IAG (ASX:IAG) share price lifts after Federal Court makes judgement

The courts have ruled in favour of insurers.

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The Insurance Australia Group Ltd (ASX: IAG) share price is lifting from the opening of trade this morning. The IAG share price jumped 3.5% before settling back to its current price of $5.29 apiece.

IAG shares are on the move as the company released a key update. Today's news relates to a second business interruption test case heard in the Federal Court of Australia.

Here's what we know.

What's led us to this point?

To understand what's got us here, we need to step back into the thick of the pandemic in 2020. This is when businesses and enterprise alike were forced into lockdown.

According to the Insurance Council of Australia, the insurance industry has "long maintained that pandemics are not intended to be covered under most business interruption policies."

Hence when some policyholders went to claim their insurance benefits due to "business interruption", many were shocked to find out that a number of business interruption policies sought to exclude cover for pandemics.

At the time, the insurers' group was denying acting on its liabilities through a reference to the Quarantine Act.

But the Quarantine Act was repealed in 2016, replaced with the Biosecurity Act.

As such, a test case was held last year to debate this issue. The aim was to establish key definitions and criteria on what the new legislature meant in real-world practice, given the pandemic was in full effect by then.

The New South Wales Court of Appeal heard the case. It ruled in favour of the policyholders – stating there were grounds to claim on business interruption. The judgement was further upheld in June 2021, when the High Court denied the insurers' leave to appeal applications.

That decision meant insurers "cannot rely on references to the Quarantine Act to deny liability in policies written in the same terms as the policies considered in the first test case."

IAG share price spikes after judgement handed down

A second test case was arranged to provide further clarity and establish "the meaning of policy wordings around disease definition, COVID-19 outbreak proximity, the impact of government mandates," and other matters.

Today IAG advised that a Federal Court judgement "found in favour of insurers on a significant number of policy wording questions and for policyholders on other questions."

As per the Insurance Council, the Court's ruling upheld 8 of the 9 matters put forward by insurers. It upheld the arguments of policyholders on 1 of the issues.

As a result of the ruling, IAG is reviewing the judgement to determine whether to appeal any aspect of it. IAG will also consider the potential impact of its business interruption provision announced in November last year.

IAG notes there is time set aside in November to hear any appeal in the Full Court so that decisions can be finalised by the end of the year.

The insurance giant looks forward to the issues being resolved as quickly as possible for its customers with business interruption policies, per the release.

IAG shares have struggled this year to date amid a wave of regulatory challenges. They have still gained 10%, adding to the 9.7% earned over the last 12 months.

The author Zach Bristow has no positions 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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