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The insurance policies in the test case mistakenly referred to the Quarantine Act 1908 , which was repealed in 2015, and replaced with the Biosecurity Act 2015.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   However, it does mean that businesses holding insurance policies which were not updated when the Quarantine Act was repealed and replaced by the Biosecurity Act 2015 may have similar grounds to pursue a claim.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

July 1, 2025
Large proprietary limited – are you one? Tips and traps for your assessment. In Australia, being classified as a large proprietary limited company means that you have to prepare, and lodge audited financial statements with ASIC under the Corporations Act 2001 (the Act), however many companies are not necessarily applying the thresholds appropriately. A proprietary company is large if it meets at least 2 of the following thresholds: Consolidated revenue ≥ $50 million Consolidated gross assets ≥ $25 million 100 or more employees. These thresholds seem simple, however some points to note: The calculations must be performed applying ALL accounting standards so even if you are preparing special purpose financial statements, then you will need to assess these thresholds as if you were applying all standards, including: AASB 16 Leases – this standard would add a right of use asset to your balance sheet potentially significantly increasing your gross assets. AASB 10 Consolidated Financial Statements – if you have controlled entities then the inclusion of their income statement and balance sheet may significantly increase each of the thresholds. AASB 128 Investments in Associates and Joint Ventures / AASB 11 Joint Arrangements – if you have entities over which you have significant influence or joint control then applying equity accounting or including your share of assets and revenue would affect the thresholds. In determining the number of employees, the Act is clear that it is all full-time and part-time employees (on a pro-rata basis), however casual employees need to be considered. For example, are they genuinely casual with varying hours / shifts each week or are they in substance a permanent member of your team but just employed on a casual basis.  The thresholds need to be met at the end of the financial year and therefore entities should track their performance during the year so they are aware if they will meet the definition of a large proprietary company at year end.
June 17, 2025
In a previous blog, we discussed the changes to the accounting standards relating to classification of current / non-current liabilities on the balance sheet. We have been receiving a number of questions on this topic and have provided some practical scenarios below as well as some actions for you as we approach 30 June reporting dates.
June 13, 2025
High Court special leave application granted to appeal Bendel Case decision The Australian Taxation Office has been granted special leave to appeal to the High Court from the Full Federal Court decision in FCT v Bendel [2025] FCAFC 15. During March 2025 we released a Tax Alert ( see here ) explaining the current view of the ATO following the Full Federal Court decision that an unpaid present entitlement (or UPE) owed by a discretionary trust to a corporate beneficiary is not a “loan” for Division 7A purposes. The ATO also issued an Interim Decision Impact Statement ( see here ) in response to the Full Federal Court decision, providing information for taxpayers and advisers in relation to the details of the case and issues decided by the court.
More Posts