Tens of thousands of small businesses have been dealt another blow in the long-running legal dispute over whether insurers are liable to cover losses associated with pandemic lockdowns.
The Federal Court on Monday largely upheld an October judgment favourable to insurers that rejected key arguments from policyholders and knocked out a significant portion of potential claims.
However, for those claims that remain valid, Justice Mark Moshinsky ordered insurers should be forced to pay interest and should not be able to deduct JobKeeper payments from any payout.
Insurers may be forced to pay interest on business interruption claims to cover COVID-19 losses.Credit:Getty
The insurance industry launched a test case in 2020 after policyholders lodged business interruption (BI) claims to cover losses associated with COVID-19 lockdowns.
Insurers, including Insurance Australia Group, QBE and Suncorp, have maintained BI policies were never meant to cover pandemics and therefore policyholders were not charged appropriate premiums.
However, the High Court shocked the industry when it sided with policyholders after determining exclusion clauses for pandemics were invalid because they referenced outdated federal legislation.
The finding forced insurers to set aside more than $1 billion for potential claims, with IAG forced to raise capital and later punished by shareholders for governance failures that left it the most exposed.
The insurers then launched a second test case to deal with the extent of liability, scrutinising various attributes of the claims, including a business’ proximity from an outbreak.
In that case, Justice Jagot sided with the insurers in a decision that put the onus on policyholders to prove losses were directly related to an outbreak of COVID-19 in their local area rather than as a result of generic health orders.
On appeal, Justice Moshinsky on Monday said he “substantially agreed” with this ruling but made amendments around interest payments and JobKeeper that would increase the value of any successful claims.
Insurance Council of Australia Andrew Hall said the judgment “marks another important step in seeking clarity for business policyholders and the general insurance sector”.
“These matters are not clear cut and we acknowledge that this has been a long but necessary process that will ultimately provide important guidance on how business interruption policy wordings are to be interpreted and applied.
“We hope that the matter can be brought to a close as soon as possible,” he said.
John Berrill, one of the lawyers representing the businesses, said the 300-page ruling had “mixed results” for business owners but reaffirmed that a “significant number of claims are still viable”.
Mr Berrill said the interest payments could amount to a “significant amount of dough” if spread over a two-year period.
“For those who are in, the benefits they can get from their policies have been significantly enhanced by JobKeeper not being offset and interest being in play.”
Mr Berrill said many businesses had suffered while waiting for the outcome of the legal process and accused the insurance industry of dragging out proceedings.
“This has been going for two years. A lot of businesses have moved on, some have gone bust, a lot have never made a claim,” he said. “Those things are in no small part due to the fact that people haven’t seen a dime for two years.”
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