Potential windfalls – quantifying COVID-19 related business interruption insurance claims

By Roger Isaacs, Forensic Partner

Any litigator in a case that concerns the value of a business should ensure that consideration is given to potential windfalls that may arise from Business Interruption policy claims.

The recent test case in the Supreme Court has shed light on what can and cannot be claimed in relation to Business Interruption insurance claims.

However, much remains unclear. One thing that is immediately apparent is that it is dangerous to rely on common sense or fairness when trying to work out what losses are going to be covered. Instead the strict wording of each policy needs to be taken into account and this could potentially give rise to some anomalies.

For example, consider a policy that indemnified a business for any “fall in turnover or increase in costs” that arose during the period of indemnity by virtue, say, of the business being forced to close. Then ask yourself whether credit would need to be given for government furlough payments or for any of the very many, and in some cases substantial, government grants that have been paid to some of those companies worst affected by the pandemic.

It will quickly become apparent that the policy wording could have a very significant and unintended effect on the quantification of claims. If an indemnity is provided, for instance, for a “fall in profits”, then it is much more likely that grants and furlough payments would need to be taken into account to mitigate the claim.

Another grey area arises from the application of so-called “trend clauses”. These are intended to ensure that any trend in the performance of a business that pre-dates the forced closure of its premises can be extrapolated to continue for the purposes of assessing how it would have performed had it been able to remain open. In other words, a growing business should be able to claim indemnified losses on the basis of an imputed continuation of its growth. Conversely a business that was already in decline should be presumed to continue to deteriorate.

The Supreme Court ruling made it clear, however, that any decline in the performance of a business that preceded its forced closure as a result of a National Lockdown or the imposition of local Tiered Restrictions, should be ignored if that decline was caused by the pandemic.

Pressure is being placed on insurers by the Financial Conduct Authority to reassess promptly all Business Interruption claims and to take a “pragmatic, transparent and consistent approach” over the loss adjusting process. That said, where claims are likely to be substantial, we recommend that expert legal or accountancy advice is sought both in relation to the effect of the relevant policy wording and the quantification of claims.

Furthermore, any litigators who are currently considering the value of businesses should ask whether there is any prospect of a Business Interruption claim that could be relevant, especially if it were to include an element of windfall.