The case of Contact (Print and Packaging) Limited v Travelers Insurance Company Limited1 concerned the failure of a printing press belonging to the claimant, which gave rise to a significant property damage and business interruption insurance claim. The court grappled with three principal issues: (1) was the loss caused by a covered peril, (2) was the claimant entitled to claim for the replacement (rather than repair) of the printing press, and (3) what was the true value of the BI claim?
As to issue (1), the mode of failure was cracking of teeth in some of the gears in the press. Insurers argued the cracks resulted from fatigue caused by gradual deterioration of the gears. The claimants argued that there had been a sudden displacement of the plinth on which the press was mounted, resulting in catastrophic cracking. The policy excluded claims arising from gradual deterioration, change in water table level, subsidence and settlement of new structures, but wrote back in claims arising from subsidence which was not caused by the normal settlement of new structures or the movement of “made-up” ground”.
Whilst there was extensive expert evidence on this issue, the judge was hampered by a lack of contemporaneous investigation, and neither party was able to positively prove the cause of the failure. Nevertheless, the judge held that (a) there was no direct or compelling evidence that natural ground movement was not the cause of the failure and (b) it was the only cause which had not been ruled out as realistically implausible. Accordingly, he held that that the claim was covered under the subsidence write-back.
On the investigation point, the judge criticised the insurers for failing to warn the claimant that further investigations into the cause of the failure may be required to prove the cause of the loss, but noted that the law did not require an insurer to speak up and warn of the consequences of failing to investigate. This is not easy to reconcile with the decision in Ted Baker v Axa Insurance EWCA Civ 40972.
As to issue (2), the judge found that, in the circumstances of this case it was reasonable for the claimant to purchase a replacement press, rather than have the damaged one repaired.
In relation to issue (3), the policy indemnified the insured for reduction in turnover and additional increase in cost of working. The former was to be calculated by applying the rate of gross profit to the amount by which the turnover in the indemnity period fell short of the turnover for the immediately prior 12 month period. In ascertaining the rate of gross profit, adjustments were to be made to reflect business trends and changes in circumstances.
The claimant’s primary position was that there were no adjustments to be made, and that it was simply a question of comparing the 12 months pre- and post-loss periods. The insurers argued that if proper adjustments were made, there was no loss. As usual in these types of cases, the parties produced expert reports from forensic accountants relying on wildly different assumptions and producing completely different results. The judge criticised the claimant for the paucity of evidence produced in relation to the state of the company at the time of the loss, in relation to which, documents had been neither retained nor disclosed. He found that the business had been in decline at the time of the loss, and that the claimant had failed to establish any claim for reduction in turnover. He made a small award in relation to the increased cost of working.
Business interruption claims are notoriously difficult to adjust and this case is a sage reminder of the burden on a policyholder to prove its loss of profit, rather than to rely simply on historical data.