If your business is hit by a hurricane, windstorm, blizzard, or other natural disaster, or if it falls victim to arson or terrorism, you might have to close up shop for a while. As a result, you could suffer a major loss of income.
One of the keys to continuing as a thriving enterprise after a disaster is to file the proper claims against your business interruption insurance as soon as possible. But be warned: 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.
Your accountant can help you prepare the claim and anticipate questions from your insurer. You may also need assistance from your attorney, who can help protect your company’s interests and avoid unfounded disputes.
Follow these steps as soon as it is feasible:
1. Notification. Tell your insurer about the damage generally. If your policy has been water-damaged or destroyed, ask the company to send a copy to you. Other questions: Do you need to fill out a claim form? How long do you have to file a claim? When can you expect a claims adjuster to visit?
2. Policy review. Read your policy in detail to determine how to best present your claim. It is important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.
3. Minimize income losses. Make temporary repairs if possible and hire security guards if necessary to protect the property. Then:
- Reopen as soon as practical, even if it is only for a limited number of hours.
- Block off unusable parts of the building and operate from less damaged areas.
- Take out newspaper, radio or television ads announcing when you will reopen.
- Lay off nonessential support staff if necessary to limit continuing operating expenses.
4. Record losses. You must maintain accurate records to support an insurance claim. Reorganize your bookkeeping to segregate costs related to the business interruption and keep supporting invoices.
Your accountant can advise you on the information you need and organize it in a way that is acceptable to an insurance company. Among the necessary documents are:
- Pre-disaster records showing accounts payable and receivable; income tax returns; and profit and loss statements. (Try to reconstruct all destroyed records.)
- Post-disaster business records.
- Copies of current utility bills, employee wage and benefit statements, and other records showing continuing operating expenses.
- Receipts for building materials, a portable generator, and other supplies needed for immediate repairs.
- Paid invoices from contractors, security personnel, media outlets, and other service providers.
- Receipts for rental payments, if you moved your business to a temporary location.
Be as precise as possible. One of the surest ways to delay a claim payment is to be inaccurate. Review with your accountant the records you plan to submit and organize them in anticipation of litigation if the insurer is reluctant to pay your claim. Taking the time to prepare for that possibility — even if it’s remote — can save a great deal of effort later.
The basic business interruption formula is:
BI equals T times Q times V
(Business Interruption equals the time operations are closed times the quantity of goods normally produced or sold per unit of time times the value of each unit of production, usually expressed in profit.)
Following accepted accounting principles, don’t book the accounts receivable due from the insurance company until you have a very high degree of comfort that you will actually receive payment. Insurance payments can be delayed for a number of reasons.
A final reminder: Consult with your accountant and attorney. Business interruption claims can be difficult and even contentious when there are differences of interpretation about the reliability of projections or the meaning of policy provisions. A successful claim entails maneuvering through the gray areas inherent in business interruption, including financial projections, consumer demand, and policy interpretation, to reach a number that’s reasonable, credible, defensible, and well supported.
Types of Coverage
Here are some basic types of business interruption coverage:
1. Named Perils Policies, which cover only occurrences that are specifically listed in the policy, such as fire, water damage, and vandalism.
2. All-Risk Policies, which cover all disasters unless they are specifically excluded. Typically, an all-risk policy excludes damage from earthquakes and floods, although coverage can generally be added for an additional fee.
For additional premiums, you can generally also add these endorsements to a policy:
Extended Business Interruption, which covers for a specified time the income lost after repairs are made but before income returns to pre-loss levels.
Contingent Business Interruption, which provides for loss of income that results from damage to the property of suppliers, providers, or customers.
Here are some clauses to examine:
The policy’s indemnity clause, which can place a limit on the time an insurance company will pay for your loss of business.
Clauses that require you to exercise “due diligence and dispatch” in the repair and construction process. This can be difficult because repairs are not always under your control, particularly if you are a tenant.