IS YOUR BUSINESS PREPARED FOR A DISASTER?
to download/view this document in pdf format, click here
In the winter issue of the BP Report, I discussed the issue of preparing your business for a disaster. In the wake of the Nisqually earthquake, I feel this issue is of significant importance. Preparation for disasters is the key to the continuation of any business. Most businesses rely upon insurance to protect them from failure. Do you know what your insurance policy will cover, and more importantly, what the policy will not cover? Here is a key aspect that should be discussed with your casualty insurance agent or broker:
Business Interruption Insurance
This coverage allows a business to insure its operations. When a covered loss occurs, business interruption insurance will typically cover the loss of income as a result of the interruption. Your policy will state how a business interruption loss is to be calculated. There are two basic methodologies in use: net income plus continuing expenses and gross profit less non-continuing expenses, both should result in the same loss calculation. Despite your insurance contract stating the method to be used, it is not “black and white.” Identifying continuing expenses, projecting what your sales would have been had the loss not occurred and taking any unusual circumstances into account are only a few of the subjective issues in an insurance claim.
There are medium-sized certified public accounting firms that offer their services only to insurance companies for the calculation of insurance claims. In all likelihood, if you have a large business interruption claim, the insurance company will bring in an accountant to assist in the calculation of your claim due to all the accounting and complex financial issues that can arise.
The basic process to a business interruption claim is as follows: An insurance adjuster is typically required to set a “reserve” for every loss. This reserve identifies approximately how much the adjuster estimates the loss to be, because, by law, insurance companies are required to set aside an appropriate amount of money to pay for your loss. To set this reserve, the adjuster will need some preliminary financial information from you fairly soon after the loss. If the loss is expected to be several months, the adjuster and his or her experts will attempt to project the loss over the estimated “period of restoration.” The period of restoration is the time period to reasonably replace or repair the damaged property to return to business. The insurance company will typically not pay beyond their period of restoration due to construction delays on the part of the landlord or other issues outside their control (see your policy). Some insurance companies will negotiate with you using their projected loss calculation to be able to close their files before the restoration is completed or to have most issues agreed upon early on in the claims process.
If there is disagreement between you and the insurance company as to the value calculated, usually the adjuster attempts to work with you as best possible. If the two of you cannot agree, then arbitration or litigation are options. Be sure to document everything clearly in an insurance matter in case you end up in litigation. Typically large insurance claims take several months, longer when in litigation, and the adjuster is required to maintain a log of all contact and decisions on your file. To have a strong case, you should also maintain a log. Take care with what you write in the log, as they are typically discoverable (meaning the insurance company can request a copy when in litigation that can later be shown to a judge, jury or arbitrator).
Patrick
DeLangis, CPA
Senior Project Analyst