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Advising Businesses on Business Interruption Insurance

With the recent late-winter storms that have hit the Northeast, many businesses could have suffered a loss of revenue they were not anticipating. If a business owner was impacted by this latest storm, chances are his or her company was affected in one way or another.

While the exact impact is not easy to calculate in a precise dollar figure, businesses suffer significant financial losses due to closures, reduced productivity and unexpected expenses.

There are many steps businesses can take to protect themselves from losses due to storms and other similar disasters. These include a strong crisis communications plan, company-wide implementation of disaster procedures and the procurement of business interruption insurance. Business interruption is a type of business owner’s insurance that provides coverage to protect lost earnings when a business is negatively impacted by unforeseen events such as storms, fires or mechanical breakdowns.

There are three basic types of business interruption claims:

• Losses suffered as a direct result of physical damage to covered property (This would include virtually any peril such as a hurricane, blizzard or someone driving a car through the front door of a business.)
• Extended period of indemnity, which covers losses resulting from the business reopening but not being “back to normal” (This is typically limited to 30, 60 and 90 days but can sometimes extend beyond a year.)
• Contingent business interruption coverage that would allow the insured to recover losses as a result of damage to someone else’s property, such as a key supplier (This was particularly relevant after the earthquake and tsunami that hit Japan in 2011.)

What about incidents like a major storm predicted to hit Atlanta in January, when business closed early but there wasn’t significant property damage to trigger coverage? Icy, blocked roads, power outages, government-issued evacuations – those are exceptions to the standard business interruption policy.

These examples, however, could fall under one of three additional coverage options: service interruption, civil authority and ingress/egress. Business owners must request these additional coverage options to ensure comprehensive storm protection. The decision of which additional coverage option to purchase depends a great deal upon the industry sector.

All of these policies require claims to be properly documented. While many insurance companies have “gone green,” they still require a lot of paper, so it is recommended to over-document a claim if possible. Because not every claim is created equal, there may be additional issues in order for a claim to be paid. For example, in the case of a loss of power, it may be assumed that losses are covered through a service interruption clause. However, if the outage was caused by ice on the transmission wires and not a blown transformer, it may not be covered. One thing to consider when reviewing a policy is to determine exactly which exclusions apply in each type of claim. Another factor to consider is what type of deductible is written into the policy.

Once the claim is filed, the carrier will hire an accountant to review the claim and offer his or her opinion on the value of the business interruption loss. The accountant will review comparative base periods for proper loss valuation and also will calculate any saved or excess costs the business experienced as a result of the loss.

Complex claims involving business interruption typically remain open for a period of time after all repairs are completed, so they tend to take longer to resolve than others. One final piece of advice for policyholders is to request timely advances so they’re not out-of-pocket for an extended period of time.

Chris Frederick is a CPA at Bennett Thrasher LLP who has been assisting business insurance carriers and adjusters in the documentation, negotiation and settlement of insurance claims for the duration of his career. He can be reached at 770.396.2200 or btcpa.net.