Dear Members,

We would like to provide you with a further update on the ongoing insurance claim and the work being undertaken following the devastating fire at Churchdown Club.

There is still a long way to go. Although we have already achieved the significant milestone of having policy liability accepted by our insurers, we are now entering what is likely to be a prolonged and complicated process of establishing the value of the claim and determining exactly what the insurers will ultimately pay.

We want to be completely open with our members about the position, including the potential challenges we are facing.

What has been happening?

As members were informed in our previous update, we received the very positive news that our insurers have accepted policy liability.

That was a major milestone and one which the Committee worked extremely hard to achieve.

However, acceptance of liability does not mean that insurers simply put a value on the claim and either rebuild the Club or provide us with a cheque for that amount.

The process now moves into the detailed assessment of the financial value of the claim.

Understandably, insurers will seek to establish what they believe represents the correct value of the loss under the policy, while our responsibility is to ensure that Churchdown Club’s interests are fully protected and that the value of our loss is properly established and supported by evidence.

This is why there is still considerable work to do.

Buildings insurance and the underinsurance issue

As previously communicated, insurers have advised us that they believe the Club may be underinsured in respect of the building’s reinstatement value.

The buildings cover was originally presented to us at £1.420 million. However, insurers have now confirmed that the underlying Declared Value is £1.234 million, with a 15% inflationary uplift producing a Sum Insured of approximately £1.420 million.

The distinction arises because the policy operates on a Day One basis.

In simple terms, the £1.234 million is the Declared Value and the policy then provides a 15% uplift during the policy period to produce the higher Sum Insured shown on the schedule.

However, insurers’ position is that when assessing whether the property is underinsured, they compare the Declared Value against the true reinstatement cost at the start of the policy period, rather than simply comparing the £1.420 million Sum Insured with the rebuilding cost.

This is an important distinction within the policy wording and is one of the reasons why we are now challenging the figures rather than simply accepting the insurers’ assessment. We of course investigated the wording and were directed to the wording within the policy. Explanation outlined below.

Patrick you asked earlier why Eaton Gate/Davies were using the Declared Value rather than the Sum Insured in their under-insurance calculation. The reason is that the policy is written on a Day One basis. The Buildings Declared Value is £1.234m and the policy then applies a 15% inflationary uplift to produce the £1.420m Sum Insured shown on the schedule. Under this type of policy, Average (the policy mechanism that reduces a claim proportionately where the property is insured for less than its full reinstatement value) is assessed by comparing the Declared Value against the true rebuilding cost at the start of the insurance period, rather than simply comparing the uplifted Sum Insured against the reinstatement cost value. The benefit of the Day One arrangement is that the additional 15% provides protection against inflation during the policy period. As mentioned, Day One policies were developed to help address the risk of inflation eroding the adequacy of property sums insured between renewal dates, a particular issue during the high-inflation environment of the 1970’s and 1980’s.

Insurers’ surveyors have indicated a potential reinstatement cost of more than £2 million.

If that figure were ultimately accepted, it could represent a very significant level of underinsurance.

What does “Average” mean?

This is one of the most important issues facing the Club.

Where a property is found to be underinsured, the policy can apply what is known as “Average”.

In broad terms, if a property were found to be 40% underinsured, insurers could seek to reduce the amount payable under the buildings section of the claim by 40%.

There is also a separate 25% contribution/excess applicable under the policy in relation to the Spicy Aroma fire-safety non-compliance, as previously explained to members.

These two issues could therefore have a substantial combined effect on the amount ultimately available under the buildings section of the claim. In the very worst-case Churchdown Club could receive 35% of any claim due to the 40% average and 25% Spicy Aroma charge.

Importantly, however, none of these figures or potential reductions should currently be regarded as the final outcome.

They are scenarios based upon positions currently being advanced by insurers and remain subject to challenge.

What have we done about the building’s valuation?

We are not simply accepting the insurers’ reinstatement valuation.

Through the help of a long-standing Club member, we are now instructing an independent surveyor to undertake our own reinstatement valuation.

We are not suggesting that the insurers’ valuation is necessarily incorrect.

However, when figures of this magnitude are involved, it would be irresponsible for the Committee not to obtain an independent assessment and establish whether the figures being used by both sides are genuinely comparable.

This will allow us to compare “apples with apples” and provide a properly evidenced basis from which to challenge the insurers’ assessment if appropriate.

Acceptance of liability does not mean acceptance of the claim value

It is important that members understand the distinction.

The acceptance of policy liability was a major and very welcome step forward.

However, it does not mean that the value of the claim has been agreed.

The insurers are currently considering a number of issues which could affect the eventual settlement.

In a potential worst-case scenario, insurers have indicated that the buildings could be subject to an underinsurance reduction of somewhere in the region of 40–50%.

For illustration only, if £500,000 were determined to be payable under the buildings section and a 40–50% Average reduction were applied, that could reduce the amount to approximately £250,000–£300,000 before taking account of the separate 25% policy contribution/excess.

The resulting figure could therefore be significantly lower.

