Published: 24th October 2016
Businesses situated in flood-prone areas face an ongoing issue as our weather becomes more and more extreme. The seemingly endless storms of late 2015 caused devastation in many areas of the north, with some businesses suffering insolvency due to their irrecoverable losses.
Although protection is available to some degree from business insurance policies, many insurers are now withdrawing their cover for flood damage, leaving business owners vulnerable to a chronic loss of trade, as well as the potential for insolvency should the storms hit again.
Huge repair bills are common in these cases, and business owners sometimes have to deal with a lengthy battle with a reluctant insurer to obtain a payout. When they have been trading successfully for years, this battle brings further worry to an already distressing situation.
So if a business is tipped into insolvency because of flooding, how does an insolvency practitioner (IP) deal with the situation?
An insurance company might try to reject a claim on the basis that their client is insolvent, but the insolvency practitioner appointed to deal with the process can decide to pursue it regardless.
If this is the case, they will need to gather as much documentary evidence as possible to support the claim prior to members of staff leaving. If flood risk has been included on the insurance policy and the insurer is willing to pay out, the IP may be able to negotiate a lump sum payment rather than specific payments for property repairs.
Should this be possible, it would boost returns for unsecured creditors and potentially be used to pay employee claims.
The value of damaged stock can be difficult to calculate under these circumstances, and success depends largely on how it was stored at the premises. Sometimes it’s possible to make a simple calculation if there is a small range of inventory that was stored in crates or boxes, for example.
If stock of different values has been scattered around the premises, however, an assessment may be needed from a specialist to calculate the losses on damaged inventory.
Additionally, if the company has kept adequate accounting records, it will be easier to arrive at a reliable figure.
Business interruption insurance
This type of insurance covers the interruption to a business caused by storms, flooding and fire, and is intended to compensate for loss of profits during a set period of time, which is usually 12 months. This is known as the indemnity period, and the calculation for a claim can be fairly straightforward if the business has been trading for some time.
When a new or developing business is involved, however, it may be more difficult. The insolvency practitioner may request the input of a forensic accountant or loss adjuster to estimate a sales figure, and the figures for gross profit that might have been achieved without the flood.
The start-up results for similar businesses could also be used as the basis for this calculation, or the turnover figures projected in the original business plan.
Real Business Rescue is part of the Begbies Traynor Group, the largest professional services consultancy in the UK. We specialise in corporate recovery and insolvency, and can offer the professional guidance you need if your business has been affected by flood. Call one of our expert team to arrange a same-day meeting free-of-charge. We have an extensive network of 78 offices offering confidential director support across the UK.