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We have been closely monitoring the outcomes of the two COVID-19 Business Interruption (BI) test cases underway in Australian courts. With two-thirds of Australian small businesses suffering loss of income related to COVID-19 outbreaks and one in ten ceasing to trade for a period, the outcome of these cases is paramount to the survival of many.
The first BI test case, which was run by the Insurance Council of Australia (ICA) and Australian Financial Complaints Authority (AFCA) argued that insurers could rely on the policy exclusion referring to the repealed Quarantine Act to deny COVID-19 claims. However, in November 2020, the NSW Court of Appeal ruled in favour of policyholders, citing that the Quarantine Act 1908 “and subsequent amendments” could not be read as also including the current Biosecurity Act 2015. As a result, insurers cannot rely on exclusions that only refer to the Quarantine Act to exclude COVID-19 BI claims.
As expected, the ICA appealed the outcome in the High Court of Australia, but on June 25, 2021, the appeal was rejected. While the outcome of the second BI test case (which examines issues of the definition of disease, proximity to an outbreak, and prevention of access due to government mandates) is still pending, policyholders are now being encouraged to lodge their claims with insurers.The test cases have prompted insurers to review and revise their policy wordings and set aside millions in reserve to cover these losses.
Preparing a BI claim can be time-consuming. Depending on the extent of the income loss, it may be worthwhile engaging a forensic accountant (loss preparer) to assist in quantifying and preparing sufficient supporting evidence of the loss. Many policies provide coverage for these types of loss preparation expenses (up to a limit), but it is important to note that until the insurer accepts the claim and confirms the loss is covered, there is no guarantee the loss preparer costs will be covered. Honan is ready to assist clients in preparing claims or engaging reputable and experienced loss preparers to support a claim submission.
The last 12 months have seen a raft of regulatory changes related to claims handling and settling. As a result of the Haynes Royal Commission recommendations, claims handling and settling is now classified as a financial service, meaning as of December 31 this year, any business providing this service must hold an Australian financial services license (AFSL) for claims handling and settling. While there are some exemptions for brokers as intermediates, most insurers and claims third-party administrators will be required to hold the license. ASIC will work with AFSL applicants to determine the outcome of license requests between July 1 and December 31, 2021.
These changes, in addition to changes to the 2020 General Insurance Code of Practice and Dispute Resolution Processes Regulations, are designed to ensure an efficient, honest, and fair claims process. Claims Managers will need to demonstrate that all their representatives meet the standards in terms of claims progress timeframes, providing clear and regular communication, and adopting flexible and fair processes for claimants experiencing vulnerability or financial hardship. In FY22, Honan expects to see insurers providing significantly more communication around their claims services; from the provision of fact sheets when offering a cash settlement, to more streamlined dispute resolution processes.
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