Back to News

SA businesses’ keen interest in NSW COVID-19 test case

15 December 2020

Many SA businesses hard hit by COVID-19 interruptions could have a lot riding on the eventual outcome of a unanimous NSW Court of Appeals judgement that pandemic exclusions referred to in the Quarantine Act 1908 failed to exclude cover for losses associated with COVID-19.

Central to the case was that the Quarantine Act was abolished some years ago, and business interruption polices now instead reference the current Biosecurity Act.

Australia’s insurance industry is staggered by the likelihood of having to pay out hundreds of millions of dollars to insured businesses because of the Court’s decision - two of which featured in the test case brought forward by the Insurance Council of Australia (ICA).

When this article was being written no decision had been made on a possible request to the High Court to hear an appeal against the decision in favour of the businesses, but so concerned was Insurance Australia Group (IAG) about the issue it put itself into a trading halt with its shares at $5.46 and has kicked off a $750m capital raising program.

In a media statement CEO Nick Hawkins said that although he still believed exclusions to IAG’s business interruption policies were valid, it was prudent for the Group to take a conservative stance and move to strengthen its balance sheet.

It would do this by undertaking a fully underwritten institutional placement of $650m at $5.05 per share together with a $100m non-underwritten share purchase plan.

The situation and its consequences

Mr Hawkins says the situation is one where the insurance industry needs to assess the consequences of the High Court either refusing to hear an appeal, or hearing one and rejecting it.  In either case part of those consequences would “involve a pricing response as had occurred with other adverse events” – not good news for business owners.

He’s revealed some 50% of IAG’s 76,000 business interruption policies refer to pandemic exclusions under the Quarantine Act, steadily declining as the Biosecurity Act was substituted in new or renewed policies. The last of old policies will have expired by June next year.

IAG’s businesses underwrite more than $12bn of annual premiums, selling insurance under such brands as SGIC, SGIO, Swann Insurance, NRMA Insurance and CGU.

In a statement to the Australian Stock Exchange (ASX) IAG said it had received “a small number of claims” for business interruption but had made provision for “the impact of estimated potential claims for the December half year”.

The estimate, subject to peer review, includes according to the statement, “a risk margin to derive a 90% level of confidence for the group’s total outstanding claim liabilities”.

However, it should be noted this exposure has not taken account of any state or national lock-downs or potential lock downs after 31 October.

The state of affairs in SA

Because it’s market is small compared with Australia’s eastern states, claims arising from SA’s six-day November lock down will have a minimal affect on IAG’s bottom line, but Macks Advisory is aware of industry concern funding available may not be enough to meet claims in more populous states that could arise from the recent test case.

Suncorp, which trades under the names of AAMI and about 15 other insurance companies in Australia and New Zealand, has many policies referencing the Quarantine Act (1908), and in the wake of an announcement that it had $195m on hand to meet potential claims arising from the case, its shares nonetheless took a sudden 2.8% dive last month.  Policy holders will take little comfort from a subsequent announcement that this $195m “does not allow for further material COVID-19 outbreaks or shutdowns”. 

Investors have for months been pressing IAG to reveal a realistic estimate of potential exposure on business interruption claims to cover loses that several analysts have estimated at between $1b and $2b.

Insured SA business owners should note the court’s findings do not mean interruption policies referencing the Quarantine Act will apply automatically to COVID-19 business-interruption claims.

When assessing whether a claim is justified, each individual policy holder’s particular circumstances will be considered against various other clauses relevant to the policy.

Looking to the future

While we’re currently unaware of whether the IAG case will go to the High Court, there’s nonetheless widespread belief in the insurance industry there is in fact no justification for making a legal issue of anything relative to a pandemic cover.  This view is seemingly borne out by IAG chairman Elizabeth Bryan who reportedly told The Australian in October: “The industry was never designed, structured or capitalised to cover losses from pandemics”.

Be that as it may, many business relying on such a cover will take heart that IAG reported on October 23 to its annual general meeting that “guidance about gross written premium growth and underlying margin trends outlined for the first quarter of next year” were on schedule for November”. Also that “after allowing for protection provided by the 2020 aggregate cover, perils costs were tracking broadly in line with the perils allowance”.

Noting that QBE has exposure to another business-interruption test case in the UK, and despite its shares falling 3.5% in a few hours last month, the company says costs of claims in Australia will be limited to $5m.  We nonetheless can’t help wondering whether there may be more to this issue than most people realise.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

  Back to News

Want to know more? 

If you would like further information on the topics raised in this article, please fill out the following contact form and a member of the Macks Advisory staff will be in contact.