Policyholders need to home in on balance sheets to take advantage of test case verdict

Commercial policyholders looking to go “full steam ahead” in preparing their non-damage business interruption (BI) claims following the High Court’s ruling on the FCA’s test case this week need to take careful consideration of projected profits and losses to ensure that claim payouts match business balance sheets.

Paul Smethurst, partner and forensic investigation specialist at accountancy firm Menzies, explained that quantifying losses for coronavirus-related business interruption “may not be as straightforward as it sounds”.

He said: “Policyholders can now go full steam ahead, preparing their claims in accordance with the clarity provided by this judgment, although some care and attention regarding the specific wording of their policies is still required.

“Businesses should take advice when quantifying the losses caused by any coronavirus-related business interruption [because] this may not be as straightforward as it sounds. As well as considering any obvious loss of profits based on a comparison with normal trading activity, they should consider any contracts that were lost, or failed to convert, due to the lockdown restrictions.

“Businesses may have received enquiries that they were unable to fulfil, or respond to within the required timeframe, and these projected losses should also be taken into account.

“Some businesses in the hospitality and leisure industry, such as pubs and restaurants, could lose out on quantity discounts that they might have expected to earn under normal circumstances. This could result in increased costs and reduced profitability going forward. While it’s easy to overlook such projected losses when pulling schedules together, they should be considered properly.

“With the prospect of more local lockdowns in the months ahead, businesses must continue to keep detailed records of their commercial dealings in a format that could assist them in bringing further claims in a timely way in the future.”

‘Green light’ for claims

On the subject of future claims, Jean-Baptiste de Courcel, partner at global consultancy Accuracy, said: “This unexpected judgment gives the green light to a raft of new business interruption claims.”

He continued: “Some businesses will have been put off from making claims by their insurers, or will have seen their claims denied first time around. Any business in that situation should now go back and look at making a claim.”

Landmark case

Despite the “partial victory” of this “landmark case”, Rafi Saville, forensic partner at accountancy firm HW Fisher, added that policyholders still need to “pay attention”.

He said: “This a landmark case and one of the most controversial legal issues resulting from the coronavirus crisis.

“The ruling is likely to [be] considered as a partial victory and it could have a ripple effect for the entire marketplace, with its conclusions likely to be applied to other affected claims. However, the decision could possibly add to the confusion experienced by many business owners.

“It is now crucial for these businesses to pay attention. Although the ruling may well be subject to an appeal, it becomes even more necessary for businesses to consult their insurance documentation with a view to understanding whether their Covid related losses will be covered. At this early stage, we understand that policies covering ‘notifiable diseases’ will be covered under the ruling.”

On the other hand, Smethurst said that the government may be heaving a sigh of relief at the judges’ decision too.

He explained: “The government will also be relieved that insurers are being forced to contribute to losses suffered by businesses as this could mitigate demand for business support funded by the taxpayer going forward.”