The National Opal Collection (NOC) – the retail arm of Cody Opal Australia, with premises in the Sydney and Melbourne CBDs – had taken out a business interruption policy, underwritten by AXA and Lloyds, prior to the COVID-19 pandemic.
The policy included a clause providing coverage in the event of an “outbreak of a notifiable human infectious or contagious disease occurring within a 20 kilometre radius of the [premises]”.
However, a claim against the policy was rejected in May 2020, with the insurer asserting that the business’ losses – which Cody estimates total more than $3 million – would need to have occurred as a consequence of COVID-19 cases within 20km of the premises, rather than “overarching factors resulting from the COVID-19 pandemic as a whole”.
Such factors include international border closures and local lockdowns, which severely limited retail foot traffic for much of the year.
However, Cody has called this interpretation “self-serving and convoluted”. “There is no ambiguity in the business interruption component of our insurance policy and no relevant exclusion,” he said.
Clause complexities
Cody is one of a number of businesspeople who have commenced legal proceedings against insurers due to pandemic policies.
However, while the NOC case is based on the interpretation of the AXA/Lloyds policy’s wording, many businesses with older policies have faced a different snag: exclusion clauses which reference outdated legislation.
John Berrill, of Melbourne law firm Berrill & Watson, is representing Cody and managing more than 20 other separate business interruption claims.
He explains that many exclusion clauses define a pandemic as an “outbreak of a ‘quarantinable disease’ under the Quarantine Act 1908”.
“Under this Act, the government had the power to put certain things into place, such as close borders, restrict access [to premises], and shut businesses down,” Berrill says.
“However, the government did a root-and-branch review of the Quarantine Act and abolished it, replacing it with a different one, the Biosecurity Act, in 2016. So, a ‘quarantinable disease under the Quarantine Act’ is no longer how you would describe a pandemic declared by the government – instead it would be a ‘human infectious disease under the Biosecurity Act’.
“The problem for many of the insurance companies is that they did not update the wording in the policies, so a lot of exclusion clauses still refer to ‘a quarantinable disease under the Quarantine Act’,” he explains.
Insurers have argued that the Biosecurity Act should be interpreted as an amendment to the Quarantine Act and that the exclusion clauses must stand, as the policies were not intended to cover pandemics but rather localised outbreaks such as Legionnaires’ disease, which can be spread through a bacterially-contaminated cooling system.
The Insurance Council of Australia (ICA) estimates that if the exclusion clauses are not upheld, some 250,000 policies may be eligible for claims, which could total $10 billion – an amount for which the industry does not carry sufficient reserves.
The Australian reports that insurance firm IAG alone may be liable to pay $225 million.
Andrew Hall, CEO ICA, said, “Those business insurance policies that were intended to cover pandemics, predominantly in the entertainment and health sectors, have paid out.
"However, if the industry is forced to pay out for risks it has not collected premiums for, or sought reinsurance for, it would compromise our ability to provide the Australian business market with protection against other risks.”
In order to resolve the discrepancy, the ICA launched a test case in NSW; in August 2020, the NSW Court of Appeal declared, in a 5-0 decision, that the exclusion clauses did not apply and the claims should be paid out.
The ICA has sought leave to appeal to the High Court of Australia, filing its application in December 2020.
Yet despite the ICA's request for the High Court to fast-track the application, Berrill said it is unlikely to be heard before March – and even if leave to appeal is granted, “We may not get a decision from the High Court until the end of the year.”
ICA CEO Hall said, “The industry understands that this is a challenging time for many small and medium businesses and is doing what it can to ensure a fair and sustainable resolution that provides clarity.”
However, Cody issued a scathing response, “The National Opal Collection and other policyholders expect that members of ICA would act empathetically, ethically and professionally in responding to claims by small businesses suffering extreme losses as a result of COVID-19.
“Instead, the members of ICA appear to be spending from their reserve to finance court cases denying the claims of policyholders and sending their policyholders to the wall.”
Further legal complications
In addition to the High Court appeal, the ICA intends to “file a second test case to follow other policy issues foreshadowed with policyholders but not dealt with in the first test case, including proximity and prevention of access [to business premises]” – issues that are pertinent to NOC’s claim.
Berrill explains, “There are a number of hurdles you have to clear before you can claim on the insurance policy.
"‘Proximity’ is about proving that the outbreak occurred at, or in, the vicinity of your premises – some policies define this, some don’t – and ‘causation’ is proving a direct causal link [between the disease outbreak and the business downturn], and you must offer proof of financial loss.
"‘Prevention of access’ refers to a government order shutting you down or preventing customers from coming to you.”
He advises small business owners to seek clarification on whether they have a business interruption policy – it is often included as part of a business insurance package – and if they are able to make a claim, even if a broker has already dismissed them as ineligible.
Indeed, Berrill is involved in a potential class action in conjunction with Gordon Legal, while Maurice Blackburn Lawyers and Shine Lawyers have also announced intentions to begin potential class actions on behalf of policyholders.
“As part of this [potential class action] we have had more than 100 businesses with all sorts of different types of policies come forward. We are saying, ‘Come forward and get your policy checked to see where you are on the spectrum’,” Berrill says.
Indeed, while insurers are unlikely to pay out any claims before the High Court ruling, he recommends small and medium businesses be “proactive”: “A lot of people have taken a really big hit [during COVID-19] – for some businesses, it's been fatal. But even if you have had to close your business, you can still claim,” he says.
NOTE: If you have information about other insurance issues regarding COVID please contact us here.
More reading:
Many jewellery stores on risky ground over business interruption insurance
WATCH VIDEO
Source: ABC's 7.30 Report: 'Insurance Industry's $10b fight with small businesses over COVID cover' Dec '20