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 adequately covered.
What are the key considerations in understanding and filing a business interruption claim?
- 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 insurance claim.
- 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 claim?
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 claim?
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 interruption claim?
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 firstname.lastname@example.org.