The facts
Contact (Print and Packaging) Limited (Contact) was in the business of printing packaging for the food and pharmaceutical industries, using large industrial printing presses. In April 2013, one of the presses at Contact’s facility in Stockport suffered a sudden, “catastrophic” failure, the cause of which was not immediately apparent.
Contact subsequently sought to recover its losses under a Techsure policy (the Policy) underwritten by Travelers Insurance Company Limited (Travelers), which, among other combined covers, in principle insured both property damage and business interruption losses. In relation to the latter, Contact asserted that the failure of the press reduced the printing capacity of the business by 50 per cent.
Contact’s claim was twofold: (i) £824,683 for the damage to the printing press, which it identified as being caused by “sudden subsidence” and (ii) consequential loss of profits of £434,139 resulting from a 50 per cent reduction in the printing capacity of the business, leading to difficulty in fulfilling orders and loss of custom.
Following its investigations, Travelers declined cover on the basis that (i) the failure of the press was not due to an insured cause (and, if it was wrong, that Contact had failed properly to mitigate its loss) and (ii) challenged the quantum of both the property damage and business interruption claims.
Although the business of Contact was sold in November 2015, the right to pursue the insurance claim was excluded from the terms of the sale and therefore maintained by Contact. The fact of the sale, however, had important implications for the subsequent judgment.
The decision
The property damage claim
Inevitably, the claim for the damage to the printing press turned very much on the facts and the evidence of several sets of expert witnesses. While His Honour Judge Stephen Davies, sitting as a Judge of the High Court expressed concerns about the quality of the evidence put forward by Contact (particularly its failure to locate and obtain statements from a number of potentially relevant fact witnesses), he felt sufficiently comfortable, at least on the issues of liability, to hold that Contact should be indemnified for the full amount of £824,683.
After a detailed analysis of the policy language (including the scope of excluded causes, as well as carve-outs to those exclusions) and the expert evidence, the judge found that the damage to the press was indeed caused by a subsidence event covered under the Policy: “I am satisfied on the balance of probabilities that the Press did not fail due to fatigue and … therefore … that there is no other credible explanation for the failure other than ground movement”.
A further issue in dispute related to the quantum of the property damage claim.
Travelers asserted that Contact (by not accepting a proposal from the manufacturer) had failed to mitigate its loss in proceeding with the replacement, as opposed to the attempted repair, of the press.
The judge considered this to be an “unattractive” point for the insurer to take. There was no contemporaneous evidence to the effect that the press was, as the insurer alleged, “eminently repairable” and the replacement of the press was recognised by its own loss adjuster to be a “reasonable mitigation and risk reduction strategy”.
Contact was therefore able to recover the full amount of a similar replacement press and necessary installation costs.
The business interruption claim
The court then turned to Contact’s claim for business interruption, the usual starting point of which is to ascertain the difference in gross profit, due to a reduction in turnover, between the period prior to the failure of the press and the period for which an indemnity is sought.
Once that difference is calculated, adjustments are then made for “business trends, variations or special circumstances”.
Despite its burden of proof, however, Contact submitted little evidence to support its claim beyond its audited accounts and the report of its forensic accountant in support of its claimed loss. The judge noted that it was “clear that the claimant proceeded… on the basis that all that it needed to establish was the accuracy of the primary basis of calculation and did not need to establish anything else”.
As a result, Contact failed to conduct the necessary intensive enquiry into the performance of the business before and after the date of damage. In particular, the judge heavily criticised “an almost complete absence of contemporaneous documentation to support the claimant’s case”, also citing the lack of reliable factual witness evidence provided.
On a review of such limited information, the judge found that:
- Contact’s business was in decline before, during and after the failure of the press;
- there was insufficient evidence to support the proposition that a lack of production capacity prevented Contact from accepting or performing orders; and
- there was insufficient evidence to establish a causal connection between the failure of the press and loss of any customers.
Indeed, the judge found that in the months after April 2013, Contact was actually able to increase its utilisation capacity and total production. Further, even when the replacement press began operation in November 2014, “the total production runs did not rise significantly above that achieved using just the one press until January 2014”.
Consequently, the court held that, due to the lack of evidence, Contact could recover only £18,900 out of its original business interruption claim of £434,139.
A reminder to policyholders
Although Contact does not depart from previous decisions in relation to the process of proving loss in the context of property damage or business interruption, the case does provide a timely reminder of the importance of ensuring that all claims are suitably supported by documentary and, where appropriate, witness evidence covering matters contemporaneous to the loss.
More specifically:
- Parties should always ensure that electronic records, including emails, are retained and safely archived. In the case of businesses, this should be considered specifically in the context of a sale: how will the seller gain ongoing access to any pre-sale records?
- The court was particularly unimpressed by Contact’s failure to investigate whether electronic information stored by third parties (the purchaser of the business and the suppliers of its IT software) was recoverable and, if so, could have been preserved as potential evidence.
- Further, this was despite the fact that Contact’s solicitors had sent a letter of claim to the insurer in September 2014, a year before the sale of the business.
- In this context, it should be noted that the English Civil Procedure Rules obligate parties’ legal representatives to notify their clients of the need to preserve documentation as soon as litigation is contemplated. Parties to litigation are also required under the disclosure rules to undertake a “reasonable search” for documents that may adversely affect their case or support the case of another party.
- Contact was also criticised for a failure to approach (or lack of evidence thereof) potentially helpful witnesses, notwithstanding that it had sold its business and no longer had any dealings with the relevant individuals. This reinforces the importance of taking contemporaneous notes of any telephone calls or meetings (and, again, maintaining ongoing access to such records).
Client Alert 2018-037
