Welcome to the seventh edition of Herbert Smith Freehills' Policyholder Insurance Highlights.
In this publication, we have pulled together the key takeaways for insurance policyholders, their brokers and claims advisors from the most relevant insurance cases and market developments over the last 12 months.
Consistent with the trends we identified in previous editions of Policyholder Insurance Highlights, the main messages this year are:
- COVID-19 has meant insurance has been front page news and top of mind for corporate Australia: interruption to Australian (and global) businesses as a result of COVID-19 has been widespread. Because COVID-19 is not a typical 'physical damage' trigger for business interruption policies, there has been a significant focus on the response of various 'non-damage' extensions for disease, prevention of access and actions by authorities as policyholders search for insurance to cover the financial impact of the pandemic. This has resulted in a series of test cases around the world – firstly in the UK where the prevalence of the pandemic lead to decisions favourable to policyholders. In Australia, there has been mixed outcomes, with the key test case currently decided largely against Australian policyholders due to findings on the facts that losses were not due to any response to the disease or risk at the policyholders' premises, but rather were caused by the desire to prevent the pandemic spreading generally. An appeal has been heard but at the date of publication the appeal decision is reserved, and will inevitably be appealed again to the High Court, so policyholders should not expect quick resolutions – disputes will continue through 2022 as appeal rights are exhausted. The cases have demonstrated that a complex range of considerations apply to claims of this kind. As such, policyholders should be seeking advice as to (a) whether their policies potentially provide coverage; (b) whether existing cases on foot will resolve issues relevant to their coverage; and (c) what steps they should be taking now to preserve or enforce their rights.
- Continuing pressure on the Directors' & Officers' insurance market: policyholders have continued to experience a hardening of the D&O insurance market, which has primarily been driven by historical and ongoing class action and regulator activity, as well as the inadequacy of past premiums to meet those liabilities. The hardening is reflected in increased pricing and reduced availability of cover – for example, the pricing of 'Side C' securities cover has resulted in many policyholders reducing their limits, voluntarily increasing deductibles and in some cases, not purchasing the cover at all. The potential silver lining in these increases is that the higher premiums which can now be charged for D&O cover, combined with some recent legislative changes to relax liability for breach of continuous disclosure laws and proposed changes to class action funding, means that new insurer capacity is prepared to re-join the D&O market, which increases available capacity, leading to options and competition which should at least stabilise premiums.
- Delays and disputes continue to affect major insurance claims: with pressure from COVID-19 and catastrophe losses and lower investment returns in a low interest environment, insurers' profit margins come under increased pressure. Consistent with the trends we have observed in recent years, coverage disputes for major claims are on the rise. Insurers are "lawyering up" for any claim above $10m. Our view remains that policyholders who do not do likewise are at a disadvantage. Policyholders should engage specialist advisers at an early stage to assist with claims notifications, preserve legal privilege, engage experts and advocate claims coverage issues so as to maximise entitlements under their insurance assets. This is even more important given the hardening market reduces policyholders' ability to push for (or even preserve) broader coverage at renewals.
We hope that you enjoy this year's edition of Policyholder Insurance Highlights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.