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:
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:
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
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.
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,
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.