This is an illustration of the potential exposure, not a prediction of what Churchdown Club will ultimately receive.

We are not blindly accepting this scenario, quite the opposite.

We have already put forward strong and robust arguments challenging the positions being advanced, and we will continue to challenge every aspect of the claim where we believe the evidence or policy wording supports doing so. It is important to outline that the policy is in excess of 80 pages across 8 x documents and it is the detail of the policy wording to which we can make our challenges.

The potential asbestos cost

One of the most concerning figures initially presented to us was a quotation of approximately £200,000 for asbestos clearance in areas required for the forensic investigation. Had that cost ultimately fallen within the claim and been deducted from the available settlement, it could have had a significant additional impact. We are therefore pleased to report a small but important win.

Following our discussions and robust challenge, the asbestos works required to facilitate the forensic fire investigation, currently estimated at approximately £50,000, have now been ringfenced and will not form part of our insurance claim. This is important because it means those costs will not reduce the amount available to Churchdown Club under the claim.

It may seem like a relatively small victory when compared with the overall scale of the claim, but it demonstrates exactly why the Committee is challenging the insurers’ position rather than simply accepting every cost or assumption presented to us.

We will continue to challenge each issue where we believe it is in the best interests of Churchdown Club and its members.

Business interruption – a separate part of the claim

The buildings claim is only one part of our overall insurance claim. We have separate cover for:

• Buildings
• Contents
• Business Interruption

The potential 25% contribution/excess relating to Spicy Aroma’s fire-safety non-compliance does not apply to the contents and business interruption sections of the claim. Our Business Interruption cover provides a maximum indemnity period of 24 months. The level of cover was set at approximately £296,000, based upon an average of the Club’s previous three years’ accounts. At the time, this appeared to provide a sensible and evidence-based level of cover. However, insurers are now advancing a different position regarding the appropriate turnover figure to be used when assessing the Business Interruption claim.

The business interruption underinsurance issue

Insurers are currently looking at the period immediately before and after the fire and using what they consider to be the underlying trend in turnover. Their current position is that this trend would have resulted in Churchdown Club achieving an approximate £120,000 increase in turnover than the figure on which our Business Interruption cover was based. That represents an increase of 38.59%. In real terms, as with the building insurance this would mean average would be applied to any payout and produce a reduction of 38.59% to any payout for business interruption.

If that position were ultimately accepted, insurers could seek to apply a corresponding underinsurance reduction to the Business Interruption claim. Again, however, this is not an agreed figure or final position. We are actively challenging it.

Why we are challenging the business interruption calculation

The figures around the fire period do not tell the whole story. Churchdown Club experienced an unusually strong period of trading, influenced by exceptional circumstances including a World Cup and what can reasonably be described as a generational summer. We accept that the Club would have expected turnover to increase compared with previous years. However, we do not believe it is appropriate simply to extrapolate exceptional trading conditions forward and assume that the same level of growth would have continued indefinitely.

Churchdown Club has a very clear seasonal trading pattern. The winter months are traditionally much quieter than the summer months. Insurers’ counter-argument is that the reduction in turnover following the fire is attributable to the loss of the skittle alley and function room, rather than normal seasonal variation. We accept that the loss of those areas has had a very significant impact upon the Club’s income. However, we are able to identify and evidence the revenue generated specifically by those areas. We know that winter skittles brings in approximately £300.00 per night. Over 5 nights that is £1500.00 per week, £6000.00 per month.

We can therefore distinguish between:

1. income genuinely lost because of the fire; and
2. the normal seasonal reduction in turnover that would have occurred irrespective of the fire.

This is an important distinction. We are using the Club’s historic accounts, trading information and detailed analysis to establish what we believe represents a realistic picture of the turnover Churchdown Club would have achieved had the fire not occurred. This is a ‘live’ situation and as and when we have any further details, we will of course update members.

Why has it been such a battle with insurance and why has it been so difficult?

In a nutshell, the simple answer is that insurance claims of this size and complexity are rarely straightforward.

We completely understand why members have asked why it has been such a battle and why things have taken so long. We have also heard from members who know people who have had fire claims that were dealt with quickly and relatively easily. We do not doubt those experiences at all. However, every claim is different, and unfortunately our claim is considerably more complicated than a straightforward building repair.

Insurers are businesses. Their responsibility is to establish exactly what they are liable for under the policy and the value of that liability. With a potential claim worth more than £1 million, they are never simply going to write a cheque for that amount without extensive investigation, evidence and professional assessment. We wouldn’t be naïve enough to expect them to.

That may be frustrating for us, but we have to recognise that this is the reality of dealing with a major and complex insurance claim. Our situation is made even more complicated by the history of the Club and the building. The property dates back to 1921, and there are agreements and arrangements affecting the reinstatement position that date back as far as 1958. Establishing exactly what needs to be reinstated, how it should be reinstated and what that reinstatement should cost is therefore far from straightforward. And this is not simply a claim to repair a fire-damaged building.

