UK insurance test case ruling is ‘an important decision for Australian policyholders,’ HSF says

The UK High Court’s ruling on the business interruption insurance test case brought by the UK's Financial Conduct Authority (FCA) is “an important decision for Australian policyholders,” said Herbert Smith Freehills (HSF) insurance special counsel Guy Narburgh.

The firm’s insurance team had represented the FCA in the landmark case, which saw the court determine that most UK business interruption insurance policyholders that were forced to shut down as a result of COVID-19 are entitled to compensation from insurers.

“The recent decision in the UK test case on business interruption insurance coverage related to COVID-19 gives a good indication on how similar cases in Australia will play out,” HSF said.

The UK court judged on Tuesday that “various policy extensions can provide coverage for financial losses suffered as a result of the UK’s COVID-19 lockdown,” the firm said, and minimised “the ability for insurers to reduce recoveries in reliance on causation arguments.”

“The court considered a variety of extensions which are said to give rise to coverage either as a result of a notifiable disease occurring within a specified area or as a result of prevention of access/action by public authorities,” HSF said. “The court confirmed that various extensions would provide coverage. Disease extensions had particular success, with the court confirming that individual outbreaks are indivisible from the general pandemic, meaning that cover was not limited to outbreaks wholly within the geographical area specified in the policy.”

The firm said that the court had “little sympathy” with the insurers’ argument, which was that “the broader impact of the pandemic on the business must be taken into account as a ‘trend’ which would otherwise have affected the policyholder’s business – effectively negating any cover for the immediate local impact of the pandemic.” Instead, the court “precluded insurers from artificially distinguishing between local and national impacts to reduce claimable loss.”

“These issues represent some real pressure points for insurers, both in the UK and Australia,” said HSF insurance partner Mark Darwin.

In Australia, there are at least two major COVID-19-related business interruption claims cases ongoing, namely, the case between the Australian Financial Complaints Authority and Insurance Council of Australia before the NSW Supreme Court and the Star Entertainment Group case before the Federal Court. Both cases are in “early stages,” and HSF said that it expects to see overlaps between the UK and the Australian test cases.

The firm anticipates that “a number of additional issues will be dealt with in the Australian cases.” Thus, Darwin said that policyholders should “re-examine their policies to see what might be claimable for COVID-19 losses and carefully assess any coverage positions advanced by insurers on these types of losses.”