The Supreme Court judgement on 15th January 2021 has implications for Business Interruption insurance policyholders, says Eimer Magee
Following the COVID-19 outbreak in early 2020 and the subsequent restrictions imposed by Governments globally, Business Interruption (BI) insurance policyholders began to ask whether their policies provided cover for the effects of the pandemic.
The purpose of BI insurance is to compensate businesses for financial losses sustained due to interruptions in trading as a result of an “unexpected event.” Arguably, the COVID-19 pandemic is the most unexpected event in human memory.
On 15th January 2021, in a landmark test case brought by the Financial Conduct Authority, the Supreme Court ruled that the majority of BI policies examined offered cover for the impact of the pandemic on business operations. As a result, businesses are being advised to review their insurance policies. Often, BI insurance is an add-on to building and contents policies and policyholders may be unaware that they are covered.
Further details on the Supreme Court case can be accessed here >> Supreme Court Case
How to calculate Business Interruption losses
Unlike buildings and contents insurance, where the loss can be quantified by a third party such as a surveyor, calculating business interruption losses is complex and requires consideration of the following:
- Whether the business has insured its gross profits or its revenues: The value of losses will differ depending on which of these is insured, therefore it is important to check the policy definition to understand which type of cover exists.
- The length of the indemnity period and the timeline of the loss event: This will determine the period for which the financial losses are calculated. In the case of the COVID-19 pandemic, many businesses have sporadically closed and reopened as a result of localised lockdowns. Therefore, careful consideration must be given to ensure that the measured losses align with the specific timeline of the loss event. In our experience, the time element of the BI claim calculation is frequently disputed so accuracy in determining the indemnity period and correctly and consistently applying it when calculating losses is essential.
- ‘What if’ analysis: Once the type of cover and length of indemnity period have been established, projections are prepared to estimate what the business’ performance would have been if the pandemic hadn’t happened. This involves detailed analysis of pre- and post-event financial data including the most recent financial statements, management accounts, sales and expense records and budgets. A sound understanding of the business cycles, seasonality and market conditions is critical in producing projections which are both accurate and reasonable.
- Comparison with actual results: Projections are then compared with the actual results of the business for the period of interruption to arrive at the BI loss.