Own IAG (ASX: IAG) shares? Here’s why the company is facing a shareholder class action

The company might be back in court sooner rather than later…

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A businessman points a finger in accusation, indicating a share price or ASX company in trouble

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Owners of Insurance Australia Group Ltd (ASX: IAG) shares might be interested to learn the company could be about to face a shareholder class action.

The class action refers to the company’s recent involvement in, and handling of, business interruption claims.

At the time of writing, the IAG share price is trading at $4.42, 0.23% lower than its previous close.

For context, the S&P/ASX 200 Index (ASX: XJO) is down 0.3%, while the All Ordinaries Index (ASX: XAO) has slipped 0.37% .

Let’s take a closer look at the trouble that might soon find IAG.

Will IAG be hit with a class action this month?

Quinn Emanuel, a law firm specialising in class action, has announced plans to file a suit against IAG in the Supreme Court of Victoria before the year’s end.

The matter for which the class action refers to dates back to 2020, when COVID-19 first hit Australia.

As a result of the pandemic, businesses sought to claim their interruption insurance benefits. However, they were told their policies didn’t cover quarantinable diseases.

Some policyholders soon found the company’s business interruption policies referred to a redundant Act of Parliament to avoid paying out pandemic-related interruptions.

The policies referred to the Quarantine Act, which was repealed in 2016 and replaced by the Biosecurity Act.

The battle between insurers and insured was eventually brought in front of the New South Wales Court of Appeals. It’s worth noting that IAG wasn’t the only insurance provider to be involved in the initial court case.

This is where Quinn Emanuel’s suit begins.

The firm’s claim states IAG failed to make the market and owners of its shares aware of the likelihood the New South Wales Court of Appeal would find in favour of policyholders and how such a ruling would affect the company.

It plans to argue the company breached its continuous disclosure obligations and engaged in misleading and deceptive conduct.

Quinn Emanuel also notes the company had 5 years to amend its policies to include new legislation but failed to do so.

When the New South Wales Court of Appeal ultimately found in favour of policyholders, IAG was forced to put aside $865 million to pay the now-viable business interruption claims. It underwent a $750 million capital raise to cover the costs.

The law firm is claiming the IAG share price “fell materially” following the judgement and subsequent capital raise.

An IAG spokesperson said the company was aware of the firm’s intent to file a class action against it and it hasn’t been served with any legal proceedings yet.

IAG share price snapshot

The IAG share price has had a rough trot lately.

Right now, the company’s stock is trading 18% lower than it was before it announced the finding’s impact.

It’s also 6% lower than it was at the start of 2021.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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