Business Interruption Losses — More than Just Math
Preparing Your Company for Unexpected Halts
The primary purpose of business interruption insurance is to protect an insured entity’s profits resulting from an insured event. To recover those lost profits, most claims utilize a damage model that documents the loss by first determining lost revenue, and then offsetting that amount with the associated save expenses or avoided cost. Although mathematically the model might appear straightforward and uncomplicated, in practice it requires more than crunching numbers.

Businesses are becoming more complex, and that makes the need for effective handling of insurable losses greater. Operations managers are tasked each day with optimizing manufacturing processes, while purchasing managers are tasked with minimizing costs. Business interrelationships become more complicated altogether as companies apply strategies to improve profits and compete effectively in the market. When an unplanned event such as a fire, explosion or hurricane suspends operations and causes a loss of income, the insured entity turns to their insurance policies to seek maximum recovery and protect that delicate bottom line.

The first step is determining who will carry out the analysis.
Rather than task employees with needed documentation and calculations regarding the business interruption loss, an entity may engage outside expertise to assist with the claim process. This practice is usually debated by management, as questions arise regarding whether the added fees outweigh the benefits. Although the entity would prefer the cost be less than the loss amount net of any deductible, management will not have a definite answer until the business interruption is analyzed.

Management may also turn to employees to carry out the analysis, although that decision can lead to its own issues. Staff members’ training and experience levels may affect their ability to accurately calculate the loss, for instance. Typical concerns include worries the staff might not identify all damage amounts within the business interruption damage model, and potential delays in both settlement and recovery.

Workflow interference is another concern. If the entity and its operating facility are only partially damaged, utilizing internal staff to investigate, analyze and coordinate a business interruption loss claim may interfere with the profitability of other operations or product lines. Nevertheless, management must dedicate some time to an initial estimate of potential business interruption loss, and time to pursue and manage a claim if so decided.

Avoid allowing emotions to affect the process.
Management should not dismiss a potential recovery for a loss of income claim because of perceived issues with the insurance company, its adjusters or experts hired on its behalf. This uneasiness, projected hostility or agitation — whether true or misplaced — is often deliberated extensively by management.

Fortunately, one of the advantages of engaging outside expertise is, the outside entity can lessen management’s burden by sharing duties and advising throughout the claim process. It can also present and document the business interruption claim of loss. In addition, policies frequently include the cost for claim assistance. Management must review the entity’s insurance policy to verify coverage, and to identify any limits on the reimbursable amount. If management is leaning toward making a “business decision” such as keeping the claim process internal regardless of cost, or bypassing on a legitimate claim due to perceived issues, the entity may want to engage outside expertise if only for preliminary analysis.

Assembling the right team is critical.
This is especially true, the more complicated the manufacturing process, or the more unique the industry and its markets. Engaging a technical team familiar with the nuances that exist in both the development of the business interruption damage model, and familiar with the claims process, may be the difference between a relatively short claim and recovery process and a lengthy, challenging process — with or without the anticipated recovery in satisfactory terms.

Inexperience with business interruption claim processes and damage modeling can delay recovery or reduce — if not negate — a legitimate loss. It is important to prove the event was the proximate cause of a loss in net income. Other industry, market and internal business factors may also contribute to a revenue reduction, such as the loss of a major customer, changes in demand, or changes to maintenance and turnaround schedules.

Understanding the entity’s cost structure is essential.
Settlements regarding legitimate business interruption claims are often drawn out unnecessarily, due to a lack of understanding regarding how the loss of a product line and its related cost affect net income. Both the entity — who should know — and insurance representatives may be guilty of underestimating or overestimating a loss related to this portion of the business interruption damage model.

Having been engaged on multiple sides of business interruption claims – on behalf of insureds, insurance companies and potential liable third parties – it is without question that a well-documented and supported damage model accelerates the settlement period and resolution of the claim. The sooner a claim for business interruption loss can move from verification of procedures and factors considered in the damage model to a discussion of mathematics, the sooner the claim will be settled. Unfortunately, procedures are frequently skipped, and an entity with valid business interruption losses may face delays until it learns all that goes into the process — and that business interruption claims are more than just math.