Small business owners across the country are battling insurers over pandemic payouts. 

A number of class action lawsuits are being prepared against the insurance industry over its denial of business interruption (BI) policy payouts.

Many businesses have interruption policies that are intended to financially bail out companies when they experience a major disruption to trade.

Last year, insurance industry lobby the Insurance Council of Australia, and the regulator AFCA took a test case to the NSW Court of Appeal.

The insurance industry had been made to pay the legal costs of two small businesses, but five judges reached a unanimous ruling that hinged largely on just a few words.

Many BI policies did not cover revenue losses due to “diseases declared to be quarantinable under the Quarantine Act 1908 (Cth) and subsequent amendments”. 

However, the Quarantine Act was repealed by the Commonwealth in 2016 and replaced by another set of laws, the Biosecurity Act 2015 (Cth), and COVID-19 was declared as a quarantinable disease under the Biosecurity Act.

“The expression 'and subsequent amendments' is not ambiguous and only describes amendments to the Quarantine Act,” the judgement said.

“To suggest that the words ‘and subsequent amendments’ include the enactment of the Biosecurity Act is many steps too far.”

The ICA estimates that around a quarter of a million small business owners have BI policies that could be impacted by legal actions, potentially leading to payouts of up to $10 billion.

ICA executive director Andrew Hall said the insurance industry has tried to prepare itself.

“Generally, pandemics have not been covered by BI insurance policies and the reason being is they're simply too large for a BI policy to cover,” he told the ABC.

“Unfortunately pandemics are a risk that's very difficult to price for. They're very expensive and could shut down the entire country at once.

“The premiums have not been collected. There has not been a pool built for them.”

Reports say further test cases will look at other contractual areas that may preclude the industry from paying out pandemic claims.

Maurice Blackburn lawyer Josh Mennen says the issue is likely to drag on.

“By spreading their liability over months and years, then [the insurers] mitigate the impact on claims payouts and capital reserves,” he said.

“All the while businesses facing existential crisis are left in limbo wondering if their insurer will ever respond.”