A significant number of businesses have had their operations interrupted as a direct consequence of Covid-19.  It has raised the question of whether companies would be covered in this respect by their Business Interruption insurance policies. 

Test cases have been brought by four pubs arising out of FBD’s refusal to indemnify them for the disruption to their businesses due to Covid-19.

The publicans claim that their insurance policies contain a clause that states the pub owners would be indemnified if their businesses were affected by order of the local or Government Authority if there were outbreaks of contagious or infectious diseases.

Mr Justice McDonald was due to deliver his judgment in the Proceedings on 15 January 2021. There was much anticipation for his judgement.

However, Mr. Justice McDonald has deferred delivering his judgment to allow the parties make legal submissions following the UK Supreme Court’s judgment in a similar test case, which coincidently happened to be delivered on 15 January.

In its judgment, the UK Supreme Court ruled in favour of businesses by substantially allowing an appeal by the Financial Conduct Authority (FCA) on behalf of business interruption insurance policyholders.

The UK Supreme Court found:

• the “disease clause” provided cover for business interruption caused by any cases of illness resulting from COVID-19 that occurred within a specified radius of the business premises;
• The Supreme Court held that such a clause does not cover interruption caused only by cases of illness outside that area. While this initially appeared like a closing of the the earlier High Court ruling, the Supreme Court’s position on causation, in practical terms kept the broad coverage afforded by the High Court, if only from a different perspective
• With respect to the disease clauses, the Court concluded that it is sufficient to prove that the interruption was a result of government action taken in response to multiple cases of the disease, as long as one case occurred within the specified radius, because, in essence, each case was an equal cause, combined inextricably with all other cases
• In this regard, an instruction given, such as the UK Prime Minister’s statement of 20 March 2020 instructing named businesses to close “tonight”, may amount to a “restriction imposed” if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers; 
• In relation to the “prevention of access” and “hybrid clauses”, prevention clauses provide coverage for business interruption resulting from a restriction imposed by a public authority that causes an inability to use, or access, an insured’s premises. The hybrid clause ties the restriction to a notifiable disease. The Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses;
• With respect to prevention of access, the Court gave an example of a golf course with a clubhouse where the course was allowed to remain open, but the clubhouse was ordered closed. In that scenario, the owner was unable to use the discrete part of the premises (the clubhouse) and unable to perform a discrete component of its business (restaurant and bar sales within the clubhouse). Both circumstances would constitute an inability to use.
• In accordance with its interpretation of the “trends clauses”, adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19.

Following on from the UK Supreme Court Judgement, the  FCA has stated that 

a)     cover may be available for partial closure of premises (as well as full closure) including for mandatory closure orders that were not legally binding. 

b)     valid claims should not be reduced because the loss would have resulted in any event from the pandemic and that, as a result, more policyholders will have valid claims and some pay-outs will be higher

Obviously a similar judgment from Mr. Justice McDonald will have a significant impact on businesses here on the hospitality and other sectors.  

Making a claim

A company making a claim for a loss of profits due to a business interruption claim will need to engage an expert accountant to prepare such a report. 

Report of Expert Accountant

A lost profit / business interruption claim is by its nature an estimate, and as such are subject to the judgment, experience and expertise of the of the professional calculating the loss.  

Calculating lost profits due to business interruption.

The first thing to note is that Lost Profits occur over a period of time.

In simple terms, Lost Profits are calculated as follows:

1. Lost Gross Revenue (“But for” revenue less “actual” revenue)
2. Less avoided or saved direct and other costs in providing goods or service
3. Equals Profits before Interest
4. Plus additional expenses

A common error is to evaluate gross margin as the measure of damages.  This is incorrect as it ignores other costs that may directly or indirectly be related to providing the goods or service. Gross Margin only measures gross revenue less cost of sales.

Avoided Costs or (Saved Costs) should be determined and offset against lost revenues when calculating lost profits. Avoided costs are those costs that were not incurred as a result of the lost revenue. In other words, since a product was not manufactured and sold, there would be no revenues, and accordingly, no costs associated with this lack of sales revenue. Accordingly, these costs were avoided.

Adjustments should also be made for variable costs and fixed costs

There are a number of Common methods used to calculate Lost Profits including

1. Lost Revenue (Before and After Method)
2. Benchmark (Yardstick) Method
3. Specific Contract Terms
4. Statistical Forecasting
5. Market Share Method

The most commonly applied is the Lost Revenue method.  It is also the most appropriate for any Covid-19 influenced lost profit claims in the hospitality and retail sectors.

This method compares revenue of the business before and after event i.e. “But For” – the business would have experienced the same level of revenues and profits post event as preceding the event.

An experienced expert should also consider other factors such as trends in industry / revenue prior to event / loss of key employee/government supports.

Next steps

At this stage, companies should have received advice from their own brokers as to whether their policy covers them for Covid. If they were entitled to make a claim they should have commenced the formal process of making a claim.

Companies who believe that they have a potential case should IMMEDIATELY get together the proper documentation and information to support any business interruption claim they may have,

• Keep track and document the dates the business has been closed or was detrimentally affected by the pandemic 
• Have accurate books and records be brought up to date and management accounts prepared on a monthly basis
• Pull together any business plan and / or  historical projections used to direct the business
• Pull together details of any TWSS, EWSS or other government grants or supports received
• Detail all separate expenditure incurred related to the pandemic 
• Have all supporting documentation organised and collated in easily  accessible  folders for your expert

Friel Stafford have extensive experience with the complexities of preparing and standing over the financial reports needed to support business interruption claims.  Please do not hesitate to contact myself or Jim Stafford or Andrew Hendrick with any queries you may have.