against insurer, Chubb, and other insurers, after its claim for BI losses during COVID-19 lockdowns was declined.

The case centres around what defines a “loss” and whether losses stemming from action taken by authorities to prevent the spread of COVID-19 are covered by the insurance policy. 

What your clients need to know

“Most BI policies in Australia only cover losses arising from physical damage on the property,” Darwin notes. 

“COVID-19 is not that. Clients may have a potential claim if they have a non-damage extension that might apply.”

He says practitioners should be advising clients to check their insurance policies. If they have BI insurance, they should look to see if it has a non-damage extension for either disease or actions by authorities. 

If clients believe they have a claim, Darwin suggests seeking relevant professional advice and notifying their insurers as soon as possible. 

“If they delay, their insurer might say they have breached the policy and have been prejudiced by the delay,” he warns.

Policyholders shouldn’t be put off if their insurer responds negatively. “My advice to clients is that’s to be expected until the test cases are resolved,” Darwin adds. 

“Best practice would be for clients to gather all their financial documents for the relevant period so that they are not looking for them in two or three years.

“Secondly, they should get witness statements from a few key personnel in the company that can explain what the impacts of the lockdowns have been on their business. 

“Employees tend to move on or forget things, so it’s important to get this down on paper while things are reasonably fresh in people’s minds.” 

Making a claim?

Mark Waller, a consultant to Clayton Utz, a firm representing some of the insured, reminds practitioners that claims for under $500,000 can be resolved free of charge through the AFCA.

He urges larger companies with claims of more than $500,000 to have their policies and claims reviewed as soon as possible, by either a lawyer specialising in the area, or a suitably qualified industry professional. 

While the AFCA can hear claims of up to $1.085 million, Waller notes that it can only award compensation up to $542,500. Therefore, if a claim is above $542,500, a claimant will need to progress it outside of the financial complaints authority.