How Recovering Disaster-Related Damages Can Help Insolvent Companies and Creditors

12/12/2016

There are many reasons why a catastrophic fire, explosion, flood or other disaster could cause a company to become insolvent.  Perhaps the business had been struggling for some time and the disaster was the final nail in the coffin or the insurance policy may not have responded, either in whole or in part. 

Regardless of the circumstances, a claim exists despite the company being in the hands of administrators or receivers.  Recovering damages following a calamity provides an opportunity, not just for administrators to obtain more funds to be distributed to creditors, but for the company itself to acquire enough capital to have a chance of trading its way out of receivership.

Insurance not responding – a common reason for a disaster recovery claim to be made

Tragically, it is only when a disaster occurs that most businesses realise that their insurance coverage is inadequate. Reasons for insurance policies not responding include:

• the policy was not updated to reflect changes in address where stock was being held          

• the value of stock/assets held in the affected premises was higher than the policy cover          

• a lack of evidence to substantiate stock losses          

• failing to make a full disclosure

Business interruption insurance

Business Interruption Insurance (BII) replaces lost revenue when a business cannot trade following a fire, flood or other serious (insured) loss. It is an essential lifeline for any business; without it the overheads cannot be paid.

BII consists of the sum required to keep the business afloat while recovering from the event and the period of indemnity, the time that it will take to achieve a return to operational breakeven, usually a period of between eighteen and twenty-four months but in special circumstances up to thirty-six months.

Organisations often get caught out with what BII will and will not cover.  For example, in the instance of a flood, BII may cover your business if flood-water damage directly affects it, but not if a major road is closed, preventing customers getting to your shop for six months.

Investigating a recovery claim

The most crucial element of making a recovery claim following a disastrous event is the speed in which investigators can get on the scene.  In today’s competitive insurance environment, providers can and do go to great lengths and expense to establish whether or not they must pay out on a policy (they have a responsibility to their shareholders to do so).

Export investigation by loss adjusters, forensic accountants, and other professionals who meticulously scrutinise the causes of the loss and damage (including looking at company management documentation to see how the company was run, managed and directed), can often mean that pay-outs are delayed for months or even years.  This can put enormous pressure on a company’s cash-flow, resulting in it having no choice but to take some sort of insolvency-based action.

 However, if an organisation reacts swiftly, getting its own independent experts on the scene, evidence can be gathered to establish facts such as how a fire started or the financial cost of the damage caused by a flood and passed onto the insurer.  Investigators can also question third parties who may be able to identify how a fire may have started.

For example, in one incident involving a company whose stock was completely destroyed when a fire guttered one of their warehouses, the investigator was able to collect witness statements, not only from the company owners, but third parties who had witnessed the neighbouring business owner’s risky behaviour with flammable material.

In addition, a solicitor experienced in recovery claims knows from experience to ask the right questions of the broker who sold the policy.  Investigations may show that the broker who sold the policy was negligent in identifying and arranging the correct coverage required.

Recovery claims can result in a complete turn-around in the fortunes of a business

A successful disaster claim can result in an insolvent company recovering enough capital to pay back its creditors and even trade its way back to financial health. 

Calling in an experienced disaster recovery team immediately after the event occurs, so they can conduct in-depth investigations while events are still fresh in witnesses’ minds and material evidence of losses are likely to be still available (even to a minimal degree), makes all the difference in bringing a successful claim, especially if negligence is involved.