Millions of dollars in COVID-19 insurance claims hinge on upcoming test case

Small businesses are anxiously waiting for the Federal Court to hear a second business interruption test case that could see insurers pay out millions of dollars in claims to clients who suffered losses due to pandemic restrictions.

In the upcoming test case, the court will determine what triggers are required for businesses to be eligible to make a claim under their business interruption policies provided their policies refer to the superseded Quarantine Act.

Michael Lee, managing director at the Brighton Savoy Hotel in Melbourne, says his insurance provider rejected his claim early last year on the basis that his policy excluded pandemic cover and there hadn’t been a positive case of COVID-19 inside his business.

“I’m praying that our coverage does come through, otherwise, the last 16 months have been horrific,” Lee tells SmartCompany.

In the first test case, brought by the Insurance Council of Australia last year, the court found that insurers couldn’t deny business interruption insurance claims based on exclusion clauses that referenced the now repealed Quarantine Act. 

The court found that under the Quarantine Act, COVID-19 is considered a communicable disease and that references to that act couldn’t be used to reject business interruption claims.

That decision was upheld by the High Court of Australia in late July when it rejected the Insurance Council of Australia’s application for leave.

The outcome of that case has direct implications for Lee because his business interruption policy referenced the Quarantine Act. Last week, Lee called his insurance provider Chubb, who told him its position hadn’t changed because COVID-19 needed to be in the building for his claim to be considered.

“I’ve asked for that in writing but I haven’t received a response yet,” Lee says.

The test case next month will look at the wording of policies, including the meaning of ‘outbreak’ and of a disease ‘occurring’ within a particular geographical radius of a business. The test case will also look at quantifying business interruption losses. 

Anthony Ciancio, director of ADC Insurance Brokers, says the court will look out how losses incurred from COVID-19 should be assessed given many businesses received government subsidies or may have pivoted their operations.

“There’ll likely be adjustments that need to be made to the loss of income, including in reference to JobKeeper,” Ciancio tell SmartCompany.

Ciancio says there are also discussions in the industry about how businesses have pivoted their operations by switching to online sales, and the fact that some businesses have prospered during the pandemic.

“Some businesses might not be able to quantify a full loss,” he says.

Should the second test case prove favourable to businesses, industries expected to benefit most are hospitality, gyms and fitness, and retail.

The case will be heard in August and any appeal will be dealt with by the Full Court of the Federal Court in early November.

SmartCompany contacted Chubb but did not receive a response prior to publication.