What was the issue?
In the recent case of Sugar Hut Group Ltd v AJ Insurance, the High Court was asked to consider the business interruption losses arising out of a fire at the now famous club 'Sugar Hut' in Brentwood, Essex.
The fire took place at the club in September 2009, in the days before the venue took centre stage in the popular TV programme 'The Only Way is Essex'. The blaze caused extensive damage to the club and resulted in a 49 week period of closure for its owners.
In the initial action in 2012, the group's insurance provider avoided liability on the grounds of breach of warranty and material non-disclosure. The group had (1) failed to disclose, at the outset of the cover, that several of the group companies had gone into administration due to financial difficulties, and (2) failed to adhere to several of the 'true warranties' set out in the policy document, relating to frying and cooking equipment, burglar alarm systems and metal wheelie bins. Importantly, even though the cause of the fire was not directly linked to the breached warranties, they rendered the policy void and cover was declined.
The 2014 case arose out of the group's subsequent claim in negligence against its insurance broker, AJ Insurance. Prior to trial the broker accepted liability and agreed to a settlement of 65% of the group's losses, together with agreed costs for property damage, and the group's legal fees in the failed 2012 case.
The question before the High Court was therefore: how to measure the loss of profits incurred during the period of closure?
Mr. Justice Eder was presented with contrasting methods by the parties' two expert accountants. Firstly, the group's expert suggested a figure of £1,345,794, calculated by reference to an average of the club's trading profits both before and after the fire (the latter being significantly higher than the former). By comparison, the broker's expert suggested a figure of £385,776, calculated by reference to the turnover pre-fire, together with an uplift in line with the Consumer Price Index (CPI).
However, neither method provided a satisfactory solution.
Firstly, the post-fire turnover was not directly comparable with the period before the fire, due to the fact that the owner, Michael Norcross, had invested £1.5 million in expanding the club during the closed period. The club was effectively a 'new club', enjoying increased capacities and significantly higher revenues.
Secondly, the new club derived benefit from the 'TOWIE effect', by virtue of publicity from its appearance on the TV show after the fire. Mr Norcross argued that, while the show had placed the club on the tourist map, it had also driven away the pre-existing clientele who were the 'bigger spenders'. Nonetheless, the Court was persuaded that the club's continued involvement with 'TOWIE' was a strong indication that the TOWIE effect contributed to higher trading figures.
Thirdly, fluctuations in trade were also attributable to the effect of the recession and seasonal trends in the nightclub industry.
In conclusion, the Judge ignored the post-fire trading figures and based his calculation on the 11 month trading period before the fire. In doing so, Eder J acknowledged general increases in turnover by applying a 20% uplift to part of the period of closure, together with a notional equivalent to CPI for the remainder.
In total, the group was awarded £715,047 (inclusive of interest) out of a claim for £1.35 million.
What lessons can be learnt from the case?
The case is a reminder of the importance of the obligations on insured parties to disclose all material facts and comply with key warranties during the period of cover. It highlights the complexities that can arise in claiming loss of profits, and provides a precedent on how to calculate loss of profits in cases where there are significant differences in a business' turnover before and after an insured peril.
How can we help?
For advice on all commercial insurance issues, including policy cover disputes, professional indemnity, non-contentious transactional support, business interruption and fire/flood claims, please contact Paul Eccles: [email protected] or 03700 868 8741.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.