From hurricanes and floods to ice storms and wildfires, 2017 is shaping up to be one of the worst years on record for natural disasters in the United States.
Even before hurricane season started, the National Oceanic and Atmospheric Administration (NOAA) reported nine major U.S. climate and weather-related events that caused more than $1 billion of damage through July. And we aren't in the clear yet: Some weather experts are calling for a stormy winter in many parts of the United States.
Experts estimate businesses, including farms, manufacturers, retailers and construction contractors, will lose billions of dollars from natural disasters this year. On the plus side, proactive business owners have business interruption insurance in place to help recoup lost profits, repair damaged assets and cover other incremental expenses. But filing a claim can be daunting.
Fortunately, outside financial experts can explain what's covered and calculate how much you're entitled to recover.
Business interruption insurance is arguably one of the most complicated insurance products on the market today. And most policies require claims to be filed in a relatively short period of time (often within 30 days).
In addition to replacing any damaged assets, such as inventory or machinery, a business interruption policy typically covers:
Lost business income. This is basically the profits that would have been earned if it weren't for the loss. The income is typically limited to 12 months or the period the business is interrupted, whichever is shorter.
Temporary location expenses. The extra costs of moving to, and operating from, a temporary location may be covered. The expenses for permanent relocation, if necessary, may also be included.
Continuing costs. These are normal operating expenses and other fixed costs that the business still incurred. These expenses must be ordinary and necessary, such as rent, salaries and related payroll costs during the interruption period (the time it took your business to resume normal operations).
Beyond continuing costs, the insured may also be reimbursed for other reasonable expenses that allow the business to continue operating while the damage is being repaired, rebuilding costs, and "denial of access" losses (for example, if the owner or employees are unable to return to business premises located in an evacuation zone). Some policies may even cover the cost of using an outside financial expert to help calculate damages.
Important note: The insured generally has a duty to mitigate its losses during the business interruption period. Sometimes, this entails moving to a temporary location. But mitigation strategies that compromise long-term operations typically aren't required. For example, a damaged manufacturer wouldn't be required to lay off its plant manager or top salesperson to save on salary and benefits costs during the interruption period. These individuals are key people who would probably be difficult to replace when the business resumed normal operations.
Seem overwhelming? Fortunately, a damaged business can hire an outside financial expert to help throughout the claims process. An outside professional is particularly helpful if the insured has already submitted a claim and is experiencing push back or denial from the insurance company. The business may also need professional help to get the insurer's attention — especially after a major disaster when insurance carriers are overwhelmed with business interruption claims.
Valuation professionals and forensic accountants have skills that are important in estimating damages. For instance, they can:
- Define the term "lost business income," which can vary depending on the company's accounting methods,
- Forecast lost business income based on historical results and industry or market trends,
- Differentiate continuing vs. noncontinuing expenses,
- Explain the long-term viability of various mitigation strategies, and
- Estimate the interruption period.
In addition, a financial expert can help assemble and review the requisite documentation to support a claim, such as financial statements, tax returns, receipts, utility bills and vendor information. He or she can also negotiate with insurance auditors to resolve the claim as quickly and painlessly as possible.
Ready, Set, File
Putting together a comprehensive business interruption claim is time-consuming and takes careful consideration. Claims can be delayed or denied if there are different interpretations of loss calculations, income projections or the meaning of policy provisions. An outside expert with experience in filing these claims can be a valuable resource, and will give you much-needed peace of mind that your business will be made "whole" again.
LOUIS J. CERCONE, JR., CPA, CFE, CFF, ABV, ASA, CVA
Lou is the Managing Director of Brisbane Consulting Group in charge of business valuations, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. He has been engaged in several forensic accounting cases and has served the judiciary as a court appointed expert and receiver for financially troubled companies. He has testified as an expert witness in State Supreme Court and Federal Court. Lou has also been engaged in the quantification of lost income in determining business interruption claims for insurance adjusters.