03 May 2022 by Paul Croft
From a forensic accounting perspective, judgments handed down in the COVID-19 business interruption test cases have been the “gifts that keep on giving”.
Firstly - as covered in our October 2021 article (which you can access by clicking [here]) - Justice Jagot’s decision in the tenth claim in the second COVID insurance test cases (Meridian Travel) provides forensic accountants with a neat framework for understanding and evaluating causation and proximity in complex situations involving multiple causes of loss.
And in the recent appeals to the second COVID insurance test cases (six of the original ten), we have the Full Federal Court upholding the trial Judge’s ruling that insurance policies referring to the Quarantine Act 1908 (Cth) will not be considered as having been replaced by the Biosecurity Act 2015 (Cth), and thus an insured is entitled to make a business interruption claim as a result of COVID.
Further, the Full Court upheld the decisions of the trial Judge in five of the appeals and substantially agreed with the trial judge in the Meridian case. However, the Full Court came to a different conclusion to the trial Judge on the question as to whether JobKeeper and other government subsidies are “saved” costs that should be deducted from the losses incurred by the Insured.
“Always go back to the contract”
In the context of quantifying contractual damages, a barrister mate of mine once said to me “always go back to the contract”. And that’s precisely what the Full Federal Court did in finding that the trial Judge had erred in concluding that JobKeeper payments should be taken into account in the “sum saved” provision.
While IAG has been given leave to appeal this decision, it is worthwhile examining the reasoning applied by the Full Federal Court in their decision.
The Full Federal Court determined that the central issue was not whether Meridian’s costs were reduced or ceased due to receipt of JobKeeper payments, but rather, whether those payments were made and received in consequence of the interruption or interference “as a result of Damage”. To that end, the Court looked to the “Cover” section and cl 8 of the policy to conclude that:
“…the reference (at the beginning of the “Cover” section) to the insured’s business being interrupted or interfered with “as a result of Damage” is to be read as including the insured’s business being interrupted or interfered with as a result of the insured peril described in cl 8(c).” [at 461]
The same logic was applied in their Honours’ conclusion that the “sum saved” provision must also be similarly read.
As the Court correctly identifies, the eligibility criteria for JobKeeper were financial ones, and not contingent on an outbreak of COVID-19 occurring within 20 kilometres of the business premises. Consequently, the Court concluded that the “causal requirement” was not satisfied, thereby excluding JobKeeper payments from the “sum saved” provision.
The Court’s focus on the nexus between “saved” costs and the damage suffered leaves me wondering as to the possible ramifications for quantifying damages, net of “saved” costs, in a broader commercial context. The High Court may have more to add to this.
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