Covid-19 has had a tremendous impact on our society in all aspects that it has been and will continue to be. Although all citizens consider ourselves, in one way or another, victims of this epidemic, there is a certain group that has suffered devastating economic consequences, and it is none other than the hospitality sector. Focusing on this sector, if we go back to March 2020 and its consecutive months, we will remember that all bars or restaurants have had to close their doors on multiple occasions.
As a result of these constant halts, facilities in the hospitality sector have become very weak economically, which is why they have asked insurance companies to pay compensation derived from profits that were not received during those months, also known as loss of profits, compared to what they denied responsibility. As a result, some decided to file a lawsuit with the courts, and it is now, at the beginning of 2022, when the legal battle is at its height.
The gist of these lawsuits is whether or not insurers should, in fact, protect so-called lost profits due to shutdown. Of course, the insured supports compensation for loss of benefits by insurance companies based on the contractual relationship of the insurance policy between the two parties. On the other hand, insurance companies challenge their liability because, according to their legal representatives, the interruption of the activity of this sector due to the decision of the authority is not included in the circumstances covered by the policy contract.
So far, the conclusions of the courts are mixed, and although they tend to rule in favor of insurance companies, in fact, we can say that there is a three-to-one ratio in favor of insurance companies. There are cases in which the court has agreed with hotel owners, such as the case of the Bella Napoli pizzeria, in which SegurCaixa was ordered to pay €6,000 plus interest on loss of profits resulting from the closure (SAP Girona, December 3, 2021).
Of course, conflict between companies and insurance companies is not an exclusive issue in Spain. Due to the global nature of the pandemic, mandatory confinement, as well as enforced work stoppages, have been a common observation among many countries in the world.
In the United Kingdom, it has already been established as a law to provide compensation for the impossibility of accessing the institution due to public order. However, the response of the French courts to the same problem varied, resulting in rulings in favor of both parties, without defining a consistent line of jurisprudence. On the other hand, Germany tends to rule in favor of hoteliers, who receive about 13% of business losses based on profit loss policies (the case of Bavaria).
In short, the national legal battles center around the direction of the majority: clearing the insurance company of paying any compensation and condemning the plaintiff’s own costs. The debate revolves around whether there is insurance coverage for loss of profits and if it is independent of the damage i.e. if we are entitled to compensation and if it is related to the existence of damage.
Loss of benefits is legally known as loss of profits. The insured is usually the damage caused, for example, by fire, theft, flood, etc. As an additional guarantee, the loss of benefits arising from the existence of the damage is usually included. Therefore, if the insurance covers the loss of benefits associated with the damage, the insured will not be entitled to compensation, because closing during COVID-19 does not entail any harm.
In general, the loss of benefits is directly related to the harm. Let’s think about everyday life. If a fire breaks out in a restaurant, there will be specific damages, such as loss of furniture. In addition to the fire, the temporary closure of the facility is caused by the loss of profits. However, the reason for the demand to be valued or not appreciated in pandemic closures is, nothing more, nothing less, the wording of the insurance contract itself.
There are insurance companies that do not make clear whether the loss of benefits is related to the risks contracted or not. It may be necessary to read the general terms of the contract. At this point, it is necessary to analyze whether we are facing a restrictive or specific clause in the insurance contract.
In litigation of this type, the expert figure is necessary when determining the amount of lost profits. The expert, based on the various documents available to the interested party, determines the value of the unreceived earnings through a comprehensive analysis. It is clear that the method used by the economist should apply the most accurate method of calculation possible, since the purpose of the economist is not only to determine the harm done to the party, but also to provide the judicial process with coherent evidence of the disputed facts.
Albert Galanco-founder of the official judicial expert
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