Business Interruption – Claim Preparation Starts with Policy Placement
Insurance professionals know that large property losses are difficult to settle. This is especially true of Business Interruption (also known as Business Income) claims. It is relatively easy to establish the value of a real or personal property loss, but business interruption requires estimates of future income to set limits, and “what might have been” scenarios in determining the amount of loss. Widespread destruction from natural disasters such as Hurricane Sandy poses additional settlement problems.
To secure the best possible settlement, proper coverage must be in place before a loss. Except for a Businessowners policy covering business income on an “actual loss sustained” basis, the first step is to select a limit. In many cases insureds will just make a ballpark estimate; this can result in underinsurance, especially if the policy has a coinsurance clause. The best practice is to complete a worksheet showing current and projected revenues and expenses. To the net income or loss add expenses that will continue after a loss. Next, estimate the time needed to rebuild and restore operations; it may be a few months or over a year. These calculations should enable you to establish a maximum probable loss. By submitting a completed worksheet to your insurer you can insure this amount on an agreed value basis eliminating a possible coinsurance penalty.
Once a proper limit is determined you will need to consider factors which can add to a loss. There may be extra expense to continue or restore operations; this is covered to the extent it reduces a loss. (Some businesses will need to continue operations at any cost; for them Extra Expense rather than Business Interruption insurance will be needed.) Once operations are restored extra time may be needed to get back to pre-loss levels; the policy has an “extended period of indemnity” which may be adjusted. Contingent income loss from damaged suppliers, customers or leader locations; extended closure due to order of civil authority; cancellation of a favorable lease; extended restoration time for compliance with building codes; pollution or mold cleanup; and interruption of off-premises utility service are extra costs which can all be covered subject to dollar sublimits or time limits.
In order to be covered a business interruption loss must result from a covered peril. If your Property policy does not cover equipment breakdown a separate policy will be needed. Flood can be covered with a sublimit in most business policies; if a property is in a flood plain and only covered by the National Flood Insurance Program a “Difference in Conditions” policy is needed for business interruption at that location.
Once all exposures to loss have been identified and quantified your broker can make a proper submission for coverage. Review proposals for adequate limits and make sure no coverage restrictions are included. The time to act is before the next loss occurs.