Cold store fire: calculating business interruption with a pre-fire delisting
A specialist food wholesaler's only cold store is destroyed by fire. The policy covers material damage and business interruption on a gross profit basis, with a 12-month indemnity period and a £10,000 excess. The latest accounts show turnover £2.4m, cost of sales £1.6m, standing charges £300,000 and net profit £500,000. After the fire the business moves to temporary premises and buys stock from a competitor. Over the 12 months turnover is £1.2m, variable costs saved are £200,000, wages saved are £60,000 and additional costs are £180,000. Before the fire, a major supermarket had given notice that it would delist the wholesaler in three months; that would have reduced turnover by £300,000. The fire started in a refrigerated trailer parked against the building; the trailer was being repaired by a contractor who had disconnected a fuel line. The insurer's adjuster has not yet agreed the gross profit figure.
1. Calculate the business interruption loss, showing the gross profit rate, the turnover shortfall and the treatment of savings and additional costs.
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Gross profit and rate. Gross profit = turnover − cost of sales = £2.4m − £1.6m = £800,000. The rate of gross profit = £800,000 ÷ £2.4m = 33.33%.
But-for turnover. The supermarket delisting was already known before the fire. The insured would have lost £300,000 of turnover even without the fire, so the but-for turnover is £2.4m − £300,000 = £2.1m. The actual turnover is £1.2m. The turnover shortfall caused by the fire is therefore £900,000, not £1.2m.
Loss of gross profit. £900,000 × 33.33% = £300,000.
Additional costs and savings. Add increased cost of working of £180,000, but test it against the economic limit: it must not exceed the loss it avoided. Deduct saved wages of £60,000 because wages are a standing charge within gross profit. Do not deduct the £200,000 variable saving separately; it is already reflected in the gross profit rate. Indicative loss = £300,000 + £180,000 − £60,000 = £420,000. Less excess £10,000 = £410,000.
Check. The adjuster must verify the additional costs were extra, the wages were actually saved, and whether the business recovered earlier than 12 months. The delisting adjustment is essential; without it the claim is overstated by £100,000.
2. The contractor's insurer denies liability, saying the fire was caused by the wholesaler's own failure to maintain the trailer. Explain how the wholesaler's insurer should handle causation and subrogation, and whether BI is covered.
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Cover for the insured. The insured peril is fire. The immediate cause is the fire, even if negligence by the contractor contributed. The insurer should check the policy for a contractors' exclusion, a care/custody/control exclusion, or a condition about hot work. If the trailer was the insured's and the contractor was repairing it, the exclusion may not apply to the building damage. A denial by the contractor's insurer does not determine cover under the insured's policy.
BI trigger. Business interruption follows material damage. If the fire damage is covered, the BI section is triggered, subject to the indemnity period and the calculation above. The insurer should not withhold BI merely because liability is disputed with the contractor.
Subrogation. The insurer should reserve its rights, obtain the contractor's method statement, maintenance records and fuel-line repair records, and check the contract for indemnities and insurance requirements. It should preserve the trailer and fuel line. If the contractor was negligent, the insurer can pursue subrogation after paying the insured. It must not prejudice the insured's rights or make an admission about the contractor's responsibility.
3. What documents and information should the adjuster obtain to verify the gross profit and additional costs?
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Financial records. Obtain audited accounts for the last three years, management accounts for the indemnity period, VAT returns, sales ledgers and purchase invoices. Reconcile turnover and cost of sales to the accounts. Check the policy definition of gross profit; some wordings include or exclude wages and other standing charges.
Trading evidence. Obtain customer correspondence about the supermarket delisting, evidence of the actual turnover in temporary premises, competitor stock invoices, and records of orders that could not be fulfilled. Check whether the business had other customers or seasonal peaks.
Additional costs. Obtain invoices and contracts for temporary premises, extra transport, overtime, hire of equipment and bought-in stock. Test whether each cost was incurred solely to mitigate the loss and whether it was reasonable. Compare the cost with the loss avoided.
Savings. Check payroll records for the £60,000 wages saved, and confirm no staff were redeployed to generate new business. Check whether variable costs fell in line with turnover. The adjuster should also consider trends, changes in business activity and the economic limit on increased cost of working.