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Insurers lose COVID-19 "business interruption" test case

Last week, a unanimous judgment from the New South Wales Court of Appeal, constituted by five judges, was handed down which ruled that certain insurance policyholders could be entitled to claim for COVID-19 related "business interruption" losses, when their business was forced to close due to the coronavirus pandemic.


At the outset, it is critical to note that this is the first of only a few Insurance Council of Australia test cases, and while the Insurers do not have an automatic right to appeal the case decision, they do have until mid-December 2020 to decide whether they believe they have grounds to apply to the High Court for special leave to appeal the decision.


Thus, there is a chance this decision can be challenged and potentially be overturned.

What was the case about exactly?

This specific test case concerned insurance policyholders who held cover for "business interruption" losses arising from an outbreak of infectious disease with a 20km radius of the insured premises, but which excluded "diseases declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments".


The insurance policies in the test case mistakenly referred to the Quarantine Act 1908, which was repealed in 2015, and replaced with the Biosecurity Act 2015.


The insurers have claimed this was clearly an error, and the intention of the policy was obviously to exclude a pandemic under any future legislation.  They argue the phrase "subsequent amendments" referred to any future legislation, not just amendments to the specific Quarantine Act 1908.


But the NSW court of appeal disagrees, deciding that the policy in question only protected insurers under the Quarantine Act 1908, and the phrase "and subsequent amendments" referred to amendments to that act only.

What does this mean for other businesses impacted by COVID 19 related business interruptions?

This does not mean that all claims for COVID-19 related "business interruption" losses must now be paid.  However, it does mean that businesses holding insurance policies which were not updated when the Quarantine Act was repealed and replaced by the Biosecurity Act 2015 may have similar grounds to pursue a claim.


Furthermore, any other businesses (not party to this test case) would still need to prove that they had in fact experienced a COVID-19 outbreak, then they would also need to prove they suffered financial loss, and they suffered loss "as a result of" the COVID-19 outbreak.

While we are drawing your attention to this recent legal development which concerns the financial impact of the COVID-19 pandemic, this Tax Alert does not constitute advice, and if this topic is relevant to your business we recommend you seek your own legal advice.

Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.