An office space landlord has won a dispute over a reduction applied to a covid business interruption insurance payout.

A claim for loss of profit caused by the pandemic was accepted by IAG, but the insurer reduced the loss calculation because it said turnover from long-term tenants was not affected by an outbreak within 20km of the premises, as required under the policy.

The business normally had an annual turnover of $4.16 million but earned only $1.85 million in the year to February 2021.

IAG’s forensic accountant determined that 65% of the $2.31 million shortfall claimed – or $1.51 million – was “in consequence” of covid within 20km. That left about $808,500 in dispute.

The landlord disputed IAG’s argument that this sum was from long-term leases and was a loss caused by uninsured events such as the general effect of the pandemic and the public’s decrease in movement.

The Australian Financial Complaints Authority has ruled the whole loss was covered and there is no “reasonable basis to somehow partition the losses in the manner proposed”.

The authority said: “The insurer’s position is that it can effectively partition the complainant’s turnover whereby the portion related to long-term leases was not affected in any way by an outbreak within 20km of the premises.

“Even on the insurer’s own submissions, it is clear that all aspects of the complainant’s turnover were affected by the government [lockdown] orders and restrictions. These orders and restrictions would result from the same underlying cause – the presence of covid in the state, including within 20km of the insured premises.”

AFCA’s panel of ombudsmen cited a test case involving a similar infectious disease clause, interpreted by the Federal Court of Australia.

It stated: “It seems artificial, contrived and commercially irrational to attempt to distinguish between the insured and uninsured perils.”

IAG said all the insured loss had been covered.

But AFCA says it has failed to show whether the long-term tenant portion of turnover was unaffected before government lockdown orders.

“There [is] no clear analysis or compelling reasons provided as to why the owners of these long-term leases would be unaffected,” the panel said.

“Back then, there was no known vaccine and it was resulting in global restrictions and concerns. Instead, the panel would consider this would be a legitimate factor and concern to those customers.

“The panel accepts the complainant’s turnover was likely impacted [and] the total loss falls within the insurance policy coverage.”

IAG must pay the amount of its applied reduction with interest, plus $5000 towards legal costs.

See the ruling here.