Regardless the size of an organization, a local enterprise or a multifaceted global corporation, Business Interruption (BI) insurance and claims adjustment, are considered as challenges of high complexity by risk managers and underwriters alike. BI losses can involve numerous complex issues requiring interpretation and analysis, many of which can have a major impact on recovery.
BI insurance is a specialty insurance product designed to provide protection for the earnings of a business in the event of a loss. However, time and again companies find themselves struggling with financial problems after a disaster, with policies that fail to address the plethora of issues arising out of large scale loss, leaving too much room for (mis)interpretation at will. In addition, there are many polices not thoughtful enough to provide accepted ways and methods for business interruption loss to be objectively defined.
Proactivity Pays Off
Being proactive is a must-have trait in the risk management business, yet most of the time the BI policy is put aside, until disaster strikes. The purpose for business interruption coverage is to ensure that company earnings should be rolled back to a state of the same results that would have been reported had no loss occurred.
A review of your BI policy by a qualified third party, an experienced risk management consultant – BI specialist, will help you assess where you stand with your policy, so that you know what is and what isn’t covered, and how you will be able to fill potential gaps. Key points to take into serious consideration can be: a) the right type of cover for your scope and line of business, b) adequate limits for your particular exposure, c) special endorsements regarding the period of interruption coverage, contingent business interruption, utility service interruption, and claim preparation expenses, among others, d) deductibles how they work, if in-line with your company needs, e) exclusions and how they affect your business.
It may sound simple and easy; someone goes over the policy terms and perhaps makes a quick shopping list to discuss with their ‘insurance person’. Unfortunately it doesn’t work that way, although this is more often than not the ‘normal’ way(and then, disaster strikes and lessons are learned).
Assessing the amount of value at risk is fundamental, as it is how appropriately to report it to the underwriters. Usually business interruption values are submitted on a brief questionnaire supplied by the underwriters, under the responsibility of the accounting department, only to be discovered later at claim time, that those values reported had been “misunderstood and misinterpreted”.
“Business interruption values” is a generic term ranging in meaning from annual business income to maximum foreseeable loss. One thing is certain; understanding Business Interruption Values can be critical to your company. Still, understanding the values at risk and overall loss of income exposures that can be critical to an organization’s finances, operations, and overall success, is up to the accounting consultant to clarify and put forward.
A Business Continuity Plan (BCP) is essential to be in place in order the organization to continue functioning even at limited capacity, in the event of a major loss. As companies are becoming more global, they reduce inventories, and rely more on sophisticated supply chains. It is imperative that a well thought through plan be available should one link in the chain fail. Companies that have a BCP in place, experience, a faster recovery from the loss event, the least possible operational impact, and smaller business interruption claims. Standard BI policies require the policyholder to make every effort to mitigate their loss, therefore the availability of a BCP will be to your advantage both when marketing your BI insurance program as well as at BI claim time.
BI claims put a heavy burden on top management, at the same time when, those high level executives struggle to stay focused on the business turnaround process. It is good practice to bring on board a risk consultant specializing in claims preparation who in case of a disruptive event will be available to address the needs of all parties involved in the documentation of the loss in order to ensure the best possible results for your business.
The Adjustment Process
Often times, even risk managers not directly acquainted with BI are surprised at the level of activity, personnel and documentation required to process a business interruption claim. Virtually every BI claim will involve the claims preparation specialist engaging a host of experts, among them an accounting consultant representing the insurer to audit the claim. This process will include the need to provide a well designed claim package along with supporting documentation. The adjuster typically relies on the opinion of the accounting consultant as a basis for adjusting the BI claim. Therefore, the risk consultant should make sure the interests of the policyholder are being addressed, and expectations properly aligned. A proactive claim compilation will aid in this effort.
One of the most common areas of dispute in business interruption claims is projecting the profitability a business would have had ‘but for’ a loss occurring. There are several ways one could select to project a business’ profitability (in terms of revenues and expenses). In addition, there are several internal factors as well as external factors to consider when projecting profitability. Internal considerations include capacity, labor force availability, maximum production volumes, labor cost, material cost, sales force and working capital. External considerations include the industry, competition and the economy, among others.
Given the numerous variables involved in projecting profitability, differences of opinion on the method and/or amount being projected do occur, but generally with the appropriate data and proper analysis, these differences can be eliminated or at least narrowed greatly.
Consequently the calculation of business interruption losses are essentially rooted in the application of accounting concepts, analyses and insurance policy valuation clauses, which is not based on an exact science, but rather subjective opinions. Thus the need for the competent accounting consultant who will present a bullet-proof argumentation based on solid ground in terms of support evidence, structure, and logic.
By properly planning and executing a disaster recovery plan, being proactive in documenting losses as well as business decisions, submitting detailed claims in a timely matter, and including the adjuster in recovery decisions process, you – the insured, can avoid or reduce claim conflicts later. As a policyholder you can also benefit from engaging claims professionals who are experts in business interruption and who have backgrounds representing both insurers and policyholders in compiling properly formulated and documented claim measurements. This will minimize disagreements with the insurer and expedite the adjustment, settlement, and payment of your claim.