Gillian Davidson, GILC’s chair and partner at Sparke Helmore, GILC’s sole representative Australian firm, said that in the midst of the pandemic, “business interruption insurance was thrust into the spotlight”.  

“The report highlights that even though businesses globally were facing similar challenges, the response from the insurance industry, governments and regulators varied markedly in each jurisdiction. However, a consistent picture is that globally, demand for business interruption has increased as businesses have become focused on the need to have the right type of cover.

“Despite some short-term pressures on pricing caused by global inflation, a recent wave of cases in Asia (including a potential new variant in China) and ongoing legal challenges hanging over from the pandemic, the outlook for business interruption insurance as a class is more positive than it has been for some years,” she said.

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“The pandemic has focused the market on the need for clarity in policy drafting and has led to a proliferation of COVID-responsive policies that either clearly exclude or include pandemic cover providing more certainty for insurers globally, and their clients.”

In Australia, a small number of claims have been paid out by insurers since the pandemic began. These claims have typically been submitted by companies seeking recovery under specific covers, such as event cancellation. However, insurers have contested a number of claims, and these have led to litigation.

The report also showed that in Australia, the two BI test cases have “created more certainty in the industry by confirming principles to be applied to each claim”, according to Sparke Helmore partner Mark Doepel, who added that “BI policies will continue to be sold in the Australian market, potentially in greater numbers, given most small businesses are underinsured”.

In terms of the litigation implications from the report, Mr Doepel told Lawyers Weekly that moving forward, there is likely to be increased BI claims that lead to litigation, as well as the continuation of proceedings that were previously put on hold.

“Prior to the finalisation of the business interruption test cases, business interruption claims numbers have been lower in Australia, but this has largely been attributed to claimants adopting a ‘wait and see’ approach pending the outcome of the two cases. As at 16 October 2022, AFCA had registered 340 COVID-19-related BI insurance complaints, of which 306 remained open,” he explained.  

“Many of these claims (including four major class actions) were put on hold pending resolution of the two BI cases, which has caused difficulty for many businesses. With the final High Court judgment handed down on 14 October 2022, it is expected many individual claims will be resumed. However, the BI test cases have created some certainty around the interpretation of the BI policies, so this may serve to reduce the number of BI claims proceeding to litigation.”

This is likely to impact claims moving forward, with a number of factors likely to “create more certainty in the insurance market” and to help resolve BI claims more efficiently and transparently.

“A positive outcome of the recent uncertainty around the interpretation of business interruption claims and the ensuing BI test cases is that [it] has shone a light on policy clarity and processes. This has led to a proliferation of business interruption policies that clearly exclude or include different types of cover (particularly in respect of pandemic cover). The BI test cases have also created some certainty around the principles around the interpretation of policies,” Mr Doepel added.

“Equally, a number of agreements have been signed between the Insurance Council of Australia, AFCA and participating insurers agreeing to follow the reasoning of the final judgements of the test cases in an efficient, transparent and consistent way when assessing claims. An online technology platform, DSpark Tool, has also been developed by the Insurance Council [of] Australia to facilitate the processing of business interruption claims.”

However, despite these new developments, there are still a number of challenges on the horizon — with Mr Doepel emphasising the definite need for some sort of pandemic, or similar, cover for businesses.

“What is not clear is whether insurers will have the appetite to provide such cover, or to extend such cover at an affordable price. When this is coupled with general trends in the Australian insurance market of increasing premiums and tougher underwriting conditions, some businesses may need to look for alternate risk management solutions for protection,” he outlined.

“Although the market has been focused on the appetite of insurers to provide business interruption cover at an affordable price, we need to be cognisant that other classes of insurance may be subject to the same uncertainty, particularly in terms of coverage for cyber incidents and natural disasters. It may be that we need to look beyond the insurance market for risk management solutions to provide sufficient protection to Australian businesses (particularly in a market where many policyholders are underinsured).”

Consequently, best practice for insurance lawyers in 2023 will include clearly understanding specific business interruption needs of their client, compared with whether insurers will provide cover to suit those needs, as well as ensuring policy terms are clearly understood between both parties.

“To the extent that the policy does not provide the cover required by the insured or is not accessible at an affordable price, this may entail the insured’s legal adviser educating them on the source of alternate risk management solutions available in the Australian market,” Mr Doepel explained.

“Equally, in a dispute scenario, lawyers will need to be able clearly articulate to insurers or insureds what is excluded or included within the relevant policy and areas of uncertainty in order to work with them towards early and acceptable resolution between both parties so as to avoid protracted litigation.”