With Hurricane Ike a not so distant
memory, many Houston business
owners are still assessing what may be covered by their commercial insurance policies.
Current estimates suggest that Hurricane
Ike caused $13 to $21 billion in damages,
making it the third most costly U.S. hurricane after Katrina and Andrew. Many face
the task of rebuilding and repairing businesses and, in the interim, have suffered
losses in income due to the inability to
resume normal operations.
Though business owners may principally
focus on personal and property insurance,
a company’s survival after a disaster like
Ike may depend on having adequate business interruption insurance, says Laura
Freudenberger, a shareholder with Briggs
& Veselka Co.
“If a company is lucky enough to have
business interruption insurance, it is frequently difficult to assess the extent to
which coverage applies and what steps
must be taken in order to file an appropriate claim,” Freudenberger says.
Smart Business learned more from
Freudenberger about business interruption insurance and how to know if you’re
What are the key considerations in understanding and filing a business interruption
- Determine the extent of business interruption coverage. Many business property
policies include business interruption coverage to cover lost business income and at
least some of the extra expenses associated with restoring business operations following a property loss. In general, business
interruption insurance is designed to
replace income that would otherwise have
been earned by the business had no loss
been incurred. Business income insurance
only applies to losses caused by a covered
loss to covered property. Many companies
find out the hard way that loss of power or
flood damage, for example, will typically
not be sufficient to file a business income
- Consider the limitations of your policy.
The end of the loss period (typically 30
days after you can resume normal operations), the time frame covered (typically up
to 12 months), any monthly or aggregate
limits or waiting periods will be spelled out
in the policy.
- Be aware of coverage adjustments. Co-insurance provisions require the policy-holder to pay a share of the business interruption loss where the actual loss sustained is higher than the estimated business income established at the time the
insurance was purchased.
- Know about provisions for extended
coverage. Common extensions include:
extra days, contingent business interruption (losses in income incurred due to property loss at key supplier or customer location) and civil authority (losses in income
sustained as a result of a government denial
of access to your property due to property
loss at a location not owned by you).
What information is needed to calculate the
Be prepared to provide the business
interruption policy, declaration pages,
three years of tax returns, three years of
monthly financials, and listings and support for extra expenses incurred during the
loss period. Also, you should project your
revenue for the next 12 months. Setting up
separate accounts within your general
ledger to track extra expenses will facilitate the accounting for these expenses.
How is the business interruption loss calculated?
Generally, the policy will guide you as to
the calculation of the loss to be claimed.
The business interruption loss generally is
calculated as the projected or expected net
profit or loss before taxes, plus continuing
normal operating expenses, including payroll, less actual revenue or gross profit collected. Extra expenses (expenses to help
reduce loss) add to the loss amount.
Should companies seek outside assistance
in calculating their business interruption
It is important to be aware that the
adjuster, and the professionals he or she
employs to calculate your claim, work
directly for the insurance company.
Accordingly, it is in the best interest of the
insured to secure the help of a forensic
CPA immediately so that the proof of loss
will include the CPA’s loss claim calculation. The forensic CPA will prepare a
report that calculates the loss in accordance with the policy provisions, using
information and assumptions provided by
the insured. It is not uncommon for insurance policies to provide reimbursement of
the professional fees incurred in connection with the preparation of the claim. In
any event, hiring a qualified forensic
accountant often results in a settlement
that far exceeds the costs of the professional fees incurred.
Whose responsibility is it to file the business
It is the insured’s responsibility to provide
the insurance company with a sworn proof
of loss. Once the insurance company receives this, it has 30 days in which to tender,
or be subject to substantial penalties.
LAURA FREUDENBERGER is a shareholder with Briggs & Veselka Co. Reach her at (713) 667-9147 or [email protected].