Possible clarity for business interruption insurance

Traditionally, business interruption insurance cover is triggered by damage to the business premises.

There has been uncertainty in Australia and other jurisdictions as to whether business interruption insurance policies will respond to the impacts of COVID-19 on businesses.  To date, insurers have been reserving their rights and have not paid out under policies.

As a welcome development, on 31 July 2020, the Insurance Council of Australia and the Australian Financial Complaints Authority (AFCA) launched a test case in Australia involving two insurers and two businesses considering the application of infectious diseases cover in business interruption policies.1  This follows a similar test case recently released in the UK.

According to the Insurance Council of Australia:

“Insurers believe the intention of pandemic and communicable human disease exclusions are clear. However, a judicial determination will provide insureds and AFCA with greater legal certainty on this issue.”   ​

According to AFCA:

“Following discussion with the Insurance industry, ASIC, APRA and Treasury, AFCA has agreed that a test case before a superior court should proceed to allow for a determination of this threshold issue. Resolution of this threshold issue is important to assist AFCA in its dispute resolution role.”

Judgment in this case will hopefully provide:

  • the clarity that the industry and the insureds have been looking for; and
  • the basis for AFCA to issue determinations in relation to more than 30 complaints that have been filed by companies under their business interruption policies.

To the extent that a judgment is made in favour of the customers, and AFCA follows that judgment in issuing determinations in favour of the customers, it could be expected that insurers will commence payments under the relevant policies.

This development serves as a reminder to businesses to have their records in order to support a claim should an outcome in favour of businesses occur.  Records should include:

  • Detailed account of the series of events, including directives from the government, the impact on the operation of the business from its current premises, staff availability, the constraints in the supply chain, and your business’ response.
  • Documentary evidence of additional costs incurred in response to COVID-19, for example, additional cleaning costs.
  • Reports of any mitigating actions your business has taken, for example, restaurants moving to a take-away or home delivery only model, a reduction in orders for inventory, promoting the sale of excess stock, offering of any discounts.
  • History of financial performance including financial statements and monthly management accounts (including, if recorded, details of foot traffic or visitors). Monthly reports are useful to compare the disrupted period with the same months of past unaffected years.
  • Budgets or forecasts prepared before COVID-19. This is important to show the expectations of your business except for the event.
  • Amended budgets or forecasts that reflect the impact of COVID-19.

1 https://afca.org.au/news/media-releases/insurance-council-and-afca-agree-to-launch-business-interruption-test-case