COVID business interruption test case panics insurer IAG

Insurance Australia Group is building up a big cash war chest in anticipation it will be hit by a tsunami of pandemic-related business interruption claims after a court ruled in favour of policyholders in a landmark test case.

Late on Wednesday, the NSW Court of Appeal rejected the insurance industry’s argument that policies should not cover losses suffered by its business clients due to COVID-19, sparking expectations of huge payouts on the horizon.

Shares in QBE and Suncorp fell on Thursday, while IAG went into a trading halt.

On Friday, the company responded to the judgment by announcing it would raise up to $750 million through a new share issue to strengthen its balance sheet.

IAG said the move was “decisive action” and revealed it was expecting hundreds of millions of dollars in payouts, with an estimated $805m hit to its 2019-20 earnings.

IAG remains adamant the intent of its business interruption policies is to not provide cover for any losses related to pandemics and says it is in talks with the Insurance Council of Australia about seeking special leave to appeal the judgment to the High Court.

If an appeal proceeds, an outcome is expected in calendar 2021, IAG said.

S&P Global Ratings suggested insurers don’t need to panic, saying potential payouts “will be manageable”.

“We expect the additional claims cost as a result of the test case ruling will vary by insurer and depend on specific policy cover,” the ratings agency said.

“Payouts may also be subject to further legal avenues.

“Our expectation is that while there will be a hit to current year earnings, the impact on ratings is negated by conservative reserving, reinsurance protection and maintenance of robust capital buffers.”

The ruling is confined to insurance policies that contain reference to the now repealed Quarantine Act 1908, rather than the Biosecurity Act 2015.

S&P Global Ratings said the payment of business interruption claims would also be contingent on policy-specific wordings, and their application under various pandemic-related economic and social restrictions.

“These could include whether the incidence of COVID-19 amounted to direct physical damage or threat of damage to property or persons, whether physical access to a business was denied, whether there was an evacuation as a result of the damage, and whether the business restructured or continued to be open in a different capacity,” it said.

IAG said its claims exposure included allowance for a period of recovery from the lockdowns.

“While it does not explicitly allow for any future state or national lockdowns after 31 October 2020, IAG’s exposure to the Quarantine Act wording issue will progressively reduce as all new and renewing policies now reference the Biosecurity Act,” the company said.

IAG said it had received a small number of business interruption-related claims to date.

IAG shares remain in a trading halt but QBE and Suncorp shares were higher on Friday.