Federal Court rules against business interruption insurance policy holders in test case on Coronavirus payouts

A Federal Court decision on a crucial test case on whether insurance companies’ business interruption insurance policies cover payouts for financial losses incurred during COVID has found overwhelmingly found in favour of the insurance industry.

In what for Maurice Blackburn principal lawyer Josh Mennen called a "a major setback" for small businesses, Federal Court ruling has that found a range of insurance policies did not cover policy holders for financial losses during COVID.

As a result, it means insurers look set to be able to avoid paying out billions of dollars in claims of policies that small businesses hoped would cover them for losses as a result of Coronavirus interruptions.

The Federal Court today ruled that the majority of nine business interruption (BI) policies put before it for scrutiny would not need to be paid out by the insurers.

Mennen commented "it's not the end of the road for all claims but it significantly narrows the field.

"Obviously, as a consumer advocate, it's a disappointing result."

Business interruption insurance has emerged as a controversial space during the pandemic, with insurance companies claiming they never intended for these sorts of policies to cover pandemics.

Estimates suggest that over 200,000 business in Australia had business interruption insurance policies when the pandemic struck, with a total potential liability of $10 billion.

Friday's test case looked at under what terms a business could claim for downturn in trade during the pandemic, including if a government lockdown order was sufficient or whether a business needed an actual case of the virus in its proximity to claim.

Mennen noted “the Court's narrow interpretation means that claims under similar policies will need to show a direct connection between COVID outbreaks on or nearby the premises and the government restrictions that caused loss of trade.”

That essentially means a business cannot be compensated if it can only prove its losses were due to government lockdown or a general economic downturn caused by the closure of international borders.

That will make it very difficult for a range of businesses to claim insurance, including those tourism as well as in entertainment,

Ruling impacts Melbourne-based gym group
Melbourne-based fitness group Results Based Training is one business that has faced significant losses due to Victoria's extended lockdowns in 2020 and 2021, and that has business interruption coverage with, QBE, one of Australia’s major insurers.

Co-owner Liv Jones told the ABC "I don't think there's a person, particularly in Victoria, that wouldn't understand how important a payout is for small business right now. The impacts have been long and almost immeasurable

"The payout for this would be an opportunity for us to reset after a very stressful 18 months and a lot of debt.

"This is never the decision you want in our position. It already feels like David versus Goliath.

"We all knew this would be an argument fought on all fronts with absolute enthusiasm. There's a lot at stake for everybody involved."

With an appeal already being lodged against today's Federal Court decision, Jones, whose Results Based Training group has 13 gyms in Victoria and Western Australia, added “we're very confident in the appeals process. It's just a few weeks. We've been in this for 18 months

"On both sides, we'll will be fighting tooth and nail for each individual party."

The insurance industry lost another test case on appeal earlier this year. That was due to muddled clauses in policies that saw an old piece of legislation not replaced by newer laws.

The Federal Court ruling also ruled that the size of insurance payouts for businesses could be reduced if they had also taken government subsidies including JobKeeper or rental abatements.

Justice Jayne Jagot explained “those payments would therefore reduce each of the insured's loss.”

In a statement, the Insurance Council of Australia (ICA) said the decision upheld the insurers' arguments in eight of the nine matters in the test case put before it.

ICA Chief Executive, Andrew Hall stated “we welcome today’s judgment of the Federal Court, which provides an important step towards finalising these matters.

"Insurers, including those not directly involved in the court proceedings, are committed to applying the principles of the courts' final ruling consistently and efficiently to all business interruption claims."

Two class actions have already been lodged by an Australian legal firm against industry giant QBE and the overseas insurer Lloyds over its refusal to pay out BI policies to small businesses and a speciality range of jewellers.

Lower image: Travis Jones and Liv Jones of Results Based Training.