Business, Interrupted

Co-authored with Stewart Dymant of Harris Balcombe

On December 11 2009 at 6am, it was precisely four years since the Buncefield disaster started. The explosions were heard some 125 miles away, and windows reverberated as millions of gallons of jet fuel exploded and went up in roaring flames. Four years on and the business owners hit by the disaster are still suffering sleepless nights; many are still fighting for compensation for both insured and uninsured losses. Even when the material damage claims are done and dusted, there is still an ongoing battle over business interruption and loss of profit claims.

It can be a shock to many, having worked late into the night every night, called in favours and leaned on credit agreements to return to trading, and find that a battle remains to receive fair and reasonable compensation. It can be real speculation to guess when, and how much compensation a company will receive. Sadly, it is becoming the norm that cases such as this drag on for years.

Traditionally, an insurance company would evaluate and pay appropriate compensation fairly quickly. But the principle of subrogation, whereby the insurer will launch proceedings against whomsoever it deems liable for the accident almost inverts this. Insurers are now often reluctant to pay out in the first place if receiving compensation for itself looks unlikely. This adds to the difficulties of winning this battle for insured losses, however for uninsured losses, the trials are in a different league, so much so that often the affected company and its insurer join together and sue the party considered to be liable for the loss.

And the knock-on effect can mean that uninsured losses can be more substantial. For example, a company may be compensated for a site being inoperable for 12 months as an insured loss. But a fire at a facility that feeds through to other locations can not only grind your logistics to a halt, but can cause the loss of contracts you expected to win or grow. Potential customers suddenly worry that you cannot cope with demand. And the effect of this may go well beyond your policy’s indemnity period.

Such was the case for one company – with a major contract almost in its grasp, the prospect pulled out, fearing the company would be unable to cope with their demands. That prospect has since expanded greatly, and the contract clearly would have done so proportionally. With this in mind, the real loss incurred was actually around five times that of its insured losses alone. Any companies working in high-growth markets face similar battles to regain their losses, particularly if they cannot prove their case.

Be prepared

There are certain activities that can help prevent the worst-case scenario, before, during and after a business interruption. Before the event, and as a day-today rule, ensure you have a sufficiently long indemnity period – companies with a 12-month period, invariably find this is too short. If you need to keep the premium down, discuss increasing the excess on the policy, and remember that insurance premiums qualify for Corporation Tax relief. Also ensure that up-to-date management accounts records, evidence explaining good/bad months and details of contracts you expect to win are kept. And be ready to provide evidence of the size and likelihood of winning bids in progress.

A company’s greatest chance to strengthen its case, and shorten the legal action, comes in the first 24 hours following the incident – in fact these hours are critical to your claim, so treat the site as you would a crime scene, and freeze the scene as long as possible in order to gather data and get as many photographs and witnesses recorded as possible. Doing so then will give you the best chance of surviving and avoiding a Buncefield situation. It also helps to bring in a specialist loss assessor to liaise with the insurance company. They can often get big issues, such as setting up new premises, sorting out issues with the insurer quickly and will prepare and negotiate claims with insurers and loss adjusters.

Finally, after the event, continue to monitor your marketplace, as well as who won the contracts that you have lost as a result of the interruption. Tallying this information against the successes of those companies will help build your case. And remember, never write a ‘quick win’ into your cash flow – it can take several years to get everything you are owed, even when you have a strong case.

When shock interruptions to business happen, companies suddenly need to learn the strange realities of compensation, or else their future trading, as well as their present, can be damaged irreparably. If businesses only ensure they are well protected before, well-informed during and ready to act after such incidents happen, they will be able to survive and succeed practically anything.

Jeffrey Nedas is a Forensic Accountant at Jeffrey Neads & Co, and Stewart Dymant is a Loss Assessor for Harris Balcombe LLP.

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