After an event covered by business interruption insurance damages property and disrupts normal operations, your policy may replace lost income and reimburse certain continuing expenses. In such times, a business valuation advisor can help you quantify the financial impact and prepare a well-documented claim if a fire, storm, or other disaster strikes.

Covered Events

Business interruption insurance is arguably one of the most complicated insurance products on the market today — and preparing business interruption claims is rarely simple. Most policies require prompt notification. You’ll need to provide documentation to support a claim by the deadline specified in your policy. (Often, policies require it within 30 days).

Commercial property insurance may cover the repair or replacement of damaged assets, such as inventory, equipment, or machinery. By contrast, business interruption coverage generally focuses on lost business income and certain continuing expenses. Examples of continuing costs that may be covered include rent, salaries, and related payroll costs during the period of restoration (essentially, the time reasonably needed to make repairs and resume normal operations).

Other covered items may include:

• The costs of moving to, and operating from, a temporary location
• Certain extra expenses incurred to reduce the loss or continue operations
• Ordinary and necessary operating expenses that the business still incurred

 
The insured also may be reimbursed for other reasonable expenses that allow the business to keep operating while covered property is repaired. Separate policy provisions may apply in special situations (for example, if the owner or employees are unable to return to business premises located in an evacuation zone).

Business interruption coverage is usually limited to the policy’s defined period of restoration and may be subject to waiting periods and other restrictions. Most policies exclude or limit coverage for cyberattacks unless the policy has specific cyber-related endorsements. Separate cyber policies may be needed for losses caused by ransomware, network outages, data breaches, or other cyber events.

It pays to be proactive. Consider reviewing your policy now to understand which events are covered, which losses and expenses may be reimbursed, and whether exclusions, endorsements, or coverage limits apply. If your existing policy doesn’t adequately address your current risks, you might want to modify it or add coverage.

Mitigation Efforts

Business interruption policies generally require policyholders to mitigate losses. This means you must take reasonable steps to resume operations, continue serving customers, or otherwise reduce your losses after a covered event. It’s important to document the costs and results of your mitigation efforts.

However, mitigation strategies that compromise long-term operations typically aren’t required. For example, a restaurant that was disrupted by a covered event wouldn’t be required to lay off its general manager or head chef to save on salary and benefits during the period of restoration. These individuals are key people who’d probably be difficult to replace when the business resumed normal operations.

Insurers generally evaluate mitigation costs against the loss avoided. For example, spending $15,000 on temporary equipment may be reasonable if it prevents you from losing $100,000 in gross profits.

Financial Calculations

Businesses that suffer covered losses often hire an outside business valuation specialist for guidance during the claims process. In fact, some policies even cover the cost of using an outside professional to help estimate damages.

Valuation professionals can help policyholders:

• Estimate the period of restoration
• Apply the policy’s definition of “lost business income” to the business’ accounting records
• Forecast lost business income based on historical results and industry or market trends
• Differentiate continuing vs. noncontinuing expenses
• Analyze saved expenses, delayed revenue, and post-loss revenue trends
• Evaluate the viability of various mitigation strategies
• Assemble and review documentation to support a claim, such as financial statements, tax returns, receipts, utility bills, and vendor information

 
Outside guidance is particularly helpful if the insured has already submitted a claim and is experiencing delays or disputes with the insurance provider. 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.

Getting Back To Business

Filing a business interruption claim adds stress when you can least afford it. Our business valuation advisors can help manage the financial details so you can dedicate more time to resuming normal business operations. If disaster strikes, contact us for assistance analyzing lost income and continuing expenses, preparing supporting documentation, and responding to insurer questions.