Business interruption, like all insurance coverage, is something we hope we will never need. Unfortunately, many organizations do not understand their coverage until the day comes that they do need it. Following is a primer on business interruption insurance coverage and claim documentation requirements. This information is general in nature, and you should consult with your professional advisors regarding your specific policy and situation.
In general, business interruption coverage is triggered by a covered property loss at your place of business that inhibits your ability to conduct business. Natural disasters such as hurricanes and tornadoes may be the cause, as well as fires and other events. Your policy may also include endorsements for lost income even if you do not have property damage if your business is closed by government order (commonly referred to as civil authority) or if customers cannot reach your place of business due to a natural disaster (ingress and egress). Careful review of your policy is necessary to understand if you have coverage for civil authority or ingress/egress issues including any limitations to coverage.
Generally, business interruption coverage replaces lost income and pays you for continuing expenses. Continuing expenses are generally fixed expenses such as rent and overhead that continue after the triggering event. You may have an additional endorsement providing coverage to cover payroll during the interruption period (the indemnity period) so that you do not lose your workforce while your business is closed. You may also have coverage for "extra expenses" incurred to mitigate your loss such as renting temporary space. Finally, your policy may include coverage to offset the cost of hiring accountants and other advisors to assist you in documenting your claim.
Key questions we ask clients are:
- Do you understand your coverage and limitations?
- If you have a major property damage claim, are you prepared to evaluate and quantify any related business interruption claims?
- How does preparation of an insurance claim (property and business interruption) fit into your overall disaster recovery plan?
- Would you have the resources to work on a claim while trying to restore your business?
Ideally, you should have a contingency plan in place to identify, collect, and retain adequate records to prepare an accurate and complete quantification of losses and submission of your claims. By identifying key documents, data, and other information needed for the future, organizations can develop an efficient process for capturing this information on a contemporaneous basis rather than months after the event when the records may no longer exist, and memories have faded.
We recommend establishing a system, either within your existing accounting system or offline, to track relevant costs. Key correspondence, contracts, and other documents should be identified, collected, and retained. Considering that most of the correspondence will likely be through telephone, video conference, and other means of electronic communication, taking and retaining notes and meeting minutes is very important. Maintaining a timeline of significant events is also a leading practice.
To help you get started, our business interruption and commercial damages professionals have prepared the following checklist of key documents, data, and information you may consider as a starting point in developing your contingency plan.
Accounting and Financial Records
- General ledger/trial balances
- Internal financial reports
- Annual financial statements
- Inventory ledgers
- Payroll records
- Production reports, budgets, forecasts and/or projections
- Income, payroll, property and sales tax returns
- List of canceled orders, contracts, and other lost business opportunities
- Applicable correspondence, contracts, and other supporting information for lost business
- Schedule of extra expenses related to the interruption or mitigation of losses
- Documentation of fixed expenses incurred, including any records supporting payments
- Records associated with disposal of spoiled inventory
- Details regarding extra or unusual health care costs incurred
- Records of debt and interest incurred because of lower profitability
- Timeline of significant events, including government-mandated shutdowns, supply chain disruptions and critical discussions with stakeholders
- Insurance policies, including any correspondence with, and notifications given to, insurers
- Relevant government programs, including any applications and supporting information
- Personnel calendars/time records during the interruption period
- Local, state, and federal orders and guidelines
- A listing of steps the organization has taken to mitigate losses, including supporting information
How DHG Can Help
The preceding guidance is general in nature and not intended to provide specific advice related to your unique circumstances. Instead, please contact the author or your DHG engagement partner if you have any questions regarding the unique details of your insurance coverage, contingency plan or business interruption claim.