The Facts

The claim arose out of a serious fire at Sugar Hut Club in Essex in September 2009. The claimant companies within the Sugar Hut Group (“Sugar Hut”) had taken out insurance cover through the defendant brokers, A J Insurance (“AJI”). The fire caused considerable damage to the premises and the club had to be closed for almost one year.

When Sugar Hut sought to recover its losses under the insurance cover, insurers avoided the policy on grounds of material non-disclosure and said that the claim would not have been covered in any event, because several warranties and conditions precedent had been breached. Sugar Hut held interests in various nightclubs in London and Essex through subsidiary companies that went into administration shortly before inception of the 2009 policy. AJI were aware of this information but failed to inform insurers and neither was it disclosed on the proposal form. Sugar Hut unsuccessfully sought to challenge the declinature in proceedings before the Commercial Court (Sugar Hut Group Ltd v Great Lakes Reinsurance (UK) Plc [2010] EWHC 2636).

Sugar Hut subsequently brought a claim against AJI on the basis that avoidance of the policy arose due to AJI’s negligence and breach of duty. Shortly before trial, AJI conceded liability on the terms set out in a consent Order between the parties and agreed to pay 65% of Sugar Hut’s losses. The Court went on to consider the claims which were still in dispute between the parties and the measure of business interruption losses to which Sugar Hut was entitled.

The Decision

In making its decision the Court paid particular attention to the calculation of loss of overall turnover from the time of the fire until reopening of the club in August 2010. The claims were considered by forensic accountants for Sugar Hut and for AJI. Sugar Hut’s expert assessed the loss in turnover by averaging two perspectives:

  • Perspective 1 was based on extrapolation of the club’s turnover in the period before the fire. Accepting that a lack of reliable data before the middle of October 2008 presented some difficulties, Sugar Hut’s expert sought to identify any trends within the period of approximately 11 months prior to the fire to seek to measure the impact of changes to the club which had been made by the owner to the underlying business. Both experts agreed that Bank Holiday weekends and the Christmas period (“the Excluded Period”) should be excluded for the purposes of this calculation as it usually results in spikes in turnover uncharacteristic for the remainder of the year.
  • Perspective 2 was based on the actual turnover achieved post-fire after the club reopened. AJI’s expert was of the opinion that Sugar Hut’s calculation was flawed and unreliable and contended that the club’s turnover in 2009 to 2010 would only have increased by the amount stated in the consumer price index (“CPI”).

The Court ruled that the appropriate way to calculate loss of turnover during the relevant period was to increase the weekly sales figure for the year 2008 to 2009 by 20% – apart from for the Excluded Period, which was increased by 10% only – and thereafter a notional increase equivalent to the CPI should be applied to the remainder of the period in 2010 until the reopening of the club.

The Court further held that the Perspective 2 exercise was not comparable, provided no real assistance in the circumstances of the present case and should be ignored. Therefore the averaging exercise fell away.

Commentary

This case gives a useful insight into the approach to be adopted by the Courts when calculating loss of turnover for the purposes of business interruption insurance, which will usually be assessed by reference to sales figures prior to the insured peril. In order to prove the claim, insureds seeking an indemnity under a business interruption policy should seek to preserve documentary evidence wherever possible to account for the loss of future profit. The decision also illustrates the importance for insurance brokers to advise fully on disclosure obligations and the implications of warranties and basis of contract clauses, to minimise potential liabilities in the event of a disputed claim.