Sugar Hut Group & Ors v A J Insurance

Damages for an insurance broker’s conceded negligence must reflect the loss that would have been recoverable under the original insurance policy. Business interruption loss should be assessed by a reasoned counterfactual comparison with the results that would probably have been achieved had the insured event not occurred. Post-event trading figures may be relevant, but should be disregarded where material changes, such as refurbishment, increased capacity or external publicity, make them incomparable. An assessment may properly involve informed estimation where the available business records are incomplete, but speculative growth assumptions should be rejected. Interest under section 35A of the Senior Courts Act 1981 is assessed by reference to the general borrowing circumstances of a business of the relevant type, rather than its particular financing arrangements.

The claimants’ nightclub was destroyed and substantially damaged by fire. Their insurers avoided the policy following an earlier Commercial Court trial, where Burton J dismissed the claimants’ claims for nondisclosure and breaches of warranty. The claimants then sued their insurance broker, AJI, alleging that the loss of insurance cover resulted from AJI’s negligence.

Before the present trial, AJI conceded liability and agreed to pay 65% of the claimants’ losses. The remaining disputes concerned business interruption losses, accountants’ costs, losses allegedly suffered by other venues, and interest. The principal issue was the amount that would have been recoverable under the original policy if valid cover had existed.

1. AJI’s liability was governed by the consent order. The claimants were entitled to recover 65% of the losses which would have been recoverable against the original insurers.

2. The business interruption policy required the counterfactual turnover and gross profit to be assessed by making appropriate adjustments for trends, variations and other circumstances affecting the business. The court accepted that the pre-fire data showed a general increase in turnover, but rejected the claimants’ proposed 27% uplift as insufficiently reliable. A broad assessment was made using a 20% uplift for the earlier part of the period, a reduced 10% uplift for the excluded Christmas-related weeks, and CPI-based increases thereafter.

3. Post-reopening turnover was not a reliable comparator. The club had been refurbished, its capacity had increased substantially, and its exposure on a television programme had materially affected visitor numbers. The corresponding averaging exercise was therefore disregarded.

4. The gross profit rate was assessed at 75.8%. Claims for staff wages and mobile phone costs, alternative accommodation, redundancy payments, losses at the Fulham and Hertford venues, and accountants’ invoices were rejected because the evidence did not establish recoverable loss or the necessary causal connection.

5. Interest was awarded under section 35A of the Senior Courts Act 1981 at 5% per annum simple from the specified dates until the final order. The appropriate rate depended on the general borrowing circumstances of a business of this type, rather than the claimants’ actual rates of borrowing.

6. The parties were directed to agree the consequential calculations and costs, failing which outstanding matters would be determined by the court.