Insurers lose COVID-19 “business interruption” test case

Lowe Lippmann Chartered Accountants

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The insurance policies in the test case mistakenly referred to the Quarantine Act 1908 , which was repealed in 2015, and replaced with the Biosecurity Act 2015.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   However, it does mean that businesses holding insurance policies which were not updated when the Quarantine Act was repealed and replaced by the Biosecurity Act 2015 may have similar grounds to pursue a claim.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.

Audit Lowe Down – Contracts often include price variations relating to bonuses / penalties / rebates – why do we need to consider these early?

July 28, 2025
Contracts often include price variations relating to bonuses / penalties / rebates – why do we need to consider these early? Many revenue streams are covered by AASB 15 Revenue from Contracts with Customers. The core principle of this standard is ‘that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.’ [emphasis added]. To determine what we expect to receive, all elements of the contract that are not fixed need to be reviewed. We need to review contracts for: Volume discounts Rebates Refunds Performance bonuses Penalties Price concessions Once we have identified variable consideration then we need to estimate the amount expected to be received using either: the expected amount using a probability weighted average of the likely outcomes or the most likely outcome. The method chosen is the one deemed to be the best estimate of the expected consideration, and the amounts may be updated at each reporting date. Once the consideration has been determined, the entity recognises only the revenue that is highly probable will occur – this is known as the constraint on revenue recognition. Practically, the requirements discussed above for variable consideration are relevant only where an entity satisfies the requirements for revenue recognition over time and contract crosses a reporting date.  As the estimate of the variable consideration changes, there may need to be a catch-up adjustment on previous revenue recognition for that contract.

Tax Alert - New Tax Agent Obligations from 1 July 2025

July 21, 2025
New Tax Agent Obligations from 1 July 2025 From 1 July 2025, “small” firms of tax practitioners (with 100 or less employees) must ensure they are complying with the eight new Code of Professional Conduct obligations from the Tax Practitioners Board ( TPB ). These new Code obligations were introduced by the Government under the Tax Agent Services (Code of Professional Conduct) Determination 2024. The new Code obligations have already commenced for large tax practitioners (with over 100 employees) from 1 January 2025. As tax agents, Lowe Lippmann Chartered Accountants are committed to upholding our professional and regulatory obligations, including with the Tax Agent Services Act 2009 which includes the Code of Professional Conduct as regulated by the TPB.

Audit Lowe Down – Related parties – what should I consider in identifying them?

July 16, 2025
Related parties – what should I consider in identifying them? Related party disclosures is an area that is receiving more scrutiny from stakeholders in both the for-profit and the not-for-profit space. Disclosure of transactions that have occurred with related parties are important since the terms and conditions are often different from those with unrelated parties, in some instances the transactions may have occurred for much lower or even nil consideration. Often one of the biggest challenges for compiling the disclosures is working out who is a related party of an entity. The definition of related parties in AASB 124 Related Party Disclosures is detailed, however we have summarised the definition into various elements below. a. Think about entities who might be related to the reporting entity i.e.: i. through control or significant influence, ii. by the existence of material transactions or iii. dependence on technical information or personnel provided by them. b. Think about people who might be related to the reporting entity, i.e.: i. Key management personnel, including all directors. ii. Close family members of key management personnel (e.g. spouse, child). c. Think about entities that the people identified in b. might control or significant influence, i.e.: i. Family businesses ii. Businesses which a close family member controls (i.e. senior partner in a legal or accounting firm). Once you have identified a complete list of who is potentially a related party, analysis can then be performed to confirm they meet the criteria in AASB 124 and then identify any transactions with these parties. Remember that transactions should be included whether or not a price was charged or whether the transaction was formally documented or not.
More Posts