To weather a business interruption, damaged businesses need to be made whole again as quickly as possible. Business interruption (BI) insurance – or business income insurance – is a type of insurance that covers the loss of income because of a disaster, typically when the loss is due to suspension of operations and direct physical loss of property. BI insurance is designed to put the insured in the same financial position it would have been in if the disaster had not occurred.

BI claims are an area of complex issues that are highlighted in the Risk and Insurance Management Society 2017 Business Interruption Survey. Key findings include:

  • 17% of risk managers were “extremely confident” that their BI values and limits are adequate.
  • 40% has experienced a BI loss and subsequent claim within the past five years.
  • 58% of risk managers who have been through a claim said that “difficulty quantifying loss” was the biggest challenge they faced;
  • 39% of risk managers indicated that their existing BI policy provides either insufficient or no coverage for cyber risk. 10 percent were unsure whether the policy covered cyber risk.
  • By taking control of their data, establishing a team and developing plausible BI figures before losses occur, risk managers can do much to lessen the confusion and frustration common to these claims process.

The following are some of the perilous areas of the BI insurance and claims process which contain numerous pitfalls.

1. Business is Underinsured – One of the biggest failures is not being adequately covered. Your insurance broker only knows what you have told them, so if you have not been proactive with your insurance, you may be left short when disaster strikes. Schedule time with your broker for at least an annual review of your BI policy to make necessary adjustments to your policy for your ever-changing business.

2. Inadequate indemnity periods – BI coverage ends when the maximum indemnity period expires (typically 12 months). It is essential that indemnity periods are enough to account for circumstances that could delay recovery. The duration of the loss period is where many of the most challenging claim arguments occur, as the insurance carrier is unwilling to pay for business interruption damages beyond the policy stated indemnity period. A careful review of your business sales cycle may alert you to inadequacies in your policy’s indemnity period, especially if the business sales cycle goes beyond 12 months.

3. Presentation of expectations – BI claims can become problematic or contentious where the reliability of projections and historical trends are questioned. Determining what the actual expectations are can be one of the more challenging components of a BI claim. When production levels vary, along with unpredictable demand, the BI claim becomes very complex. Typically, a BI claim preparer analyzes the trends which include the planned, budgeted or anticipated production and sales against historical trends. Carriers frequently focus on a business’s track record to project what its revenues would have been if not for the loss.

This approach becomes more complex when the loss period is lengthy or when the business lacks sufficient historical data to present a trend (e.g., start-ups or new product lines). Agreeing with the adjuster can require additional exchanges of data and various follow-up discussions. Don’t rush the process – emotions typically run high and becoming frustrated can easily occur when trying to provide corroborating support. By identifying challenges as much as possible at the beginning and committing the time and resources to support the assumptions can go a long way to removing frustration. Up-front work can also greatly increase your credibility and reduce the review period.

4. Value – Presents the worth of each unit of production, thereby adding to the complexity of the BI calculation. Value brings into question:

  • What price per unit would have been charged if not for the loss?
  • What was the gross margin or profitability expectation?
  • What expenses would have been saved or were noncontinuing during the loss period?

For example, if the business were seasonal, a trend over several years could establish a production and sales profile. A financial expert who’s familiar with the business and its industry might highlight industry trends, market changes or business-specific developments that indicate a higher level of growth going forward for the business during the damage period. If there is an anticipation of coverage and policy interpretation issues early on, it will be prudent to engage legal counsel that specializes in insurance coverage. Adding an attorney to the team does not mean the claim will result in litigation, but it will go a long way in protecting an owner’s interest.

5. Duty to mitigate – is an area that’s apt for disagreement. There are many actions a business can take to mitigate its damages; however, not all of them are reasonable, and doing nothing is never the smart option. For example, a damaged business might be able to reduce its loss by laying off salaried staff and managers. Although the cost of recruiting and hiring a replacement when normal operations resume may exceed any saving by laying off the staff, as well as the loss of experienced staff would adversely impact the business in the long term.

If a disaster strikes your business today, would you be prepared to handle your business interruption claim?  We can help you navigate the pitfalls of a BI claim by pulling together a timely, well-supported business interruption calculation that will provide the needed support for the insurance carrier to expedite payment for the losses. Contact your BMF Advisor or one of our business valuation experts.

About the Authors

Bryant D. Petersen

MBA, ASA, CFE
Senior Manager, Valuation/Litigation Support Services

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