Insurance companies could ‘collapse’ with continued COVID uncertainty
Insurance lawyers should brace for a significant number of Australian insurance businesses to “likely fail” as the continued impact of COVID-19 claims and a global recession hits home.
As events unfold, COVID-19 has changed the priorities for insurers which has led to widespread uncertainty, according to the new “Approaches to coronavirus” report by Global Insurance Law Connect.
The report brought together the latest views on COVID-19 from the organisation’s member firms in 16 countries, including Australia, and was represented by Sparke Helmore.
Catherine Power, Sparke Helmore national practice group leader for commercial insurance said that for Australia, “we are seeing COVID-19 [has] a significant impact across multiple lines of cover”.
“The obvious impacts have been seen in the travel, life, health, event cancellation and business interruption classes,” Ms Power said.
“But we are also seeing impacts across liability, defence costs, financial lines and D&O classes. We think the majority of claims will be [long-tail] claims, both in this pandemic phase but also when the recovery begins.”
The report considers that it is likely that all classes of business will be affected. The majority of the claims will be long-tail claims, which will be seen both during the pandemic phase but also when the recovery begins.
Furthermore, it revealed that it might also be the case where liability, defence costs, financial lines, and directors and officers classes are impacted, depending on the success of the Australian government’s intervention measures aimed at reigniting the economy and relieving directors and officers of liability for certain decisions in these extraordinary times.
This aligns with the recent insurers’ lobbyist stance on class actions who have called for a reprieve on director liability, as they argue the combination of COVID 19 and class action is a catalyst for skyrocketing claims.
The firm said that insurance lawyers had been advising clients on the operation of contingent business interruption extensions in property policies, most of which provide cover where diseases cause loss without the need for actual physical damage under “section 1” property cover.
“If we think outside of the box, insureds may also try to get cover wherever available and based on a number of the environmental liability protection wordings we have seen, a daring insured might even seek to make a claim under these policies!” the report revealed.
“It is almost certain that we will see insurance businesses fail and quite possibly in significant numbers.”
Sparke Helmore also said that success will depend on how long those measures are in place while the economy seeks to recover from the effects of the pandemic.
The types of claims that may be presented could be in respect of any number of issues including holiday postponement or cancellation, loss of trade and event cancellation.
Further, for insurance directors, defence costs for litigation arising from distressed decisions, insolvency as well as post-hoc scrutiny of decisions made by directors and officers particularly given the devastating fiscal impacts of the pandemic.
Gillian Davidson, partner commercial insurance at Sparke Helmore and GILC board representative for Asia Pacific, also reflected on dealing with the combined effects of the Hayne royal commission and COVID-19 in the Aussie market.
“The General Insurance Code of Practice came into effect on 20 January 2020 – off the back of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry – just ahead of COVID-19 hitting Australia in earnest,” Ms Davidson said.
“The immediate compassionate response of many insurers to help alleviate the financial hardships being experienced in the community showed insurers working hard to achieve the outcomes fundamental to the success of the [code].”