Evaluating Business Interruption Claims

Business interruptions can be highly disruptive and financially damaging to a company. Whether caused by natural disasters, fires, pandemics, or other unexpected events, businesses often turn to insurance to mitigate the financial losses incurred during downtime.

Understanding Business Interruption Insurance

Business interruption insurance is designed to compensate businesses for the income they lose during a temporary closure or period of disruption. These policies typically cover a range of expenses, including lost revenue, ongoing operating costs, and potential relocation expenses. Evaluating a business interruption claim requires a comprehensive assessment of the financial impact.

Key Steps in Evaluating Business Interruption Claims

1. Review the Insurance Policy:

The first step in the evaluation process is a thorough review of the insurance policy. It’s crucial to understand the coverage limits, waiting periods, and any specific conditions or exclusions that may apply.

2. Document the Event:

Proper documentation of the event that triggered the business interruption is essential. This includes gathering information about the cause, date, and duration of the disruption.

3.Quantify Lost Revenues and Sales:

The heart of a business interruption claim is the calculation of lost revenues. This involves projecting what the business would have earned during the interruption period had the event not occurred. Several methods can be used for this calculation:

• Historical Financial Data: Analyzing past financial records, including income statements, sales reports, and cash flow statements, is a common approach. This helps establish a baseline for revenue and sales projections.
• Trend Analysis: Evaluating historical trends in revenue and sales growth can help estimate future performance.
  
• Industry Benchmarks: Comparing the business’s performance to industry benchmarks can provide insights into expected revenue and sales levels.

4. Analysis of Continued or Discontinued Expenses

As part of any business interruption analysis, the Forensic Accountant performs a thorough review of the ongoing business expenses as well as the discontinued or saved expenses.  This process typically involves an analysis of monthly profit and loss statements or monthly income statements.  These expenses should be documented and included in the business interruption analysis.   

5.Consider Extra Expenses:

In addition to lost revenues and sales, business interruption insurance may cover extra expenses incurred to minimize losses. These expenses should be documented and included in the claim.

6. Account for Mitigation Efforts:

Businesses are often required to take reasonable steps to mitigate losses. These efforts, such as relocating operations temporarily or implementing a contingency plan, can impact the final claim amount.

7. Prepare a Detailed Claim Analysis & Report:

The evaluation process culminates in the preparation of a detailed claim analysis and report that outlines the calculations, supporting documentation, and justification for the claimed amount. This report is typically submitted to the insurance company for review.

 

Evaluating business interruption claims involves a meticulous and data-driven approach to projecting lost revenues and sales. It requires a deep understanding of financial analysis, insurance policies, and industry-specific factors. Accurate assessment of these claims is essential to ensure that businesses receive the compensation they need to recover from unexpected disruptions and continue their operations. A Forensic Accountant that specializes in economic damage analysis, can help navigate this intricate process and assist in the resolution of the claim.