A Melbourne hairdressing salon has won a business interruption dispute after it was found revenues fell due to a covid outbreak that happened before government lockdown orders.

Its policy included an “additional benefit” infectious disease clause for losses caused by an outbreak within 20km of its premises. That wording also featured in a Federal Court industry test case claim involving a travel agent that indicated a different type of business could have been successful in having losses covered. 

The suburban hairdresser, represented by lawyers in the Australian Financial Complaints Authority case, provided financial records showing a “clear and marked” revenue slide from early March 2020, which it said was caused by a confirmed case of covid within the 20km radius. 

The “very nature” of the business required customers to be willing to attend the premises and be close to other people, it told the ombudsman.

The insurer, Lloyd’s Australia, said the salon had not shown the required link between an outbreak and the losses, and its revenue drop could be explained by uninsured causes such as seasonal factors, a trading name change and the general threat or impact of the pandemic.

It pointed to statewide restrictions imposed on March 23 – which it said forced the closure of the retailer in whose store the complainant operated – as the key cause of loss. 

AFCA says it is “more likely than not” a covid outbreak occurred before March 23 within 20km of the salon, noting the Federal Court test case found an outbreak required only one active infection in the community. 

The dispute authority looked at the similar wording in the test case dispute involving Melbourne-based Meridian Travel.

That case was the only one out of 10 disputes where the Federal Court found insurance would respond, but it was also found that, given Meridian’s business focus, it was an overseas travel ban rather than the local outbreak that was the driver of losses. The agency generated 90% of its business from international travel. 

The court highlighted the potential for a successful BI claim if “all the other circumstances were the same but Meridian Travel’s business was a typical suburban restaurant drawing much of its custom from within the 20km radius”.

AFCA says the hairdressing business is “analogous” to that suburban scenario. It finds there was an outbreak and the complainant has shown a revenue downturn that aligned with it.

It is also satisfied that the impact of state government restrictions from March 23 and the retailer’s closure on March 29 “arose from the same underlying fortuity as the insured peril”.

AFCA’s decision says the insurer must accept the BI claim and assess any future claims preparation costs in line with the policy terms, and reimburse up to $10,000 in legal costs.

Coverage provided under the additional benefit was 20% of the sum insured for gross income loss, which equated to $30,000. 

The case differs from a string of BI disputes rejected by AFCA that have centred on hybrid clauses.

In those cases, cover depended on trading restriction orders made by the authorities “as a result of” an infectious disease within a specified radius of the premises. AFCA has generally found government orders were due to wider public health concerns and that the specific causal link with the insured business was not made. 

The salon decision is available here.

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