26th August 2020Q&A: All you need to know about the Business Interruption Insurance court case

Nearly 400,000 small businesses are waiting to see if insurers will be forced to pay out on their business interruption policies after a landmark High Court case was heard in August.

The issue of whether business interruption insurance policies cover pandemic-related losses is one of the most controversial legal issues resulting from the coronavirus crisis. In bringing its test case to the High Court, the FCA is aiming to provide a roadmap to businesses and insurers regarding how to interpret the wording of policies and therefore the amount that should fairly be awarded.

Worth potentially billions of pounds, the case has involved examining 17 policy wordings from eight different insurers in order to determine whether COVID-19 triggers a pay-out. However, the ruling is expected to have ripple effects for the entire marketplace, with its conclusions likely to be applied to other affected claims

Why are leisure businesses and those in the hospitality industry likely to be most impacted?

The leisure industry is typically conducted ‘at location’, which is most affected by denial of access. Businesses such as restaurants, gyms, bars, swimming pools, etc., that are all location specific, are therefore more likely to be impacted by the change. Loss mitigation is also harder– a restaurant may adapt to serve more takeaways, or a gym could offer online classes, but the perceived value is often lower. By contrast, the retailers were already shifting online and Covid-19 has definitely accelerated this trend.

In terms of preparing for a decision in favour of businesses – what should leisure businesses and those in the hospitality industry be doing now?

• Review your insurance documentation, to gain an understanding of what risks you are protected against. If the business interruption insurance is for ‘fire and flood’, then you will not be covered. Similarly, if ‘pandemics’ are an explicit exclusion.
• Maintain accurate records and ensure you have taken any reasonable steps to mitigate loss (for example, recovering staff costs from government scheme).
• Retain records and communication where action has been taken as a result of the pandemic. For example, if you have attempted to renegotiate rent, this evidence should be kept.
• Contact your insurance company in writing and keep a record of this.

Are there any potential issues if businesses don’t take notice and prepare now?

It’s very important to consult your insurance documentation, and to approach the insurance company. Many policies will have a cut off to make a claim, so engaging early would appear prudent.

What losses might be covered?

One of the challenges of the test case in the High Court will be to determine not just whether the losses should typically be covered, but also what losses. For example, would the time period cover all losses that can reasonably be shown to be caused by the Pandemic or would the losses only be insured for the time period that the government required the business to close. Further, with some businesses currently opened at reduced capacity, there is an additional question as to whether these losses would be covered.

Why is it so difficult to prove loss of earnings?

If the claim is accepted, it’s likely that a loss adjuster working on behalf of the insurer will consider the claim. It is also possible that there are simply too many claims for a loss adjustor to handle. Therefore, it may be that a process will need to be set up by the FCA or a similar government body where the majority of claims are processed by simply comparing profits during a comparable unaffected period. If the loss is obviously exceeding the insured amount, then this will likely be a more straightforward process.

Generally, however, a loss of profit claim can be much more complex, as it will be required to be tailored to an individual Business (rather than the loss of an asset that is comparatively easy to value, such as a car):

• This business might be seasonal
• The business might be growing, or in the process of opening a new outlet, for example
• The business may have taken steps to mitigate their loss (such as a restaurant taking on Deliveroo) – and the extent to which the additional income earned from these steps covered their losses.
• In the most extreme example, the business may go under, and therefore a complex case arises of estimating the value of the business lost ‘but for’ the pandemic.

In certain circumstances we might find that where losses are complex, the claim will be passed on to a forensic accountant by the insurance company, or otherwise engaged by the business to challenge the findings of the insurance company.

If you have any questions about loss of earnings or making a potential claim, we would encourage you to get in touch with a forensic accountant. Please feel free to get in touch to discuss with the team here.