Business interruption insurance claims – what can and cannot be claimed

More than 370,000 small businesses in England and Wales could eligible to claim via their Business Interruption insurance policies for disruption during the first Covid-19 national lockdown, following the Supreme Court’s important ruling.

This ruling substantially allowed the appeal brought by the Financial Conduct Authority (FCA) and campaign groups Hiscox Action Group and Hospitality Insurance Group Action following an earlier case at the High Court.

During this case, the court found that the wording of many Business Interruption insurance policies meant that thousands of UK businesses should have received a payout for disruption and loss of earnings caused by the pandemic, despite many initially being told that they could not make a claim.

As businesses begin to assess the level of payment due to them, it is important that they understand what can and cannot be claimed, so that they can calculate the loss of profits during the period they were affected.

The Supreme Court judgement confirmed that losses should be calculated by extrapolating the financial performance of the business based on how it was trading before it was forced to close.

This may make it hard for those businesses that were adversely affected, but remained open, to make claims, compared with those that were forced to shut completely as a result of Government restrictions.

Many of the insurance policies affected by the ruling include so-called “Trends Clauses”. These state that if a business was already in decline before Covid-19, that decline will be assumed to have continued for the purposes of working out how it would have performed had it not been forced to close.

Of course, where a business had been growing prior to the lockdown, that trend too should be assumed to continue under the same mechanism within a policy.

Insurers will also need to take into consideration specific factors, such as unique circumstances within a business before the period of disruption, when deciding how much to pay out from a policy.

During the appeal, the Supreme Court considered the case of a restaurant whose celebrity chef was due to leave during the period of closure.

In this case, the court concluded that the losses should be calculated by taking into account how the business would have fared had it remained open but factoring in the effect of the chef’s departure.

The court said, however, that no account has to be taken of so-called “Pre-Trigger Events” caused by Covid-19. For example, a pub that had suffered a 30 per cent fall in turnover because of Coronavirus before it was forced by the Government to shut, should ignore that downturn in trade for the purposes of extrapolating its financial performance during the period of loss.

Claiming for losses incurred during the period before a business was forced to close or the period after it reopened, as trade gradually resumed, is likely to be more difficult than claiming for losses during the period of closure.

Another important factor in claims, which is likely to affect a company’s ability to claim or its calculation of loss, could be whether access to the insured premises was prevented or merely hindered.

The Supreme Court considered five different types (or so-called “Categories”) of business depending on the sector in which the operated and the restrictions that threfore applied to them.

In looking at the policy of one particular provider, Arch, the court found that in the case of pubs, cafes and restaurants (Category 1), where businesses closed completely in response to the 20 March advice or the 21 March regulations, there was a qualifying prevention of access from the moment of closure.

Even where a business then set up a takeaway service which it had not carried on before, there was still a qualifying prevention of access, since that takeaway business was fundamentally different from the business described in the policy schedule.

If the business already offered a takeaway service and it was stated in their policy, this may affect its ability to claim or the calculation of loss.

Likewise, where leisure businesses, such as cinemas, theatres, nightclubs, gyms and leisure centres (Category 2) closed completely in response to Government advice or regulations, there was a qualifying prevention of access to the premises from the moment of closure.

That prevention of access is “not precluded even where the business in question set up a remote or internet service, which it had not previously provided, as the business is fundamentally different from the business described in the policy schedule”.

For those non-essential shops and businesses offering goods for sale or hire (Category 4), that were required to close their premises under Regulation 5 of the 26 March regulations and cease trading (apart from deliveries from orders received online, by telephone or by post), the court found that their complete closure qualified as prevention of access from the moment of closure.

This becomes more difficult to assess for Category 4 businesses where other factors are considered, such as whether the relevant business previously delivered orders.  Here, the ruling said that “it seems to us that the setting up of such a service would not preclude there being a prevention of access, since that business would be fundamentally different from the business described in the policy schedule”.

By comparison, there would not be a prevention of access in the case of an estate agent, which “already conducted a proportion of its business online and which was permitted to continue using its premises to conduct that online business even though clients could no longer come to the premises in person”. In many cases, the court said the ability to claim and value of loss could hinge on unique factors.

For essential shops and businesses (Category 3) that could remain open, while there may have been an impediment or hindrance in the use of the premises, due for example to reduced footfall, the ruling found that there was not “in any sense a prevention of access to the premises”.

As such, where the policyholder chose to close down the business because of reduced footfall or for some other reason, that is not a qualifying prevention of access, because the closure was not due to Government actions or advice.

Finally, the ruling considered businesses not listed in the 26 March regulations, such as manufacturers, accountants, lawyers, recruitment agencies and construction sites (Category 5). None of these businesses were ordered to close and they were permitted to remain open.

As such, there was no prevention of access, even if clients or customers did not visit the offices or site because of the restrictions on movement imposed by Regulation 6 of the 26 March regulations or staff were asked to work from home. The ruling found that at most there was an impediment or hindrance on the use of the premises, but not sufficient reason to prevent access.

Roger Isaacs, Forensic Partner at Milsted Langdon, said: “It is clear that the ruling from the Supreme Court is complex and contains a myriad of reasons why a business may or may not be able to make a claim.

“There are also a number of factors that affect the value of a potential claim, including the nature of the business prior to the pandemic and the effect that the various Government regulations and advice had on their company and the insured premises.

“Many insurers have pledged to contact those affected with offers of a payout, but every business with a relevant policy at the time of the first pandemic must assess its ability to claim and the amount that is due based on their losses and the ruling.  This is where specialist accountancy advice can be very valuable to ensure that what is claimed is justifiable and appropriate in the circumstances of both the business and the policy ”

Roger said that Forensic accountants are used to undertaking these types of loss of profits calculations and are well placed to assist with the quantification of  losses and helping clients to calculate an accurate claim.

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