IAG (ASX:IAG) shares halt trading after court rules COVID-19 claims valid

Do insurance companies like IAG have to pay out on COVID-related losses? New South Wales court says yes, and it has rocked the industry.

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Trading was suspended on Insurance Australia Group Ltd (ASX: IAG) shares on Thursday morning after a court ruling that could have dire consequences for the insurance giant.

On Wednesday, the New South Wales Court of Appeal ruled that rejecting business interruption insurance claims on the basis of COVID-19 losses is invalid.

The decision was a shock for the industry, which thought that including COVID-19 as a “quarantinable disease” as defined in the now-repealed Quarantine Act would be sufficient to decline claims.

The Insurance Council of Australia (ICA) argued that regardless of wording, the spirit of the policies were meant to exclude pandemics.

QBE Insurance Group Ltd (ASX: QBE), which was also represented by the council in the court case, did not suspend trading of its shares.

The company stated to the ASX that business customers still must jump through other hoops to make a successful claim.

“Notwithstanding the ruling, QBE notes that the particular wording of QBE business interruption policies require a number of policy triggers to be met in order for policyholders to be entitled to indemnity for business interruption.”

Business disruption claims were expected to be capped at $5 million per occurrence, QBE added.

ICA has stated it’s considering an appeal to the High Court.

IAG and QBE have not disclosed how much this decision could impact their bottom line. But Suncorp Group Ltd (ASX: SUN) earlier this week set aside an extra $125 million to cover themselves for COVID-19 claims.

Suncorp stated to the market that, overall, it has $195 million allocated for potential claims.

“While the group continues to review the judgment, the test case outcome is not expected to affect the total business interruption provision.”

Both IAG and QBE shares have climbed more than 12% in the past month. Suncorp has risen about 8%.

The court case specifically referred to a claim made by a business customer to its insurer, HDI. But it acted as a test case for the entire industry since most insurers use similar wording in their policies.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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