JobKeeper – A call for a uniform approach in Business Interruption claims

At LMI we have been involved in many claims now where JobKeeper payments made by the government where it may or may not be appropriate to consider in the claim adjustment.

While the title of this paper is “A call for a uniform approach”, what I am not suggesting is that in every case that we either ignore it, or that we deduct any payments received by an insured in each and every case. What I am suggesting and asking for input on is a common way of determining which way JobKeeper payments should be treated.

I do this in the belief that it is in everyone’s interest and brand insurance generally, that as an industry, subject to individual policy wordings, to approach the issue in the same way. That way no client is being penalized or receiving a windfall just because, all other things being equal, one person treated it one way compared to another.

I am also looking for input from anyone interested to put forward their own ideas and thoughts on the matter which in the spirit of transparency we can all read and consider.

One of the challenges we at LMI have been experiencing is that while we explain our approach to the Insured, we are finding that some external accountants are taking a very different approach saying that JobKeeper should not be taken into any claim situation under any circumstance and I and my colleagues do not always agree with this.  

I am also very mindful of either a media bashing of the industry and or a government directive that it is not to be taken into consideration under any circumstances.

There are a number of issues to cover when looking at this issue, but before I get into the nuts and bolts of the matter, I think it important to start at the beginning and recap on what government was trying to achieve with the payments to businesses that qualified for it.

Most of the paper is on JobKeeper but it is appropriate to include the Governments Cash Flow boost and some of the States recovery grants that are directly linked to JobKeeper.  

What is covered also has relevance to some of the State Government Grants, particularly where they are linked to JobKeeper as is the case in the various Victorian Government Business Support Packages.

Jobkeeper – the Government’s Plan

The following is the bulk of the media release at the time JobKeeper was announced. I have bolded the parts that I think relevant to our discussion but while I was tempted to leave some of it out, to avoid any suggestion that I am trying to influence readers in any way, I include the entire media release. I have left the bolding as it appeared in the original media release.

We now know that JobKeeper has been extended beyond the first 6 months although additional tests have been introduced and that the level of payments are to be reduced.

We also know that the Government have described the program as a “Blunt Instrument” rushed through at a time of crisis.

First Principles

One of the key important drivers of business interruption insurance, as it is with many classes of general insurance is to put the Insured back, as near as money will allow, to the same position they would have enjoyed but for the loss. This as we know comes from Castellain v Preston (1883) [iii] in which Justice Brett’s stated:

A traditional business interruption policy attempts to achieve this through several important clauses including but not limited to:

1. Definition of Turnover conjunction with
   1. the Adjustments clause;
   1. turnover achieved elsewhere to be included in the claim calculation; and
2. the Savings clause

My first reaction when considering Jobkeeper and ignoring individual policy wordings was that JobKeeper ought to be taken into consideration so as to put the insured in the same position, everything else being equal had the insured event not taken place.

I will give two simple examples to explain, what I stress was my original thought process.

1. Let’s assume a business was going okay despite the impact of COVID-19 and would not have seen their revenue drop had an insured event not occurred then my proposition is that the triggering of JobKeeper is a special circumstance and needs to be factored into any settlement. What I suggest is that this is not just for the period of the disruption but for the full period the business benefited from JobKeeper.  The logic being that had the insured event not have occurred they would not have received JobKeeper and therefore to put them back where they would have been but for the insured event then JobKeeper needs, subject to the terms and conditions of the policy to be factored into the claim adjustment so as the Insured is not over indemnified.
2. At the other extreme, let us assume that the Insured qualified or would have qualified for JobKeeper as a result of a down-turn in business as a result of COVID-19 without an insured event occurring. In that case, I do not believe that any of the JobKeeper payment ought to be factored into the claim calculation as the Insured would have received it in any event and it would be penalizing the Insured unfairly by deducting JobKeeper. It would certainly open the Insurer and Industry to criticism.

Reasonableness Tests

As with any business interruption claim, disputes can arise as to what growth would have been achieved but for the loss and what is a reasonable period of disruption bearing in mind that the policy provides coverage for the period the business is effected by the insured event limited to the number of weeks shown on the Policy Schedule.

Reasonableness tests are usually available to check and this could be to look at similar businesses in the same area but always making sure that their results have not been propped up by the fact that the Insured business has not been able to trade due to the insured event. This is just one way to test but the point I am making is that reasonableness tests ought to be made and not just an arbitrary judgment one way or the other.

Issues to Consider

Business Interruption claims can be emotive at the best of times and when so many businesses are distressed like never before, the tension in claims at the moment is arguably higher than normal.

There is one thing to look at first principles as I suggest, but then the actual wordings have to be considered for while the coverage was originally designed to “indemnify” an insured, it is a contract and can only achieve this by the words/clauses in the policy. As we see in Material Damage policies that provide new for old or extra cost of reinstatement, traditional indemnity policies can and often do provide a broader coverage than mere indemnity.

Business Interruption policies are in the same category as we saw in Tropical Reef Shipyard Pty Ltd V QBE Insurance (Australia) Ltd (No 2) [2010][iv] where the court held that business interruption policies can be varied with the basis of settlement being a form of agreed value.

