What-happens-when-flood-damage-causes-a-company-to-become-insolvent

What happens when flood damage causes a company to become insolvent?

Businesses in flood-prone areas face ongoing challenges with the increasing severity of weather conditions. The relentless storms in late 2015 caused significant devastation in the north, leading to insolvency for some businesses due to unrecoverable losses.

While business insurance policies provide some protection, many insurers are now retracting coverage for flood damage, leaving business owners exposed to chronic trade losses and the potential for insolvency if storms strike again.

These situations often result in substantial repair bills, and business owners may find themselves in prolonged disputes with hesitant insurers to secure payouts. 

For businesses pushed into insolvency by flooding, how does an insolvency practitioner (IP) handle the scenario?

 

Claims on business insurance

(i) Business interruption insurance

This insurance type covers business interruptions caused by storms, flooding, and fire. It aims to compensate for the loss of profits over a specified period, typically 12 months, known as the indemnity period. 

Calculating a claim can be straightforward for established businesses, but for new or developing ones, it may pose challenges. In such cases, an insolvency practitioner might involve a forensic accountant or loss adjuster to estimate sales figures and gross profit unaffected by the flood. Alternatively, calculations may be based on start-up results for similar businesses or the turnover projections from the original business plan.

(ii) Stock insurance

Calculating the value of damaged stock in these situations can be challenging, with success hinging on how it was stored at the premises. Simple calculations may be possible for a small inventory range stored in crates or boxes.

However, if diverse stock values are scattered around the premises, a specialist assessment may be necessary to determine the losses on damaged inventory. Maintaining thorough accounting records can facilitate the process and lead to a more reliable figure.

(iii) Building insurance

An insurance company might attempt to reject a claim citing the insolvency of their client. However, the insolvency practitioner overseeing the process can choose to pursue the claim regardless.

In such instances, gathering extensive documentary evidence to support the claim becomes crucial before staff members depart. If flood risk is covered by the insurance policy and the insurer agrees to a payout, the insolvency practitioner may negotiate for a lump sum payment instead of specific payments for property repairs.

This approach could enhance returns for unsecured creditors and potentially be utilised to address employee claims.

Vanguard Insolvency specialises in corporate recovery and insolvency. We provide the professional guidance necessary for businesses affected by floods. Contact one of our expert team members to arrange a same-day, free-of-charge meeting. With an extensive network of 100 offices, we offer confidential director support across the UK.


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Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.