Recent court rulings in favour of companies calling up the Business Interruption clause of their insurance policy have set a welcome precedent for potential financial relief for those businesses that have been adversely affected by the pandemic.
It’s a given that each matter will depend on the clauses set out in the agreement and determining whether a business is eligible to receive a pay-out is only one part of the problem. Now that the precedent has been set, the next, more pertinent, question for most claims will be how the value of the claim is calculated.
During a recent interview, we confirmed that isolating specific factors within each business’s circumstances will prove key in calculating the potential value of the interruption. These factors that will come into play are:
- Industry specifications, and;
- The incidental provisions contained within the insurance policy.
Obviously, industry variations will indicate the actual amount claimable; however, a standard formula of a classic business interruption claim would be to:
- Take the average income generated over a set comparable period in prior years;
- Account for various factors such as expected/projected marginal growth targets, and;
- Deduct fixed and standard expenses necessary for the business to operate.
The difference in projected versus actual income for the specified period – once readjusted for any potential savings the business may have benefited from – would then form the basis of the claim.
Claimants would be required to submit proof of this loss by means of annual financial statements, VAT returns and management accounts as well as any financial relief measures that were received or financial assistance provided resulting from COVID-19.
Businesses in sectors that are more susceptible to an ‘interruption’ resulting from lockdown regulations restricting movement of persons and/or sanctions on specific products will experience a greater risk than an industry where alternative means of supplying goods or services to consumers may exist. With this in mind, a business such as a restaurant or hotel will be at a clear disadvantage when compared with a retail outlet or a company with a conventional office structure.
Alternatively, if a business were to make adaptations to its organisation by making use of online platforms, the availability of alternative decentralised office spaces or other methods to offset its loss of profits, it may potentially have less merit to warrant a wide interpretation of its policy. On the other hand, increases in costs incurred as a result of adapting the working environment to better suit new methods of trade could possibly be claimable as necessary costs to sustain the business.
Taking the above into account, each policy will be placed under the microscope and extensions relating to infectious diseases are likely to be incorporated into the calculation.
The more practical approach, which seems to be adopted by notable insurers Hollard and Guardrisk, is to offer a settlement amount to clients who can show a sufficient degree of causation between the immense loss of profit and the inability to work as a result of the lockdown, together with cover for an infectious disease within a certain radius, as applied in the Guardrisk vs Café Chameleon case.
The cases being adjudicated at this point are merely an indication of the ‘calm before the storm’ and, due to the vast degree of variability in business models, the unique vulnerabilities associated with them and the varying levels of documentary evidence that a business may have available to prove its losses, a one-size-fits-all template to process these claims is unlikely to develop in the near future.
It seems insurers may be in for a hard time as these recent rulings have the potential to open the floodgates in a manner that may financially decimate them. The industry is expecting to undergo vast changes in future policies, premiums, and, potentially, new exclusions over the coming years.
We have already heard expert comment from the insurance industry that the right approach would have been to offer an agreed-upon settlement figure from the outset as a means both of honouring the obligation of the insurer whilst still protecting the interests of the insured within the ambit scope of the policy.
Whether it is too late to settle these claims amicably remains to be seen.
