Preparation Tips for Business Interruption Claims
September 12, 2017
By Hubert Klein, CPA
Many business enterprises are facing catastrophic property losses, often accompanied by business income losses due to a complete cessation of business activities following the storms. This can be a devastating period of time – loss of income and cash flow coupled with increased personal and business expenditures.
Impacted business owners should look to their business’ insurance policies for funds to help rebuild and cover losses, including business interruption resulting from damage to owned property. There are also places to look for relief that may not be as obvious.
Based on insurance policies, damage to the property of suppliers and customers may drive restitution to other parties. Additionally, some covered losses may have begun even before landfall of the hurricane itself, including costs associated with shutdowns in advance of the impending wind, rain and flooding. At this stage, notice to your insurers and a careful review of any and all policies in which you are (or may be) named are important first steps in preserving your rights to coverage.
The following suggestions are offered to provide some guidance for affected business owners to aid in the preparation of business interruption insurance claims.
Thoroughly examine and document all physical damage.
Except for coverage under civil authority clauses that is limited to a short time period, physical damage to covered property is the triggering event for attachment of business interruption coverage. For policy coverage to kick in, the physical damage must be substantial enough to cause the interruption to your business. It is imperative to conduct a thorough examination of your business premises. While doing so, document and photograph any damage in detail before commencing any repairs. Many times the damage may be greater than the untrained eye can detect; a construction expert can be helpful in assessing and documenting damage.
Rely on a team approach.
A business interruption (“BI”) claim is often more complex than other types of claims and demands more forensic work. Typically, preparing and supporting a BI claim is a project best tackled by a team of experienced professionals with different skill sets – including accounting, legal, insurance, and possibly construction. In addition, your insurance broker is a critical team member as s/he has an existing relationship with the insurer and will likely be the best conduit of information during the handling of the claim.
Know your policy.
Policy language is often complex and confusing to read. However, by tailoring your claim to the insurance policy as written, you’ll be able to maximize your insurance recovery. Pay particular attention to:
- the forms of coverage provided,
- covered locations,
- covered causes of loss,
- and the loss calculation methodology including co-insurance clauses and waiting periods.
Do your homework before preparing your claim.
Identify your “business operations,” potential coverage problems, and the strongest arguments for recovery before submitting any claim. A comprehensive preliminary analysis should be conducted prior to any communications with the insurer to avoid an inconsistent stance on coverage interpretation. Poorly prepared or incomplete claims can damage an insured’s credibility, as potentially the relationship between the insured and the insurer.
Act as though you have no coverage.
Make decisions about repair, restoration, and restarting the business as though you have no insurance coverage at all. Many people get comfortable and sit idle believing they have coverage while forgetting they have a duty to mitigate their losses. The duty to mitigate is best satisfied by acting as though coverage does not exist. Remember, this is your business, and until the insurer commits to covering the loss, you truly do not know what you will recover. Prudent management calls for making decisions independent of the coverage.
Teach the insurer about your business.
You know your business better than anyone, and can help maximize your recovery by teaching the insurer about your operations and putting the losses into the proper perspective. Many times an examination by someone who does not understand your business or industry is more likely to be superficial, and may result in an incorrect or lower reimbursement.
Present your case to the insurer.
Do not rely on the insurer to tell you what your losses are, as it may not understand the business the way that you do. Be proactive and do not approach the damage claim by merely responding to the insurer’s questions and filling out the insurer’s forms. Instead, present your losses as you or your accountant understand them. Be prepared to fully document the losses, which requires a theoretical projection of the amount of business income lost. This will require a comparison with financial figures from prior years, as well as adjustments for seasonal differences, growth, pricing, and other trends.
Communicate frequently with the insurer.
Let the insurer or its adjuster know about the day-to-day demands the loss has caused – the need for cash for operations, the need to repair property or equipment, or other demands you face. Business interruption coverage generally extends at least until the “period of restoration” concludes, which is typically when the underlying property has been repaired or replaced, or when that can be accomplished with reasonable diligence. Some policies provide “extended business income” coverage, which provides additional coverage for a certain period of time while the business is recovering after the close of the “period of restoration.”
Look for ancillary coverages.
Many policies provide coverage for additional items such as extra expenses, expediting expense, and debris removal. These additional coverages vary from policy to policy so be sure to know your coverage and limits. Be sure to document, categorize and submit these for reimbursement in addition to your business interruption loss claim.
Be prepared to take a hard line when necessary.
If you disagree with the insurer’s handling of the claim, let them know. Disagreements between insured and insurers are not uncommon. Insurers are subject to many regulatory requirements and laws that have established time lines which require action by the insurer, including penalties that may apply for delays or unreasonable treatment by the insurer. If you feel the claim is being mishandled, speak up in terms that are civil but firm.
Do not rush the claim.
Business interruption claims take time, particularly to fully document the loss. If you feel there is a need for immediate cash-flow, under many policies you may be able to request cash advances along the way. Most insurers know that providing you with working capital during the claims preparation process generally benefits both parties because it provides you with needed cash, while helping you to mitigate its losses. However, remember that it is often impossible to determine at the early stages how the claim process will play and do not let your need for working capital during the early stages of recovery force you into finagling a settlement with the insurer before you have a thorough and comprehensive claim. Many times settling early (just to have cash in hand) can be detrimental to a full recovery in the long run.
Your goal is a comprehensive claim.
Claims should be thorough and comprehensible to a complete outsider, someone with no insight into insurance or your particular industry. Further, the claim document must be able to stand up in court, should a dispute carry that far.