Business Interruption Insurance and Calculating a Loss

Since many of us are still in the process of recovering and rebuilding, we undoubtedly are becoming more aware of, and reviewing, our insurance coverage pertaining to unexpected losses.? In this multi-part series of posts, I’ll give some key points to coverage policies and the process for calculating an unexpected business interruption loss.

?Let’s start with understanding the commercial policy and preparing for an event. ?The purpose of business interruption insurance is to bring a business back to the same financial position as if not incurring a loss.

• Good polices lead to good claims.? Having the appropriate endorsements help protect a business against the layers of interruption that can occur. ?

o The Business Interruption endorsement addresses the financial impact of a disruption of operations over a period of time.

o Do not overlook a Contingent Business Interruption endorsement that provides coverage for losses resulting from damage to suppliers or customers.? Think of the inability of Ford to procure tires for their vehicle production line.?

o What about a Service Interruption endorsement? This covers interruption due to utility service interruption due to physical damage to those supplying the utility.? Many of us were without power or access to our place of business.

o Extended Period of Indemnity allows the inclusion of time subsequent to the restoration of damaged or destroyed property.? It might take time for a business to bring customers back and achieve pre-disaster levels of revenue.

• Develop a plan and process ahead of time.? Coverage can begin at, or shortly after, the time of direct physical loss.? Make sure you can start the claims process quickly after making sure you, your family and employees are safe.

o?? Understand how your coverage applies to loss events and when coverage begins.?

o?? Know what expenses you are covered for.? Additional expenses outside normal operations can include mitigation expenses to reduce the loss, expediting expenses, purchase or lease of equipment, temporary staffing services and rental of temporary locations.? These expenses should be tracked on a separate ledger with supporting documentation.

o?? Plan your path to recovery.? How quickly can you get back into production, in partial or full capacity?? Will there be a delay in future product lines?? Increased expenses will likely be incurred to get production back online quickly.

o?? Develop a plan for each scenario and have the team in place with knowledge of their specific responsibilities.? This team might include Marketing, Sales, Legal, Risk Management, Internal Accounting and External Accounting (I will get into specific accounting and calculations in a later post). ?Everyone on the team can share their perspectives on what should happen before, during and after a claim.

There’s nothing easy about going through a business interruption, especially because of a widespread disaster.? The emotional toll significantly outweighs the financial burden; however, we can prepare best practices to mitigate the financial impact to our businesses. In future posts we will review putting together the claim and documentation needed.

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The content shared on this LinkedIn page is intended for informational purposes, reference and guidance to the reader, and is not intended to be a substitute for the reader seeking professional advice based on specific factual situations.? Information in this post does not constitute professional accounting, tax, financial, investment or legal advice.