Coromin Ltd -v- Axa Re & 9 ors 30.11.07

This is a recent case relating to business interruption which has been given a prominence in various legal news letters and forums. The low number of cases specifically relating to business interruption makes them more interesting when they occur.

Setting aside some of the complicated contextual details, there are two issues that this case considered specific to business interruption cover.

Firstly, the business interruption cover was held to commence not at the date of Damage but at the point of interruption with the business. This is different from most UK wordings, for which the trigger for commencement of the Maximum Indemnity Period is the date of Damage. This has long been a contentious issue with regards commercial subsidence claims, for example, where cracking is noticed, and is monitored for a 12 month period prior to repairs being carried out. Disruption to the business commonly arises only at that point.A 12 month Maximum Indemnity Period would normally commence at the point that the Damage (cracking) is observed, and will have already expired prior to the business having to relocate (and interference suffered) to allow for repairs to be effected.

The Coromin case does not in fact alter this position. The commencement of the Maximum Indemnity Period from the date of interference with the business is purely a function of the specific wording in this instance which noted that the Maximum Indemnity Period will commence “with the date of Damage or interference …”.

Secondly, it was argued that business interruption cover did not extend to include loss flowing from assets that did not exist at the time of the incident. This argument failed. The case transcript confirmed that the business interruption section of the policy will include cover for Loss of Gross Profit from assets which did not exist at the time of an incident. This does not alter the current operation of business interruption covers as generally understood in the UK. Consider a business with 10 production lines, planning to install an 11th production line in six months time. If there is a fire at the Premises, the Material Damage Proviso will be satisfied, and the subsequent business interruption loss will include the higher level of turnover that can be demonstrated would have been generated from the 11th production line within the Maximum Indemnity Period but for the fire. The Other Circumstances Clause allows for the Standard Turnover to be adjusted in terms of trend (Adjusted Standard Turnover) to reflect the turnover from the new line. (There may be savings in terms of staff costs avoided to man the line etc).

This echoes the case of Glengate – KG Properties Ltd -v- Norwich Union Fire Insurance Soceity Ltd and Others (1995), which related to the interface of the Material Damage Proviso with the Operative Clause. In the Glengates case, Insurers paid for physical damage caused by fire to the buildings and other assets, but there was a dispute as to whether business interruption losses flowing from fire damage to architect’s drawings in the Premises (which were not insured by Glengates) were covered. The judgement concluded that the Material Damage Proviso was satisfied by the fire Damage to the insured property, and that the Operative Clause provided for cover in respect of losses flowing from the Damage generally.

In essence, the business interruption Operative Clause does not restrict cover to loss flowing only from that element of damage that satisfied the Material Damage Proviso. Once the proviso is satisfied, all business interruption losses flowing from the Damage will be covered.

It remains to be seen whether this issue will be tested again in litigation, but it will appear that this case does not require any change in the approach to BI adjustments in the UK at the current time (subject to specific policy wordings).