Our claim potentially involves:

1. the reinstatement of the building;
2. the contents of the Club;
3. Business Interruption;
4. business extensions under the policy;
5. professional and associated costs; and
6. the many investigations and assessments required to establish the claim.

When these elements are combined, with a potential overall value north of £1 million, it becomes clear why this is an exhaustive process.

We have also had to deal with issues such as the forensic fire investigation, asbestos, reinstatement valuations, policy interpretation and the detailed assessment of our Business Interruption claim. Each of these has its own evidence and professional requirements, and progress in one area can sometimes depend upon progress in another. We are, however, not trying to navigate this process alone. We have the dedicated support of a loss assessor with 35 years of experience, together with a technical director with 30 years of experience. We are also taking account of the views and experience of the loss adjuster appointed by the insurers. All professionals have indicated that the level of investigation and assessment being undertaken is consistent with what would normally be expected for a major and complex loss of this nature.

That is why the Committee has consistently taken the view that we should listen to the professionals, challenge matters where necessary, provide the evidence required and make sure that the Club’s interests are properly protected. We know it can sometimes look from the outside as though nothing is happening. We can assure members that this is not the case. A huge amount of work continues behind the scenes, much of which is technical, detailed, time consuming and unfortunately not always visible.

We also understand that members may become frustrated when they hear about another business that had a fire and was back up and running much more quickly and had a smoother experience. We want to make it clear that we cannot compare our situation with somebody else’s claim. We have an historic building, a complex reinstatement position, multiple elements to the claim and a potential value exceeding £1 million.

The reality is that every pound of the claim must be evidenced, assessed and negotiated. Our job as a Committee is not simply to get the claim settled as quickly as possible. It is to make sure that, when it is settled, Churchdown Club receives everything it is properly entitled to under the terms of its insurance policy. That is why we will continue to be patient where the process genuinely requires it, but equally we will continue to challenge delays, question decisions and push for progress wherever we believe it is justified.

It has been a long, frustrating and at times exhausting road. We know that members are desperate to see the Club fully restored and back to normal. We are just as determined as you are to get there — but we also have a responsibility to make sure that we do not sacrifice the Club’s financial position simply to make the process quicker.

The fire investigation and asbestos

There remains one major unanswered question: Do we know what caused the fire? The simple answer is no.

And we are absolutely not prepared to speculate. Two forensic fire investigators have already attended the site. They now want to return to the building and work alongside the asbestos-removal operators so that they can safely access and investigate specific areas of interest. Their objective is to try to establish the cause of the fire and, where possible, identify the source or origin. In very simple terms, they are looking for the “smoking gun” amongst a heavily fire-damaged building.

It is inevitably a painstaking process, and there is no guarantee that a definitive cause will ultimately be established. The forensic investigators are appointed and paid for by the insurers, and Churchdown Club has no control over the precise timescale of their investigation. The insurers had originally asked Churchdown Club to fund the asbestos removal required to allow their investigators to continue their work. The Committee robustly challenged that position.

As explained above, we have now reached agreement that these works, currently estimated at approximately £50,000, are ringfenced and will not form part of our insurance claim. This is another example of why we continue to challenge matters where we believe it is necessary.

What happens next?

There are still a number of significant areas to resolve. These include:

• establishing the correct reinstatement value of the Club;
• resolving the buildings underinsurance issue;
• determining the correct basis for the business interruption calculation;
• establishing the value of the contents claim;
• completing the forensic fire investigation;
• progressing the asbestos works;
• determining the appropriate reinstatement scope;
• assessing how and when rebuilding can commence; and
• continuing to protect the Club’s financial position throughout the process.

We fully expect there to be further discussions, challenges and negotiations before the claim is finally resolved.

The Committee’s approach

We want members to understand that we are not simply accepting the first figures put in front of us. Where insurers put forward a position, we examine it. Where we believe there is a legitimate question over the interpretation of the policy, we challenge it. Where figures require independent verification, we obtain that verification. Where evidence can support our position, we provide it. And where an issue is unclear, we will seek clarification rather than make assumptions.

We will also continue to be honest with members about both the positive developments and the potential difficulties. There are some very large figures involved in this claim, and relatively small percentage differences can translate into tens or even hundreds of thousands of pounds for Churchdown Club. That is why the Committee is taking this process extremely seriously. We have scheduled conference calls on a fortnightly basis to discuss the claim with all parties, and in addition we have calls 3 x times a week with our dedicated major and complex loss assessor.

We believe we are doing everything that we can to get the best outcome for Churchdown Club and its members.

Finally – a message to members

We appreciate that members understandably want to know when the Club will be fully restored and when everything will return to normal. We want that too.

But the reality is that there is still a considerable amount of work to do before we can give members a definitive timetable. What we can promise is that the Committee will continue to work tirelessly to protect the interests of Churchdown Club and its members. The acceptance of policy liability was a major hurdle and a very significant positive development. There are now further hurdles in front of us.

We will continue to deal with them one at a time, challenge where necessary, and keep members updated as the position develops.

We will communicate further updates as soon as there are meaningful developments to report.

Thank you for your continued support, patience and understanding.

Churchdown Club Committee