Pandemic uncovers embarrassing error

by Resolve Editor Kate Tilley

The Covid-19 pandemic created an embarrassment for the insurance industry, says Lloyd’s commercial division dispute resolution manager Paul Plustwik.

He told the AILA Qld Insurance Intensive the pandemic was a big shock for the industry and an embarrassment when it was discovered that policies were still referencing long-repealed legislation.

“That led to a swag of court cases and test cases that the industry funded. It’s not a good look when we have to argue about what the wording means when we get claims,” he said.

Many business interruption policies referred to the Quarantine Act, which had been repealed in 2016 and replaced by the Biosecurity Act. The NSW Appeal Court heard a test case on the issue in 2020 and ruled in favour of policyholders.

Serious shocks

Mr Plustwik outlined three serious shocks for the industry in the post-pandemic environment – the Ukraine war, climate change and natural catastrophes, and insurance affordability and availability.

He said the Ukraine war, the most significant conflict since WW2, had a high human cost and far-reaching geopolitical and social consequences that were reshaping the world. The war put the spotlight on energy, food and cyber security, created supply chain pressures, and had implications for organisations’ efforts to reach net zero emissions targets.

Ukraine produced 13% of the world’s barley, 15% of its corn and 10% of its wheat. The United Nations was forced to cut food programs for needy nations because 40% of programs relied on Ukrainian wheat. The UN brokered a deal with Russia to create a grain corridor, but “shipowners are not going to risk a loss by going to Ukraine unless they can get insurance, so the corridor is useless without insurance”.

Mr Plustwik said Lloyd’s underwriters developed an insurance program for the risks to avoid food shortages for many countries.

On climate risks, cat 221, the northern NSW-southeast Qld February 2022 floods, had cost almost $6 billion “and we’re still counting”. The claims count was 240,000, of which 39,000 were outstanding and 83.6% were closed. “I can’t get my head around how many ‘once-in-a-lifetime’ events we’re had in the past 10 years,” he said.

“Not all water is the same. You could argue for five hours over whether it’s flood or storm water. It all turns on the wording of the policy.”

Underwriter’s intent

Mr Plustwik said the policy wording must reflect the underwriter’s intent. “We’re resourced enough to communicate our intent. That doesn’t mean burying things within a document. We want to be clear on the risk we’re covering, meet consumer expectations and abide by regulations. That reduces trouble at claim time.

“We are selling a promise. We have important obligations to ensure that promise is clear and there are no contradictory provisions.”  

He cited the 2013 court case, LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd QSC 181, in which the insurer unsuccessfully argued water damage to a Brisbane premises after the 2011 floods was excluded.

Qld Supreme Court Justice Jackson found the insurer was unable to deny indemnity because inundation of the premises was through back-flow from pipes running from the riverbank, not water overflowing from the natural confines of the Brisbane River. [Read more in a 2013 Resolve column by then AILA president David Lee.]

Community expectations

Mr Plustwik said insurers had to consider the Australian Financial Complaints Authority’s (AFCA) fairness jurisdiction and community views on the duty of utmost good faith.

On insurance affordability and accessibility, he said cyclones in far north Queensland impacted on premiums and insurers’ decisions on whether they were prepared to take the risk.

“What are community expectations? Should AFCA be able to review premiums? I don’t think so, but it might be coming.

“We buy insurance with the expectation that we will be looked after at claim time.”

Mr Plustwik said the insurance industry must lobby for better planning laws and zonings so the industry is not always shouldering the cost and the blame after natural catastrophes.

He said it was time to consider other products, for example parametric insurance. He cited Redicova, a Lloyd’s-back parametric wind insurance cover available to northern Australians in cyclone-prone postcodes. “It helps people bounce back in the immediate aftermath of an event.”

Unlike traditional indemnity insurance, Redicova pays when a trigger event, ie a severe tropical cyclone, passes over an insured’s property, regardless of how much, if any, damage occurs.