Business Interruption Policies and Flooding Maximising Recovery

• United Kingdom

• Insurance and reinsurance - E-briefings
• Litigation and dispute management

10-03-2020

The UK has suffered widespread damage as a result of recent flooding over the winter of 2019/20, with anticipated losses in excess of £400m.

If flood-related interruption to a business is significant, property and business interruption (“BI”) policies can provide an important form of protection and it is therefore imperative that businesses understand how these insurances operate in order to maximise recovery.

Notifying the claim / circumstances giving rise to a loss

Property and BI policies invariably require that claims / circumstances which may give rise to a loss are notified to insurers within a certain period of time, and often within a specified format. Such provisions are often conditions precedent to the liability of an insurer so policyholders should familiarise themselves with these obligations and should act as quickly as possible when they become aware of a potential claim.

Trigger points for indemnity

The event which triggers an insurer’s liability can vary depending on, for example, whether a policy is written on an “All Risks” basis or a “Specified Perils” basis. A flood will amount to physical damage although there may be arguments as to whether a flood has actually occurred.

Dealing with loss adjusters

Loss adjusters are insurer-appointed investigators instructed to advise insurers on liability and adjust claims. Policies will contain obligations that policyholders should cooperate with insurers and provide information reasonably requested in support of a claim. This will extend to cooperating with agents of the insurer, including loss adjusters. However, it should always be borne in mind that ultimately loss adjusters represent the insurer’s interest. As such, they will endeavour to identify issues which allow the insurer to avoid the policy, or decline the claim.

Policyholders should consider instructing a loss assessor or lawyer at an early stage of the claim to assist with presentation of the claim, ensure compliance with policy terms and to deal with loss adjusters. Instructing lawyers can help secure legal privilege over documents which otherwise may have to be disclosed to insurers.

Knowing the policy extensions

Valuable extensions to the primary cover are often buried deep within policies. For example, in circumstances where a civil authority closes or denies access to insured / business property due to flooding, resulting losses may not be covered if the cause of those losses is the lack of access, rather than the flooding itself.

In Orient Express Hotels Ltd v Assicurazioni Generali SPA, a claim was brought by a hotel in New Orleans which had been forced to close for two months due to significant damage caused by Hurricane Katrina. As the entire area had been closed off for several weeks, the Court held that the hotel was unable to recover its BI losses on the basis that they were not caused by the damage to the property, but by the damage to the wider area. In short, the Court found that even if the hotel had suffered no damage, it would have suffered the same loss of profits due to denial of access to the city.

Policyholders should therefore consider whether BI policies include denial of access cover, so that they are insured in the event of civil authority involvement.

How losses are calculated

Calculating BI losses can be complicated, and policyholders should be prepared to negotiate settlement of an adjusted claim with professional support. The basis for calculating these losses can vary from gross profit to gross revenue to increased costs of working, and the formulas rarely operate in the way that accountants / finance teams might expect. For example, when calculating the correct sum insured, wages are not normally included in an accountant’s gross profit figure, but should be included in the insurable Gross Profit figure. If the sum insured has been incorrectly calculated, as is regularly the case, a business may be underinsured and could incur a penalty if the policy contains average provisions.

Dealing with delay

With floods in particular, circumstances giving rise to claims can be widespread and insurers can be inundated with claims, causing delay. It is therefore advisable to notify insurers as soon as possible of any imminent business costs and to provide the requested information as quickly as possible to allow the insurers to assess, and hopefully pay, the claim,

In the event that there is unreasonable delay in making payments, the Enterprise Act 2015 enables insureds to sue insurers for damages caused by the failure to make payment on time, in addition to claiming the losses insured under the policy. The point at which an insurer is obliged to pay a claim pursuant to this Act will not arise before the insurer has been provided with sufficient information to assess the claim so it is imperative that insureds clearly and promptly set out claims with corroborating evidence to maximise their chances of recovering damages if payment is not made within a reasonable time.