Three tips for surviving a business disruption
Disaster strikes. A fire destroys your manufacturing facility, bringing production to a halt. A storm damages your store front, preventing sales. A cyber-attack forces your on-line business to shut down for weeks, severing customers’ access to your services. In short, your business has been growing, changing, tackling challenges, but something you never anticipated has interrupted the flow and you’ve lost business. This is why you have business interruption insurance. But what do you do next? Filing a business interruption claim doesn’t seem quite the same as a claim for your teenager’s fender bender. And you’re right. It’s not. So here’s what you need to know.
1. It is critical to understand the insurance coverage you have and your rights and responsibilities.
In the midst of a hectic and damaging loss event, thinking about your available insurance coverage can get lost in the chaos. No one thinks about the insurance binders that went in the file cabinet after renewal. But evaluating your insurance coverage is one of the most important initial steps in navigating the aftermath of a disaster. All insurance policies include notice provisions, requiring insureds to put the insurer on notice of the loss and claim for coverage. Identifying and complying with these notice provisions is a critical preliminary step in protecting your insurance coverage. There is little more tragic than seeing clients spend time, money, and energy fighting with insurance companies about whether notice was timely—sometimes with thousands or millions of dollars in coverage hanging in the balance.
It is also important to understand the scope of coverage available under your insurance program. Your basic property insurance coverage should cover the cost to repair or replace your damaged real and personal property.
- But does your policy also provide business interruption coverage, which covers the loss of income a business suffers after a covered event? For example, if your business is shut down for 5 months and you lose $500,000 in projected profits, your business interruption coverage should put you back in the financial position you would have been in but for the loss event.
- If your policy does include business interruption coverage, is there a time-period deductible, and is your coverage limited by a specific period of restoration after which coverage ceases (i.e., 12 months following the interruption)? Understanding these aspects of your coverage can help you manage financial expectations going forward.
- Are “extra expenses”—expenses above and beyond your normal operating expenses that allow your business to continue operations while your business is being restored—covered, and to what extent? For example, your business may have to temporarily relocate to a different location during the interruption, and the added costs of relocation may be covered extra expense.
- Your insurance may also provide coverage for what is called “contingent business interruption,” which can protect your business from loss resulting from a covered event that damages the business premises of one of your third-party suppliers or customers. For example, if the product you sell depends on a component part and the direct supplier of that part suffers a fire, preventing it from supplying the parts you need to do business, contingent business interruption coverage may give you protection.
Understanding your coverage, answering these questions, and identifying potential coverage exclusions are critical to help you understand the potential value of your insurance claim, manage expectations, create a plan for determining and presenting your total claim value, avoid land-mines in presenting your claim to the insurer, and maximize your recovery. An insurance-coverage lawyer or sophisticated insurance broker can often help you navigate the maze of your insurance policies at little cost.
2. It is important to get the right professionals involved early.
Most businesses have rarely, if ever, prepared a business interruption claim. In contrast, insurance companies handle these kinds of claims every day, and they often have paid adjusters and consultants who work only for insurance companies.It is not hard to see how these representatives are incentivized to minimize their insurer’s financial exposure. Moreover, insurance companies often involve their paid consultants from the start, lulling businesses into thinking the adjusters are looking out for their interests.
You can level this uneven playing field.One of the most common mistakes we see insureds make is delaying in engaging professional help. For any substantial business interruption loss, it is prudent to hire an external forensic accountant or consultant who is experienced in compiling and presenting business interruption losses at the outset. These professionals can add tremendous value to your business for a variety of reasons:
You want to avoid early mistakes that can come from inexperience. Often, the best practices for handling these claims involve doing certain things immediately, such as setting up separate receivable account to accumulate expenses related to the incident. This practice has two benefits. First, it simplifies the process of identifying the “extra expenses” portion of your claim. Second, it keeps your operating profit and loss free of the effects of the incident which can help simplify the process of determining your business interruption loss down the road. Engaging a professional at the beginning of the process can also provide you assistance with technical issues like determining the right restoration period and managing your cash flow from the insurance company during the claim process.
- Your final claim settlement for your business interruption losses may be noticeably lower if you don’t anticipate objections and internally scrutinize your claim before presenting it to the insurance company. In the subjective area of business interruption losses, the initial claim will often be viewed by the insurance company as a “start high” bid. Typically, it will be analyzed to identify a number of areas that could be used to reduce the claim and provide negotiation openings. Does your claim fail to account for growth trends in your business and accurately project future income or, on the flip side, does it imply business growth from the prior year that you can’t prove? Is your claim based on unsupported budget expectations? If your initial claim has significant flaws or weaknesses, you may be left with no supportable calculation of your own and feel forced into accepting an amount based on the insurance company’s own calculation. The more of these arguments you can anticipate and preempt with a well-reasoned and supported claim, the more likely your ensuing negotiations will be reasonable, brief, and successful. Accounting professionals experienced in creating business-interruption claims can anticipate and head off the kinds of objections insurance companies commonly make.
- You may also benefit from a sounding board during negotiations. Often, the insurance company will use its own hired analysts to come up with an insurer-friendly determination of your business’s losses. A professional is often able to use their past experience to identify weaknesses in the insurance company’s analysis, giving you substantive leverage during the back-and-forth of settling on a final claim amount.
- A professional may not cost you a thing! Many insurance policies include a provision covering a certain amount of expenses incurred to help prepare a claim. A professional’s fees will often fall under this coverage, and much or all of their professional fees with be reimbursed by the insurance company. Don’t waste the benefits of the insurance coverage that you paid for!
3. You still catch more flies with honey than vinegar.
When all is said and done, most businesses simply want to be made whole from their loss and move on. On the same note, most insurance companies want to maintain healthy business relationships with their insureds. This process does not have be adversarial or tense. Bringing the appropriate professionals alongside your business early in the process allows you to “speak softly, and carry a big stick.” Understand your insurance coverage and what it gets you. Work hard to make your initial claim clear and well-supported. Trust that your work with the right professionals on the on the front end of the claim process will make it smoother and more successful on the back end. And rest easy knowing that you have a solid team behind you to handle any bumps in the road, helping you get back to what you do best—run your business.
You’ve already had all the surprises you need.
Cassandra Elgersma, CPA/ABV/CFF, CFE is a manager with SDK CPAs with over twelve years of experience in audit, tax, accounting and consulting. She has worked with clients in manufacturing, retail, technology development, and not-for-profit industries. She has assisted businesses in a variety of industries when submitting insurance claims for business interruption or pursuing later legal claims from related losses. Cassandra also assists in the preparation of prospective financial statements, business valuations, economic damage calculations and forensic investigations.
Bryan Freeman is an insurance-coverage lawyer who adds value to his policyholder clients by helping them secure the benefits and protection their commercial insurance is meant to provide. Bryan has helped his policyholder clients recover millions in insurance coverage, in litigation over coverage for D&O, employment-practices, product, environmental, and fiduciary liability.
Bryan is also a commercial litigator who represents his clients with excellence in and out of the courtroom. He has broad experience litigating business disputes in federal courts around the country, handling complex, class-action defense matters under the Telephone Consumer Protection Act (TCPA) and Racketeer Influenced and Corrupt Organizations Act (RICO), among others.