Detlef Haupt survived a near-knockout blow when the COVID-19 economic crash drained his cafe of customers and put the future of his 15-year-old business on the line.

His only small comfort during the worst of the downturn was the belief his insurance policy covered him for this exact kind of revenue shock.

His insurer believed otherwise.

“I’m not going anywhere. I will fight,” he said.

Mr Haupt is among at least 250,000 Australian businesses affected by a drawn-out legal battle over the fine print in insurance policies that looks set to stretch well into next year.

“If the Insurance Industry just tries to hide behind their terms and conditions, I think that’s diabolical,” said Mr Haupt.

Australia’s financial regulator has now intervened with its strongest statement yet on the dispute, telling the insurance industry to throw its customers a lifeline and start paying out valid claims.

“Claims on these policies should be assessed and, where appropriate, paid in a timely manner to ensure that financial pressures on small businesses are not exacerbated by slow payments,” the Australian Securities and Investments Commission [ASIC] said in a statement to ABC Investigations.

“If there are reasonable grounds to pay part of a claim but not to pay the full claim, we encourage insurers to make an interim payment.”

Does COVID-19 count as ‘business interruption’?

At the heart of the dispute is a type of cover known as business interruption insurance, which is designed to bail out companies that have suffered a major disruption to trade — such as a fire or natural disaster.

The industry insists the policies are not designed to cover pandemics, so paying out claims like Mr Haupt’s would send a financial shockwave through the sector.

“Pandemics are something that have never been contemplated for cover simply because they’re too large an event,” said Andrew Hall, chief executive officer of Insurance Council of Australia.

“If you can get a price or a premium to cover a pandemic, it is likely to be very expensive.”

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Mr Haupt’s insurer, Zurich, says he is not covered for COVID-19 because an exclusion clause in the fine print means the policy does not pay out on claims related to pandemics.

Yet there is a serious flaw in Zurich’s position.

His policy says the insurer is not liable for any diseases declared as quarantinable under the Quarantine Act 1908 — and any amendments to it.

But that legislation no longer exists. It was replaced with the Biosecurity Act in 2015.

Zurich, and many other big insurers offering business interruption cover, failed to update the wording in their policies to reflect the new laws.

“They made a mistake,” said Berrill and Watson lawyer John Berrill, who is representing Mr Haupt and more than a dozen other business interruption insurance customers.

“It’s ironic because I’m usually fighting insurance companies who are trying to rely on the fine print to knock back claims, but here the boot is on the other foot.

“The insurance companies are trying to say, ‘forget the fine print — we never meant to cover you, so we’re not going to pay you’.”

Zurich declined requests for an interview and in a statement said it does not comment on individual customers.

Fight has $10 billion implications

It is not the only big insurer with the outdated exclusion.

The Insurance Council of Australia estimates that around 250,000 business interruption policies contain specific references to the Quarantine Act, and there could be many more policies that use different wording to exclude pandemic cover.

The ICA says that if insurers end up accepting every claim under those policies, the industry could be facing $10 billion in payouts related to COVID-19. That is double the $5 billion pool of funds the industry currently holds for business interruption cover.

“If all claims were paid, it would be a serious impact not just on insurers, but also on policyholders and the economy more broadly,” Mr Hall from the ICA said.

The Insurance Council of Australia recognised the problem earlier this year and in August responded by funding a test case in the New South Wales Supreme Court aimed at resolving the question of whether insurers should pay up.

In November, a panel of five judges in the NSW Court of Appeal unanimously ruled in favour of the customers involved in the test case — signalling that the insurance industry should start paying out the claims.

The ICA has this week sought leave to appeal that ruling in the High Court, which means the dispute might not be resolved until next year.

“The legal advice we’ve received is that there are grounds for an appeal. And in fact, we should pursue that appeal because it’s very much in the public interest that a policy construct as important as this is held up,” Mr Hall said.

Lawyer John Berrill says the industry should start paying customers affected by the pandemic exclusion immediately.

“They have their heads in the sand, saying ‘deny, deny, deny.'”

The ICA’s Andrew Hall says insurers have paid some claims.

“We do have examples in the health care industry and the entertainment industry where they had contemplated a pandemic closure and they had paid a premium for that. So those policies are being processed,” he said,

Some big insurers also appear to be denying COVID-19-related claims from customers who do not even have the pandemic exclusion in their policies.

Opal business chasing lost millions

In Damien Cody’s case, his policy says that his opal retailing business — which has been ravaged by the collapse in international tourism — is covered in the event of a pandemic.

Specifically, his policy says the business is covered for any damages related to a serious disease outbreak within 20 kilometres of its premises.

Yet his insurers, AXA and Lloyd’s, have denied his claim.

“It’s indefensible,” Mr Cody said.

“I just don’t know how they can do it.”

In its rejection letter, AXA argues that the policy does not cover business losses related to an overall economic slowdown as the result of a pandemic.

Lloyd’s, which is the underwriter on the policy, said in a supplementary rejection letter that the stores are not covered because health authorities did not specifically order them to close.

“It seems to me that what they are doing is just issuing denials of these claims and hoping that small guys like us will just have to walk away from it,” Mr Cody said.

“We’re not going to walk away from it. We’re going to fight this tooth and nail and we’ll get the result that we believe we deserve.”

Both AXA and Lloyd’s declined to comment on Damien Cody’s claim.

Mr Cody, who is also a Berill and Watson client, has lodged a dispute with the Australian Financial Complaints Australia to get paid.

Because the claim could be worth in excess of $2 million, however, it may end up being above AFCA’s financial threshold and need to be resolved in court.

“We’re losing money every day that this thing goes on. We’re losing truckloads of money,” Mr Cody said.

“A big legal action will be another huge expense for us.”

Australia is not alone in grappling with the question of pandemic cover in business interruption insurance.

In the United Kingdom, regulator the Financial Conduct Authority moved to resolve the issue earlier this year by launching its own test cases to resolve whether insurers are liable under 21 different policy wordings.

In September, the UK’s High Court ruled that in most cases the insurers were liable.

ASIC says it does not have the authority to launch the same kind of process to reach a resolution in Australia.