Therefore, before any adjustment is made to any claim the words of the policy need to be reviewed to determine if an adjustment is in fact allowable.

To do this, we start by looking at the accounting treatment of JobKeeper.

I would also point out that you cannot just look at JobKeeper payments in isolation. The funding of salaries and wages, plus superannuation, pay-roll tax, and WorkCover all need to be taken into consideration in any adjustment for JobKeeper.

Jobkeeper in Practice – Accounting Treatment

The way JobKeeper is being handled by the insureds that I have reviewed is that JobKeeper payments are not treated as normal business income. It does not attract GST but it is regarded as taxable income. I come back to this later. In theory the way the payment is made is that the business owner claims the wages and superannuation as a tax deduction which is offset by the JobKeeper payment.

As JobKeeper is not attracting GST it is being recorded as “Other Income” below the Gross Profit and Net Profit from operations lines.

Importantly it is not being treated by businesses as a negative expense under “wages and salaries” sometimes referred to as Payroll.

JobKeeper is not a Savings

As such a situation JobKeeper is not technically a saving in any expense.

Is it Turnover?

Therefore, the definition of Income or Turnover under the specific policy needs to be carefully reviewed to ensure that the receipt of the funds can be factored into any adjustment of a claim.

Taking the Mark IV Industrial Special Risks Policy as an example:

“TURNOVER: The money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.” [emphasis mine]

The issue we face in practice is that Insured’s and their accountants are arguing strongly that JobKeeper is, using the government’s words, a subsidy and not money … “paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises”.

This definition is typical across many business pack policies across the Australian market as well.

With this background, is JobKeeper fairly able to be deducted even if it has only been triggered by an Insured event?

Naturally, many Insured’s and their accountants are arguing, very strongly that, under such a policy definition of turnover that it cannot be.

There are policies that bring in all income to the business and so the wording needs to be carefully considered on a case by case basis.

Even if it is regarded as income/turnover, and assuming it is agreed that JobKeeper needs to be taken into consideration in a claim settlement then simply deducting the JobKeeper payments from Adjusted Standard Turnover is not going to deliver the correct result. The adjustments clause would need to be looked at to see if this revenue should be adjusted to a 100% rate of Insurable Gross Profit.

Tax and Pay Roll on Cost Implications

As explained earlier, neither JobKeeper nor the Cash Flow Boost is subject to GST payments.

JobKeeper is however to be treated as taxable income while the Cash Flow Boost is not to be treated as Taxable Income and in fact is treated as a tax credit against Pay as You Earn tax payable by the employer to the Australian Tax Office.

With state taxes different states are treating JobKeeper payments differently. Most are requiring wages and salaries paid to staff that would otherwise have been stood down or retrenched but retained due to JobKeeper to be treated as Pay Roll which attracts Pay Roll Tax and WorkCover. Some states have waived WorkCover premiums which is, no doubt in part, so that they are not liable for injuries for those staying at home and not actually working.

Below is a table that sets out my understanding of how Payroll Tax and Workers’ Compensation are to be treated.

If we look at Victoria and New South Wales, if the Insured would have stood down their staff, but because of JobKeeper retained them and paid them the full amount of JobKeeper, then the business is required to pay PayRoll Tax and Workers’ Compensation insurance and are therefore worse off than if they had retrenched or stood down the staff.

Just to deduct Jobkeeper receipts alone would be unfair to the Insured.

Another point to factor in to look at the full picture is that the business may have had to fund the salaries and wages for some period of time before being reimbursed by the Government. Many businesses as we know took out loans to see them through this period and the interest payments need to be considered as well.

Summary

This is a complex subject and I could go on but I feel I have raised enough points for one paper. In summary, I think this is a multi-step process. I think the order of this is in fact in reverse to the way I have written this paper and my original thinking.

1. Does the policy allow for any adjustment to a claim? This typically boils down to the definition of “turnover” or “income” under the policy as I do not believe that the payments received by the Insured can be regarded as savings under any of the insurance policies that I have read.

• If it is able to be considered, then the fair test is did or would the Insured have received JobKeeper payments even if the Insured event not taken place? If yes, then no adjustment ought to be made.

• If tests 1 and 2 above both mean an adjustment is allowed, other factors such as additional costs incurred by the Insured such as Payroll Tax, Superannuation payments and Workers’ Compensation premiums, and possibly interest need to be factored in.

• Finally, the last thing our industry can afford at this time is to be seen to be profiting unfairly by incorrectly deducting JobKeeper payments from any Insured’s claim. It is as the government said, a blunt instrument. Many businesses have had a windfall from the program. This of course does not make it right or fair but at the same time, every claim needs to be addressed in accordance with the terms and conditions of the policy. Great care is called for.

I hope you have found this paper of assistance and I do look forward to receiving your own thoughts on this topic.  

[i] We now know that payments came nowhere near the $130 billion amount.

[ii] We now know that this has been extended subject to new eligibility rules for another 6 months.

[iii] 11 QBD 380

[iv] FCA 1093, Federal Court of Australia, 07 October 2010.