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COVID-19 Business Interruption Insurance

Enhancing brand reputation and customer experience in an uncertain environment


In June 2021, the High Court upheld the NSW Court of Appeal’s decision for the first COVID-19 business interruption (BI) test case, which prevented the insurers from denying liability on the basis of a reference to the repealed Quarantine Act 1908 in many of the BI policies. This was considered a significant win for policyholders.

Following the outcome of the first test case, the much anticipated primary decision regarding the second BI test case was handed down by Jagot J of the Federal Court of Australia on 8 October 2021.

Second BI Test Case

The second test case relates to business interruption claims submitted by various small businesses. Each of the insurers had declined the claims, which led to the disputes being lodged with the Australia Financial Complaints Authority (AFCA) and subsequently the proceedings in the Federal Court. The second test case focused on insurance policy definitions including:

  • Disease and disease outbreak;
  • Impact of government mandates; and
  • Potential claims adjustments (e.g. whether JobKeeper payments would reduce loss claims).

In the second test case, it was identified that the relevant provisions of the insurers’ BI policies fell within four classes:

  1. Hybrid clauses
  2. Infectious disease clauses
  3. Prevention of access clauses
  4. Catastrophe clause

Unlike the first BI test case, the primary judgement for second test case largely went in favour of the insurers. A few considerations which limited the coverage of BI policies include:

  • Unlike the UK, the Australian governments’ restrictions were considered to be generally as a result of the “risk” of COVID-19 outbreak instead of actual outbreaks;
  • Reference to “Damage” in the relevant prevention of access clauses would not cover damage as a result of infectious human diseases like COVID-19;
  • Reference to “Catastrophe” in the relevant catastrophe clauses would not cover infectious human diseases such as COVID-19.

Nevertheless, the second test case decision suggests that some policyholders may still be eligible to claims, e.g. under the quasi-hybrid and infectious disease clauses, if the necessary factual circumstances could be proven.

As expected, the decision by the Federal Court was appealed, and the hearing by the Full Court of the Federal Court concluded on 12 November 2021.

The ICA hopes for the matter to be concluded by the end of 2021. However, there may be a special leave application for a High Court appeal following the Full Court of Federal Court’s decision, which may further delay the final outcome.

So what does this mean for insurers, brokers and their customers?

Whilst the initial outcome is an important step to closing out the coverage issues, until the court outcome is finalised, there continues to be a level of uncertainty in the industry. Actuarial reserving estimates are unlikely to fully reflect the second test case outcomes until after there is clarity of the appeals outcomes.

From an operational perspective, industry insights from the UK continue to show that insurers that prepare ahead of time will fare the best at “crunch time”, when policyholders or their brokers begin to lodge claims.

Prepare and Protect: Enhance brand reputation and customer experience through claims readiness

Further to our previous blog, below are some of the more specific considerations for insurers to address to navigate through the uncertainties while the final court outcome is still pending. We have taken the view that these considerations can result in insurer brand and trust enhancing experiences with their policyholders.

We are of the view that if the court case outcomes for the second test case remain unchanged upon appeal, that there may still be a number of claims lodged.  These claims are likely to have a higher proportion of declines and the claims payouts will have a significantly lower average value.

This puts insurers in the potential position that we have seen play out in the UK, where insurers that do not put in place appropriate BI processing solutions will experience cost of processing BI claims levels that are relatively high when compared to the value of claims payments.

To avoid this, insurers should begin to consider the different potential claim lodgement scenarios and volumes of eligible claims under their BI policies should the court decisions remain or change (whether for or against the policyholders). These assumptions could then inform the design and implementation of effective and cost efficient claims management frameworks and processing solutions that will cope with volume of lodgements (whether accepted or declined).

Effective claims management frameworks and solutions may include:

  • Automated tools to accelerate the assessment of claims eligibility and risk profiling; and
  • Risk based decisioning linked to calculation and payment tools to auto-process claims.

The frameworks and associated infrastructure should aim to reduce the handling of any manual processes and tasks and to alleviate the time and resources required to process, assess and respond to claimants in accordance with regulatory guidelines. This will allow insurers to build trust with customers and regulators, even during difficult times.

For most policyholders, the claims process will define their experience with an insurer and influence whether or not they choose to renew their policy. Therefore, we note insurers plans to proactively communicate with policyholders with clear and helpful information to guide policyholders regarding their claim eligibility and claim requirements prior to claims lodgment. These key activities will enable the insurers to:

  • Build trust with policyholders;
  • Manage expectations;
  • Reduce the volume of ineligible claims lodgements; and
  • Reduce the time and effort required to seek further information from claimants.

After claims lodgments, claims outcome letters should clearly explain why claims were accepted or declined. Studies have shown that policyholders are more likely to be happy with an outcome, even if it isn’t an outcome that they originally wanted, when they are provided with enough detail to understand the reasoning behind a decision.

As we have seen in the UK and South Africa insurance markets, some insurers have taken a different approach to offer affected policyholders with relief payments or early settlement agreements. This can be difficult where loss quantification is unavailable but may avoid the time and effort for a lengthy claims and dispute resolution process.

Complaints are to be expected, especially when we consider that there is limited cover available for policyholders under the current court outcome. An efficient dispute resolution process will be one that assigns value to these complaints, and which recognises that there may be multiple reasons why the issue has been escalated.

To ensure that complaints are handled consistently, fairly and within expected timeframes, insurers should also:

  • Have clear escalation and approval processes in relation to the BI claims;
  • Enable appropriate and scalable resourcing to handle complaints;
  • Establish a consistent approach and framework to manage the claims with any third parties;
  • Establish a consistent approach and framework to handle complaints.

Whether or not the court outcomes change, insurers must recognise that this last 18 months has been challenging for most small businesses, some of which may now be insolvent or experiencing financial hardships due to the effects of COVID-19. Insurers will also be responsible for adherence to the updated General Insurance Code of Practice, and will need to consider this, along with other reformative changes as part of their claims management process.

Accordingly, now more than ever, insurers should act with utmost good faith, and the winners will be those who can achieve quick, clear, communicative and consistent claims processing. Regardless of the court outcomes, this is a great opportunity for insurers to build social credibility by taking the lead to engage and communicate with policyholders proactively.  

The COVID-19 BI developments have ultimately been an industry wakeup call, with the adequacy of insurance risk management being a target of recent regulatory reviews. This will bring additional challenges to insurers, after an already extended period of reform, who will need to be ready to change focus when the time comes. However, this may also be the prime opportunity for insurers who can proactively navigate through the challenges to distinguish themselves as industry leaders and reap the benefit of expediting their claims handling process through anticipation, preparation, and clear communication.

Contact us

At Deloitte, we have the global experience and expertise to help organisations design and implement efficient and compliant solutions to uplift claims handling processes. Please get in touch if you would like to discuss how we may assist you.