As they weather this year’s storm season, many businesses will experience property damage, often accompanied by business income losses. Most commercial property policies will provide business interruption coverage and extra expense insurance as an adjunct. However, the complexity of a business interruption claim coupled with a pressing need for operating capital often combine to create a difficult scenario for business owners in these situations.
Because business interruption claims and coverage can be so complex, it's crucial to make sure your business's business interruption values are reported correctly. These numbers are what determines the amount of coverage your business has in the event of business interruption, and just carrying over numbers from the previous year with an inflationary factor might not be enough.
In general, business interruption and extra expense losses may be covered when they are due to physical loss or damage to covered property or other covered conditions, such as damage to a “dependent business” or an order from civil authorities such as an evacuation order. There may also be exclusions and limitations, such as whether the policy provides coverage for power loss occurring outside of the covered property.
For businesses that experience losses this year, the following best practices can help smooth the business interruption insurance claims process and maximize recovery:
Thoroughly Examine and Document All Physical Damage
Physical damage to covered property is usually the triggering event for attachment of business interruption coverage. Conduct a thorough examination and photograph and document damage in detail before performing any remedial work. Keep in mind that the damage may be greater than the untrained eye can detect, so a construction expert or expert adjuster can be critical. If the insurer believes part of the loss resulted from a risk that is not covered, then the need for a skilled independent expert becomes greater.
Assemble a Team
A business interruption claim is often more complex—and calls for greater forensic work—than a property damage claim. This undertaking is best tackled by a team of people with distinct skill sets, including accounting, legal, insurance and construction. Select a team leader to direct, communicate and coordinate activities. An accountant who truly understands your business is also critical. Since they already have a relationship with your insurer, your broker is often the best conduit of information as the claim is handled. An adjuster (or contractor experienced in loss assessment) who speaks the language of insurers can help convince the insurer’s adjuster about the extent of the damage. Depending on the claim, additional experts may be warranted, such as an insurance consultant, structural engineer or architect.
Know Your Policy
To maximize recovery, it is essential to tailor the claim to the insurance policy. Pay close attention to the forms of coverage provided, covered locations, covered causes of loss, exclusions and the methodology for loss calculation. Identify your business operations, potential coverage problems and the strongest arguments for recovery. Conduct a thorough preliminary analysis before any communications with the insurer. An inconsistent stance on coverage will damage the critical relationship between the insured and the insurer.
Act As Though You Have No Coverage
Make decisions about repair, restoration and restarting the business as though the coverage does not exist. You have a duty to mitigate losses, and until the insurer commits to covering the loss, you truly do not know what you will recover. Prudent management calls for making decisions independent of coverage. This is particularly important in the period soon after the loss. As the insurer investigates the claim and gives an early indication of the coverage, you can partner with the insurer for decisions on expensive repairs, such as whether to replace a damaged roof or tear down and rebuild.
Teach the Insurer About Your Business
You know your business best and can help maximize your recovery by teaching the insurer about your operations and putting the losses into proper perspective. An examination by someone who does not understand your business the way you do is more likely to be superficial and may result in a lower reimbursement.
Present Your Case to the Insurer
Do not approach the damage claim by merely responding to the insurer’s questions and filling out the insurer’s forms. Present your losses as you or your accountant understand them. Be prepared to fully document the losses, including a projection of the amount of business income lost. A full presentation will require a comparison with financial figures from prior years, as well as adjustments for seasonal differences, growth, pricing and other trends.
Communicate Frequently with the Insurer
Let the insurer or its adjuster know about the day-to-day demands the loss has caused, such as the need for cash for operations or the need to repair property or equipment. Business interruption coverage generally extends at least until the “period of restoration” concludes, which is typically when the underlying property has been repaired or replaced, or when such repair or replacement can be accomplished with reasonable diligence. Some policies provide “extended business income” coverage, which provides additional coverage for a certain period of time while the business is recovering after the end of the period of restoration. It is in the best interests of both the insured and the insurer for the recovery to be as rapid as possible.
Keep Your Eye on Ancillary Coverages
Categorize and submit for reimbursement all covered expenses in addition to business interruption losses. This includes extra expense, expediting expense, debris removal and other losses relevant to additional coverages, which vary from policy to policy.
Do Not Rush the Claim
Business interruption claims take time, particularly for the accountants to document the loss. Sometimes, such as when repairs take months or when the claim cannot be estimated with any certainty, many months may pass before the amount of the claim can be fully ascertained. During that time, cash advances benefit both parties because they provide the insured with needed cash and reduce exposure for the insurer by helping the insured mitigate losses. Settling early can be to the insured’s detriment because it is often impossible to determine how the claim will play out in the early stages of an investigation.
Be Prepared to Take a Hard Line When Necessary
If you disagree with the insurer’s handling of the claim, speak up. Know the deadlines legally imposed on the insurer and the penalties that may apply for delays or unreasonable treatment. If the claim is being mishandled, speak up in terms that are civil but firm, and be prepared to take a more aggressive position if the insurer does not respond as you believe it should.
Recognize That Your Goal Is a Comprehensive Claim
Your team’s ultimate output is a claim that can be understood by a complete outsider. The claim submission must also be able to stand up in court, should a dispute get that far.