Estimating Business Interruption Losses
From hurricanes and floods to windstorms and wildfires, 2020 is shaping up to be one of the worst years on record for natural disasters in the United States. Experts estimate businesses, including farms, manufacturers, retailers, and construction contractors, will lose billions of dollars from natural disasters this year.
Many business owners have business interruption insurance in place to help recoup lost profits, repair damaged assets, and cover other incremental expenses, but filing a claim can be daunting. Here's some important information to help your company recoup its losses.
Most business interruption policies require claims to be filed in a relatively short period of time (often as soon as 30 days after the interruption occurred). In addition to replacing any damaged assets, such as inventory or machinery, this insurance typically covers:
Lost business income. This is basically the profits that would have been earned if not for the loss (typically limited to 12 months or the interruption period, whichever is shorter).
Temporary location expenses. The extra costs of moving to, and operating from, a temporary location may be covered. Expenses for permanent relocation, if necessary, may also be included.
Continuing costs. These are normal operating expenses and other fixed costs that the business still incurred following the event. These expenses must be ordinary and necessary, such as rent, salaries, and related payroll costs during the interruption period (the time it took your business to resume normal operations).
The insured may also be reimbursed for rebuilding costs, “denial of access” losses (for example, if the owner or employees are unable to return to business premises located in an evacuation zone), and other reasonable expenses that allow the business to continue operating while the damage is being repaired. Some policies may even cover the cost of using an outside financial expert to help calculate damages.
Important note: The insured generally has a duty to mitigate its losses during the business interruption period. Sometimes, this entails moving to a temporary location. But mitigation strategies that compromise long-term operations typically aren't required.
For instance, a damaged manufacturer wouldn't be required to lay off its plant manager or top salesperson to save on salary and benefits costs during the interruption period. Such key employees would probably be difficult to replace when the business resumed normal operations.
When filing a business interruption claim, it's important to:
- Define the term “lost business income,” which can vary depending on the company's accounting methods,
- Forecast lost business income based on historical results and industry or market trends,
- Differentiate continuing vs. noncontinuing expenses,
- Explain the long-term viability of various mitigation strategies, and
- Estimate the interruption period.
A damaged business can hire an outside financial expert to help throughout the claims process. An outside expert is particularly helpful if the insured has already submitted a claim and is experiencing pushback 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 carriers are overwhelmed with business interruption claims.
In addition, a financial expert can help assemble and review the requisite documentation to support a claim, such as financial statements, tax returns, receipts, utility bills, and vendor information. He or she can also negotiate with insurance auditors to resolve the claim as quickly and painlessly as possible.
Filing a Claim for COVID-19-Relate Losses
Small businesses have lost billions of dollars during the COVID-19 pandemic. Those that had the foresight to buy business interruption insurance to protect themselves from a disaster-related closing may want to file a claim as soon as possible. Unfortunately, it's likely that those claims will be denied — at least until the courts and lawmakers can address the issue.
Insurance Companies vs. Policyholders
Some insurance companies are claiming the legal defense of “force majeure.” This refers to a situation where unexpected external circumstances prevent a party to a contract — in this case, the insurance company — from meeting their obligations.
In addition, many insurance companies note that business interruption policies provide coverage when a policyholder suffers a loss of income as a result of physical loss or damage to covered property. According to their interpretation, COVID-19 doesn't qualify as a physical loss.
Insurers also highlight the fact that policies don't cover loss of income because of market conditions, an economic slowdown, or concerns regarding contamination. They claim that policies don't provide coverage for government actions designed to limit the spread of COVID-19.
On the flip side, attorneys representing business owners in a growing number of lawsuits against insurance companies state that the existence of SARS, MERS, and the Avian flu have given insurers ample opportunity to predict a subsequent global pandemic involving another virus. As it relates to need for a physical loss to occur to trigger payments under the policy, the attorneys contend that the virus can attach itself to physical surfaces. Therefore, viruses cause physical loss that requires cleaning to remove.
Courts and lawmakers are currently addressing these issues. In the meantime, be aware that your insurance company will probably deny COVID-19-related claims, but filing a claim now establishes your company's rights to contest the claim as the legal landscape evolves.
Putting together a comprehensive business interruption claim can be time-consuming and cumbersome. Insurers often delay or deny claims because of differing views on loss calculations, income projections or the meaning of policy provisions. An experienced financial expert can help ensure that your claim holds up to scrutiny.