What do insolvencies, business interruption claims, and after the event insurance have in common?

Insolvencies, business interruption insurance claims, and after the event insurance are three topics that, at first sight, may seem like strange bedfellows. But are they?

A recent article by David Steinberg and Yasmin Curry of Stevens & Bolton LLP looks at the number of insolvencies in the last quarter of 2020 which were the lowest since 1989. Given the Covid-19 Pandemic and the effect it has had on the economy, and particularly on the SME sector, it is indeed very surprising. Quite rightly, as the article points out, this may be the “calm before the storm” as the various Government support schemes are withdrawn, and the “new normal” world emerges from lockdown.

In addition to the Covid-19 business support schemes the Government has introduced, the Financial Conduct Authority (FCA) also started a High Court action in the last quarter of 2020 involving several insurers who were arguing that their commercial policies did not cover the financial losses arising from business interruption because of the pandemic. This case was treated with such urgency that the appeal process was leapfrogged straight to the Supreme Court who handed down their judgement on the 15th of January 2021, which largely favoured the policyholders. 

In a laudable effort to help businesses, the FCA has set up an online resource to assist claimants to see if their policy will cover them. It is worth having a look at the process and forming a view as to how helpful it is to the layperson. I suspect that for many businesses they will need help just to identify who they are or were insured with.  

In my opinion, the media reporting of the FCA business interruption judgement was over-optimistic. There were big headlines across the media about how more than 370,000 business would be affected. 

“Unfortunately, a few minutes on national TV and radio news could not possibly give the full story of the 112-page judgement that their Lordships handed down. What the reporting did not deal with, was the process of actually making a claim.”

As with any claim under any insurance policy, evidence of loss needs to be proved and quantified, and for business interruption claims, this means not just what turnover has been lost. As most businesses know, turnover is not the same as profit. So, whilst turnover is lost, so are some aspects of costs. Most claimants will need some form of assistance from their accountants to formulate and put together their claim. 

Regrettably, despite the Government’s support and the FCA’s action, it will be too late for many businesses who will not come back.

So where does after the event insurance (ATE) enter the equation? Very simply, ATE provides a policy for a claimant to insure against having to pay the other sides legal costs if they lose a claim. Unlike most insurance however, the premium is deferred and contingent upon the outcome of the litigation. Again, in simple terms, no premium is payable unless the case is successful. If the case is lost, then the policy pays the other sides costs, and the premium is waived.

So how does this help in insolvency matters? 

The role of the insolvency practitioner (IP) is basically to protect the creditors of the failed business and maximise recoveries. This may involve litigation. 

As the trustee, the IP acquires various powers, including the ability to undertake litigation against debtors (and potential debtors). Whilst many bankruptcies are genuine cases, there are always those that are less transparent. The most common events appear to be transactions at an undervalue (section 339 and 341, Insolvency Act 1986) and transfer of property (section 423).

In the discharge of their duties, IPs must be mindful of the cost to the estate and may engage a solicitor on a Conditional Fee Agreement (CFA). With ATE, the protection can be extended to effectively create risk-free litigation.

The much more regular use of ATE is likely to be in situations where there was (or is) a commercial combined policy in force at the time of the insolvency, where a claim for recompense under the business interruption section has been declined or disputed in terms of either cover or quantum. 

So how can after the event insurance help with insolvency and business interruption claims?

There is no reason to stop an IP from asking a lawyer or insurance specialist, such as Prosperity Insurance, to undertake a review of the insurance documents to ascertain if there is a potential to lodge a claim under the policy, and if there is then the combination of a lawyer on a CFA, combined with ATE cover, to create risk-free litigation with nothing to lose but with something to gain.

So perhaps insolvency, business interruption claims and after the event insurance are rather a nice, cosy fit rather than strange bedfellows.

Contact us

If you are an insolvency practitioner or a lawyer, and you would like more information relating to ATE insurance or to discuss this article further, then please feel free to contact me, Chris Kelly, on telephone:  0800 524 4235, email info@prosperityinsurance.co.uk.

This is not legal advice; it is intended to provide information of general interest about current legal and ATE insurance issues.