A failed business interruption policy and a “well jell” business owner with no cash for a “vajazzle”. In true soap opera (or “scripted reality”) style, the curtain came down on The Only Way is Essex (TOWIE) hotspot, the Sugar Hut (Brentwood), this week as Eder J handed down his judgment inSugar Hut Group v A J Insurance.  

According to its owner and star of TOWIE, Mr Norcross, the Sugar Hut Club in Brentwood was a “beautiful place teeming with beautiful people” and business was booming before the club burnt down on 13 September 2009. It was the Sugar Hut’s case that turnover would have increased on a straight line, or even better, but proving that was more difficult in practice.

Background

The Sugar Hut Group Ltd (“Sugar Hut”) held interests through subsidiaries (“the Old Companies”) in three nightclubs in Brentwood, Fulham and Basildon. The Old Companies went into administration on 3 February 2009 and were replaced with other subsidiaries, “the New Companies”. 

The Sugar Hut’s insurance brokers, AJ Insurance Services ("AJIS”) placed property insurance cover for the nightclub premises through Cobra London Markets Ltd (“Cobra”), with various Lloyds syndicates including Great Lakes Reinsurance (UK) Plc. Cover took effect on 21 March 2009 subject to the satisfactory completion of a proposal form (“the policy”). AJIS knew but failed to tell Cobra that the Old Companies had gone into administration and neither was it disclosed on the proposal form.

A fire occurred at the Brentwood premises (“the Club”) on 13 September 2009 and the Sugar Hut sought an indemnity under the policy. The policy was avoided on grounds of material non-disclosure but in addition, underwriters said that the claim would not have been covered in any event because several of the warranties/conditions precedent had been breached. The Sugar Hut commenced proceedings to challenge insurers’ decision (the judgment is reported at [2010] EWHC 2636 (Comm)).

Sugar Hut Group Ltd v Great Lakes Reinsurance (UK) Plc

Material non-disclosure 

The Sugar Hut accepted that it had not disclosed the information but argued that the questions in the proposal form were constructed in a way that constituted a restriction on insurers’ rights to receive all material information. This was said to evidence insurers’ consent to the omission of the information and to amount to a waiver. The court dismissed the argument, saying “claimants cannot rely on factors not being ‘covered by the questions’ if the reality is that they were not covered by the answers”. The constant reiteration in the proposal form of the need to disclose material facts made this a “difficult exercise” for the Sugar Hut. 

Breach of Warranty 

The court determined that in the case of “true warranties” (ie, something which is of fundamental importance, is material to the risk and must be complied with), section 33 of the Marine Insurance Act 1906 is clear and if the warranty is not complied with then the insurer is discharged from liability from the date of the breach. The court also made it clear that if insurers intend a particular clause to have the effect of a warranty then it should be expressed to be a warranty (although there may be exceptions). In this instance, the court found that all but one of the clauses that the Sugar Hut had failed to comply with had the status of a warranty or condition precedent.

Sugar Hut Group v A J Insurance

After failing to overturn the declinature, the Sugar Hut sued AJIS on the basis that the consequence of the declinature was attributable to AJIS’ negligence/breach of duty.

The issues in the dispute became academic and were not aired before the court because AJIS agreed to pay 65 per cent of the Sugar Hut’s losses excluding interest which was claimed separately and in addition. The main issue was Sugar Hut’s claim for 65 per cent of its business interruption losses since the property damage costs and the Sugar Hut’s legal fees (from the claim against insurers) were agreed. The court dismissed the claim for accountant’s fees out of hand because those costs were not incurred at the instance of insurers and thus would not have been recoverable under the policy.

While Eder J accepted that one method of calculating the gross profit (which was expressly contemplated by the terms of the policy) was to refer to the post-fire turnover, he refused to do so in this case for a number of reasons. The post-fire turnover was not comparable with the period before and it was, for all intents and purposes, a “new club” given that £1.5 million was spent on the refurbishment and capacity was increased from 595 to 1,000.

Finally, the TOWIE effect had a big factor and publicity from the show since the club’s reopening in 2010 had increased the number of visitors to the club. The owner, Mr Norcross (and a star of the show) argued that the Sugar Hut had become a “tourist destination” which had put off the big spenders and reduced average spend per head. The argument was considered but the fact that Mr Norcross permitted the club to feature on the show from October 2010 to March 2013 and to re-join six months later in October 2013 indicated that the publicity created some benefit. 

As a result the court concluded that the lost turnover must be assessed by reference to the pre-fire turnover. The problem for Mr Norcross was that the pre-fire information was limited and unreliable and it was even implied by the Sugar Hut’s expert that turnover may have fallen in the 12 months leading up to the incident.

Neither did the court seem to like the Sugar Hut’s expert’s suggestion that an uplift should be applied to the 2008-09 turnover based on (i) Mr Norcross’ “plans” to carry out improvements at the Club in early 2009, and (ii) the Club had “built momentum” in 2009-09 which was “likely to continue”. The court did not accept (ii) and there was no contemporaneous evidence to support (i).

As for interest that was to be applied to the whole claim, the question was not what rate of interest is actually payable by the Sugar Hut on the various loans it has but “what rate of interest would generally be payable by a company like the Sugar Hut having regard to the general nature of its business operations”. The court awarded a rate of five per cent simple interest.

In conclusion, Eder J took a “somewhat crude and inexact” approach to provide a methodology for calculating business interruption losses (£568, 670 – gross; £1.35 million was claimed) and interest (£146,377.59).

Points to note for insurance brokers dealing with commercial insurance and their E&O insurers

  • Whenever possible, advice should be given in writing. At the very least you should make a note.
  • Prior to placement and/or renewal, advise your client about the obligation to disclose all material facts. Advise your client about what a material fact is and the consequences of failing to disclose or misrepresenting information. Be wary of basis of contract clauses and their effect – ensure that your clients are equally aware.
  • In the event of a breach of a warranty, insurers are discharged from liability as from the date of the breach. The breach cannot be remedied. In order to protect your own position and reduce the risk of claim against you, you should advise your client (i) what warranties and condition precedents look like, (ii) how to find them in the policy, and (iii) the consequences of not complying with either. The advice should be documented and if possible, signed by the client to confirm that they understood the advice. This should happen at least once a year prior to placement or renewal.
  • Reduce the risk of exposing your clients to unnecessary disputes with insurers. Given the impact of a breach of warranty, consider whether stand-alone rather than multiple risk policies are better. The client is unlikely to want to pay several different premiums (and a higher aggregate) but in this case, had there been separate policies for each premises then insurers would only have been discharged from liability relating to the premises where the breach of warranty occurred. A simple price comparison giving the client options and explaining the reasons would suffice.
  • With BI cover, the question is what would have happened had the loss occurring event not occurred. Reminding the client that they are likely to be asked to prove and account for the loss of future gross profit.
  • If you are faced with a claim arising from a failed BI policy, interrogate financial statements, market trends, business plans/budget. Question whether the past is indicative of future performance – look at changes and fluctuations in the market, the company structure and/or legislation.
  • Ensure that credit is given for savings in variable and fixed costs such as utilities, rent, rates, labour and depreciation. The latter was raised by AJIS’ counsel at trial but it was not pleaded and there was no expert evidence on the issue. The judge said that he sympathised with AJIS but in the absence of pleaded arguments and expert evidence, the judge decided that it was a “stab too far”.
  • For insurers, preserve your rights to avoid cover by checking that the answers to the questions on the proposal form are satisfactory. Burton J gave a warning in his judgment in Great Lakes that that unsatisfactory answers which are not followed up “might” be a starting point for a waiver.