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LONDON, UK: The COVID-19 pandemic has left companies in unprecedented difficulties, and without government support, many businesses would have undoubtedly failed to survive the past year. Apart from government support, some businesses have sought to rely on business interruption insurance. In this article, Hewi Ma, specialist dental solicitor at Goodman Grant Solicitors, and Darren Nicholson, specialist dental accountant at Azets, both in the UK, recap their experiences in dealing with post-pandemic business interruption insurance claims.
The legal perspective
From a legal perspective, my first consideration was to look at the wording of the insurance policy and make initial enquiries in respect of a claim. As might be expected, assistance was not exactly forthcoming.
A change in the insurers’ approach followed the judgment in FCA v. Arch Insurance (UK) Ltd and ors handed down by the Supreme Court, which ruled largely in favour of policyholders. Since then, insurers appear to be more willing to review and process claims, but this exercise can still be daunting for the uninitiated. Here are some ways by which you can be best prepared.
Request for information and questionnaire
You will be asked to gather information to prepare your claim, so be prepared to pore over your business affairs since the start of lockdown. Dental practices using digital accounting software may find it easier to prepare the required information.
The insurer will want to confirm the date of commercial operations closure. In this regard, practices should refer to the chief dental officer for England’s letter on 25 March 2020 that requested a stop to all routine, non-urgent dental care.
The key items of information you will be asked for include:
- annual accounts for the latest fiscal year completed;
- monthly income and expenditure from Period 1 of that year to date;
- a breakdown of your losses (if you own more than one practice, this will need to be split between those practices);
- details of income generated prior to closure, which can go back to 2018;
- details of government support—consider the furlough scheme, business rates rebates, grants, and business interruption and bounceback loans if applicable, and for NHS practices, consider the NHS contract payment scheme and the abatement figure applied;
- estimates of a decrease or increase in expenditure—consider your expenditure and costs on reopening: did you spend any extra on training, personal protective equipment, HEPA filters in surgery or even new IT processes to enable contactless form filling? Include even the little things, such as signage, as it all adds up.
In my experience, the initial request for information takes about an average of 6 hours to complete. This assumes that the information is stored digitally and does not require external accounting assistance.
Some insurers may ask whether access was prevented to the premises as a result of the government-enforced lockdown or whether it was unreasonable to trade, but no restrictions were in place. This will perhaps result in a string of expletives being directed at this query from a business owner who has diligently followed government advice! Care must be taken when responding to this query, as it may affect your claim depending on how your policy is worded. Seek advice if you are unsure.
In addition, most practices will have had to renew their policies or may have even switched insurers since 25 March 2020. It is unlikely that your new policy will include cover for COVID-19, but check your policy carefully nevertheless.
Offers are now being made by insurers on successful claims. This is after the insurers have appointed forensic accountants to examine the information provided in the claim forms. Though the offers are not quite as much as expected by business owners, it is certainly a step in the right direction.
An accounting perspective
Claims need to be accompanied by a spreadsheet full of information that, by now, your accountant should be more than familiar with. The claim will typically be calculated as follows:
- The turnover element of the claim amount will often be calculated by looking at the same period in the prior year and assuming that an equal level of income would have been achieved had the business not closed or suffered reduced trading. So, if for some reason you had lower than average income in the relevant months of the prior year, this should be flagged up with the claim. Any income you did receive in the claim period will be deducted from the claim, so if you received income that actually related to work carried out in another period, this too should be highlighted.
- The claim amount will be reduced to reflect expenditure on direct costs (materials, subcontractors, transaction costs and so on) that were not incurred. This will typically be achieved by applying a percentage rate to the loss of turnover figure that will be taken from your annual accounts.
- A deduction will be made related to any reduced staff costs and any job retention scheme monies received.
- A deduction will be made for any business overheads you were able to avoid paying in the claim period. This must not include any amounts that were deferred.
- Finally, any amounts that have been incurred to meet the new trading challenges can often be added.
We are now beginning to see claims being paid and not a moment too soon! Upon receipt, I would recommend that you forward a copy of the claim calculation to your accountant for review, since it is not unheard of for mistakes to have been made in the insurer’s computations.
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