Business Interruption Claims Require Professional Help

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Smart company owners and executives obtain business interruption insurance -- and possibly contingent business income coverage if the operation relies heavily on outsourcing or a particular supplier. The idea is that the policy will compensate the company for lost earnings if a devastating event forces it to temporarily close down.

But the calculations and coverage of business interruption policies is complicated and mounds of paperwork are often required to support a claim. To make matters worse, most policies don't specify exactly what support documents are required and it isn't uncommon for claims to be denied.

Depending on the scope of the loss, the insurer may have a staff of specialists auditing your claim. With that in mind, your company, too, should consult an accountant who is experienced in these types of claims. Some policies cover the cost of hiring the accountant.

The accountant should be the primary contact with the insurer, dealing with the typical onslaught of requests for documentation. That leaves you free to get on with running the business and bringing it back up to speed. The accountant will also keep the insurer informed on what actions you are taking and deal with requests to inspect the damaged property, helping to keep the claims process on track.

It's possible the accountant may already have had dealings with your insurer and knows how the claims department works and what it'll expect from your organization. More specifically, your accountant can:

Help you claim as much as possible. Accountants know what is reasonable and how to negotiate with the insurance company's adjusters and accountants.

Assemble and review your company's documentation. Most policies define losses based on the earnings a company would have made if the interruption hadn't occurred. Calculating the amount of the loss is one of the most complex -- and potentially contentious --  issues in making these claims (see right-hand box for an example).

Ensure that you have all the financial records the insurer requires, such as receipts, utility bills and vendor information.

The insurer will want to know the income your business was generating before and after the loss. Your accountant can analyze, identify and segregate revenues, costs and expenses, as well as review your company's profit projections to help ensure they are accurate and solid enough to hold up to a potential dispute.

Depending upon the size of your company, various departments can be affected differently by the interruption. Your accountant can determine whether your claim should include statements from department heads outlining specifically how their operations were hurt.

Show how losses were kept down. Your company will be required to detail the steps it took to mitigate losses during the business interruption period, which is the time it took your business to resume normal operations. The steps may involve having to move to a temporary location. The interruption period is critical and one of the determining factors the insurer will use when examining the total amount of your company's claim.

Prepare the loss analysis and formal claim. The analysis should comply with the language in the policy and the claim should be written and organized in a way that anticipates potential disputes and even litigation if your company and its insurer can't reach an out-of-court settlement. Preparation can help keep litigation costs down.

Calculating Historical Earnings Data

The calculation of losses is one of the most important and complicated issues involved in business interruption insurance claims.

The policies often state that "past performance" must be considered, but conflicts can arise in determining the time frame used in calculations. One case from the U.S. Court of Appeals for the Fifth Circuit illustrates the approach many courts take in determining acceptable comparative financial data.

After a tropical storm hit Texas and caused flooding, Houston-based Finger Furniture had to close all seven of its stores on a Saturday because employees couldn't access the company's computer system. The next day, the stores opened, but operated at different times. The following weekend, the retailer held a discount sale and made a very large profit.The company filed a business interruption claim with its insurer, Commonwealth Insurance. The claim was denied and Finger sued. Eventually, the two parties reached a $325,402 settlement. The trial court, however, entered a summary judgment in favor of Finger for $342,029.

Commonwealth appealed, arguing that the award should have been offset by the profits earned during the discount sale held after the storm.

The retailer argued the policy didn't require that and cited a provision stating that the insurer was liable for the actual loss sustained. The court sided with Finger, ruling in 2005 that the "strongest and most reliable evidence of what a business would have done had the catastrophe not occurred is what it had been doing in the period just before the interruptions." (Finger Furniture Co., Inc. v. Commonwealth Ins. Co.)

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