Business interruption insurance typically pays for income that is lost while operations are suspended after a natural or man-made disaster. However, these claims can be difficult and even contentious if there are differences of interpretation about the calculations, projections or the meaning of policy provisions.
When disasters such as Hurricane Sandy occur, the need for a forensic accountant and an attorney can arise. Although many of the insurance claims that result from such a storm are relatively straightforward, policy claims for business interruption insurance may require detailed proof of the losses.
Insurance basics: Most insurance claims involve determining what costs and replacement values of equipment and materials were lost or damaged in the disaster, proving the losses and values, and submitting a claim.
Business interruption insurance typically pays for income that is lost and expenses that are incurred while operations are suspended. A business interruption policy typically covers expenses including:
- Profits that would have been earned if it were not for the loss (usually limited to 12 months).
- Continuing costs – Operating expenses and other fixed costs still being incurred by the business (these expenses must be ordinary and necessary such as salaries and related payroll costs during the interruption period).
- Replacement of inventory and machinery.
- Temporary location – The extra expenses for moving to, and operating from, a temporary location may be covered. (The expenses for permanent relocation, if necessary, may also be included).
- Other expenses – Businesses are reimbursed for reasonable expenses (beyond the continuing costs) that allow the business to continue operating while the damage is being repaired.
Important: This type of insurance is arguably one of the most complicated on the market today, and submitting a claim is time consuming and takes careful consideration. Claims can be delayed or denied if there are differences of interpretation about the loss calculations, income projections or the meaning of policy provisions.
A business may approach its accountant or attorney for advice on how to approach a claim for business interruption coverage, especially if the business has already filed a claim and is experiencing push back or denial from the insurance company. The business may also need professional help to get the insurer’s attention — especially after a major disaster when insurance companies can be overwhelmed with claims.
A forensic accountant and an attorney can work with the business to determine the losses and prove them in a claim. When it comes to business interruption claims, it is important to properly calculate losses upfront.
Forensic accountants, particularly those experienced in business valuation and litigation, have skills that are important in determining losses for business interruption claims such as forecasting, modeling and properly presenting damages and losses. Working with an attorney, who can aid in the legal interpretation of the policy, a forensic accountant can quickly and efficiently assemble the information and calculations needed for a viable business interruption claim. Filing a well-crafted claim can help in a quick and easy resolution with the insurance company.
Before a Disaster
There is more that businesses and their advisers can do to proactively prepare for the potential of a business interruption claim. According to George Stratts, President of AIG’s Property Casualty Global Property Division:
“More and more, forensic accountants are being brought in before the loss to help companies evaluate their potential exposure, and provide additional insight that they may have not been building into their coverage. We’re seeing more specific coverage being sought and different limits than companies have used before. Companies have expanded their limits where they’ve been able to identify the exposure. So companies have to make sure they have the best understanding of their business and the best understanding of the exposures to it. In commercial insurance, contracts can be manuscripted so they are unique to the individual insurance.”
The idea is to structure a policy that anticipates the most likely losses that would occur if your business suffers a catastrophe.
Filing a business interruption claim requires companies to assemble financial records, such as receipts, utility bills, salaries, vendor information and more. The insurer will want to know the income the business was generating before and after the loss. The business must analyze, identify and segregate revenues and expenses, as well as review its profit projections to help ensure they are accurate and solid enough to hold up to a potential dispute. Consult with your accounting firm for assistance to help ensure a successful claim.
For More Information
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– content reprinted with permission from BKR International.
Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article