In June 2020, UK’s Financial Conduct Authority (FCA) – their corporate regulator similar to ASIC in Australia – launched a test case to determine whether insurance clauses that specified an infectious disease would allow some policyholders to claim for business losses attributed to lock-downs.

Test cases are generally launched to set a precedent in order to prevent multiple cases from being brought on the same or similar issues. That is said to afford the general public the opportunity to arrange their business and private affairs with some confidence and clarity. It also helps small business people to avoid lengthy and costly court disputes which they may not be able to afford.

The English court determined a case against the UK based Australian subsidiary of QBE, who is a major player in the global insurance sector. The court produced very lengthy and complex written reasons in a 150-page judgment in favour of businesses. They are able to claim for losses resulting from the Covid-19 pandemic if their policies had the relevant infectious disease clauses.

READ MORE: Insurance companies will cover the costs to clients affected by bushfires

QBE is appealing the decision of the UK court. If they do not do so they have no opportunity to set aside the judgment and they will be obliged to pay out an additional $170 million in claims. Goldman Sachs, an American multinational investment bank, said, in a research note that it was unable to comment on the rest of the UK insurance sector but resolved that the increase in claims exposure was manageable for QBE.

The Insurance Council of Australia (ICA), launched its own test case in August, and Campbell Fuller said on behalf of ICA that the matters brought before the courts in Australia are “chalk and cheese.” Nevertheless, the action was brought because many insurance policies in Australia had a policy clause relating to “quarantinable disease” which ICA believes is outdated and might mean that insurance companies would be obliged to pay claims for losses arising from the COVID-19 pandemic.

The NSW Court of Appeal will hear the case in early October. The ICA, although in the process of reviewing the complex decision handed down in the UK, believes the Australian courts will rule in the insurance industry’s favour.

Christopher Woolard, the FCA’s interim chief executive in the UK, said the ruling was a “significant step” for policyholders and that “We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market”

He went on to say: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat.”

Contrast this to comments, made in August, by Peter Harmer, the chief executive of Insurance Australia Group, he felt it was the government’s responsibility to foot the bill for the pandemic particularly as there was not enough capital in the insurance industry globally to cover the financial fallout from COVID-19.

Mr Harmer Said:  “There’s simply not enough capital in the insurance industry globally to be able to insure these events and payout claims.”

That certainly invokes a sense of Déjà vu when one reflects back to the Global Financial Crisis and the “too big to fail” mantra chanted at the time. That said, who then is obliged to pay?

The UK ruling may prove to be influential in the Australian business environment. In the UK the FCA argued a position that is similar to natural disasters, meaning shock events that restrict trade, infectious diseases caused proximity issues and therefore should trigger a payout.

Most business interruption policies in Australia will only cover property damage, but the above mentioned UK ruling may persuade the Australian Court to do otherwise. The Australian action is between Chubb (the main insurer) and Star Casino which is arguing that mandatory closures should trigger the payment of compensation under its business interruption policy particularly as the abrupt change in trading conditions was out of its control.

Whoever wins in the end, I suspect that Big Business and the lawyers will come out smiling, while the average small business person will be left to pick up the pieces and be forced to decipher what it all means.

READ MORE: More Greeks turn to private health insurance

Advice

The need arises now, to draw these matters to the attention of your State and Federal Member of Parliament and ask them to consider the risks posed to small business in the clear light. The sector is Australia’s largest employer.

You should remind every one of them of the principals that underpin fairness (equity) relevant to any contract. Simply, ask yourself the question. Why did you enter into this Insurance contract? The answer is obvious – peace of mind, your business income is covered. And that is what the insurer represents to a prospect (policyholder) at the point of sale!

‘Legal semantics” should not defeat the obligation to pay and there is a risk that may occur. That outcome is not equitable when one considers the position of policyholders (small business) who pay their insurance premiums in good faith in order to be covered against this kind of event and the damage it delivers.

Policyholders are entitled to be compensated when there is an event that causes an insured loss notwithstanding the particular language employed to define the event. For example, there is no difference between Johnny or John! Pandemics are not unprecedented. One only needs to reflect on history in order to confirm support for that submission. I don’t accept what the insurer says.