13/11/2017
Headlines last month were dominated by the collapse of Monarch Airlines. As the UK’s fifth biggest air carrier, employing over 2,000 staff, it is an insolvency on a massive scale.
Insolvency practitioners have considerable responsibilities to creditors, the main one being to generate enough funds to satisfy existing debts as far as possible. If a business has failed due to an unexpected calamity such as a terrorist attack, fire, explosion or flood, there may be a claim against an insurer or negligent party. This claim, if brought, could result in a higher return to creditors and even allow the company to trade its way back to profitability.
One situation which can lead to a disaster recover claim is business interruption insurance not responding.
What is business interruption insurance?
The loss of property following a disaster can be considerable, but nothing compared to the income deficit that can result from flood, fire, or riot damage.
Business interruption insurance is designed to put the insured back into their pre-loss trading position had the loss not occurred, not just back where they started. Therefore, a fast-growing business that can demonstrate aggressive growth potential could expect a settlement higher than their current turnover.
What does business interruption insurance cover?
The trigger for business interruption insurance is found in the preamble of most business interruption insurance policies, and reads:
“The Insurers will pay the amount of the Consequential Loss resulting from interruption of or interference with the Business carried on by the Insured at the Premises consequent upon DAMAGE to Property used by the Insured at the Premises in accordance with the undernoted definitions .”
The term ‘but for’ is a useful way of understanding how business interruption insurance works. ‘But for’ the damage caused by the disaster, what would have happened to the business? If the affected business can demonstrate that ‘but for’ the loss, they would have had a viable business, the business interruption insurance should respond if all other conditions of the policy have been satisfied.
This can be crucial in today’s aggressive business environment, where customers have enough choice available through online retailers and suppliers. If a business is closed for a few months or even weeks, competitors can quickly swoop in, using sharp social media campaigns and discounts to hoover up the available clientele.
This may be enough to lead to the collapse of an organisation which may have been facing financial difficulties for some time prior to the disaster occurring.
Why does business interruption insurance fail to respond?
There are several reasons for business interruption insurance failure to respond:
- The broker failed to explain what the business interruption insurance would or would not cover.
- The term "insurable gross profit" is miscalculated, for example, growth trends in the business are not accounted for. An example of this is where the business enters a new, profitable sector but fails to update their policy to account for the rapid increase in turnover projected.
- The indemnity period is too short. Most indemnity periods for business interruption insurance are for 18-24 months but can be stretched to 36 months.
If the insurance company is refusing to pay out on the business interruption policy, an examination of the policy and the circumstances of the disaster may lead to a claim being brought against the insurer.
Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) provides a good illustration of an insurer repudiating liability and seeking to avoid the contract of insurance because of alleged material non-disclosure and/or misrepresentation by the insured. Following a claim being brought, the court found that although there had been a material misrepresentation by an insured, it had not induced the insurers to renew the policy of insurance and they were not, therefore, able to avoid liability because of it.
The claimant (one of several companies in the Synergy group), provided laundry services to the NHS. A fire at the claimant’s premises in 2007 led to a claim for material damage and business interruption losses. However, the insurers argued that a letter received from the claimant during a renewal of the policy stated the claimant would, in response to suggestions made regarding risk improvement, install an intruder alarm on the premises. This action was never taken.
The insurer argued the indication that the alarm would be installed was a material misrepresentation which was continuing or which had been impliedly repeated at the time of renewal, or that it was a material non-disclosure. In either case, they submitted, they had been induced to renew the policy on the basis that they believed the action would be taken.
The court found in favour of the claimant. Although it found there was a misrepresentation, it had not induced the insurer to renew the policy.
“...the test of inducement is not a heavy one, the Court should approach with care and caution the evidence of the underwriters as to whether they were induced, for the reasons given by Colman J in North Star Shipping v Sphere Drake Insurance [2005] 2 Lloyd's Rep 76 :
“In evaluating the underwriters' evidence, it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available”.
In this case, when the evidence was tested rigorously, it was clear:
“Despite Mr Garbutt's protestations to the contrary, I do not consider that Fusion [the underwriter] would have adopted any different attitude to the Risk Improvement relating to the Dunstable alarm if the true position had been disclosed prior to renewal.”
The insurers were not entitled to avoid the policy and Synergy were entitled to an indemnity under the policy.
In summary
If the case of Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) had involved an insolvent claimant, the outcome for the creditors, and perhaps the company, may have been very different had a claim against the insurer not been brought.
Pursuing an existing claim against an insurer or negligent party in cases of insolvency triggered by a disaster can be vital in getting the best results for all affected.
Fisher Scoggins Waters, are a London based law firm specialising in construction, manufacturing, and engineering law. We have years of experience in bringing claims following disasters affecting commercial operations. Please phone us on 0207 993 6960 for further information.
(1) http://london-bia.org/lectures/LBIABIManual.pdf
(2) [2010] EWHC 2583 (Comm); [2011] Lloyd's Rep. I.R. 500;