In business interruption claims, minutia could mean millions

A business interruption (BI) claim is likely to be triggered by either some form of property damage, a cyber event or a product recall/contamination issue. Policies often define business interruption or loss of business income using verbiage like ‘net profit plus continuing expenses’. The latter may include payroll for a determined period. This is known as the ‘bottom-up’ (BU) approach.

An easier method to follow, which ultimately should be reconciled to the BU approach is the ‘top-down’ (TD) method, which projects gross revenue, reduces it for any actual revenue earned during the indemnity period, and then further reduces it by what’s called a saved/discontinuing/non-continuing expense, usually expressed in percentages (e.g., cost of goods sold).

When dealing with certain industries, other records are also warranted (e.g., rent rolls and occupancy reports for condos & co-ops; widget production for manufacturing; visitor attendance reports and weather statistics for theme parks). That gets us to a business interruption value in a nutshell.

BI claim calculations are part science and part art. Most specialists servicing clients’ needs within this niche will have an affinity for and credentials in forensic accounting, which by definition encompasses financial knowledge and acumen and presentation suitable for court proceedings, meaning that another professional should easily understand and follow your analyses, calculations and conclusions.

Although we may give an opinion on a loss estimate, it should not be construed as an “opinion” provided by auditors on financial statements. We merely evaluate the evidence, project a loss of business income, including all pertinent considerations on both a macro and micro-economic basis, as well as utilizing typically two years of historical, detailed, monthly profit and loss (P and L) statements. Tax records are always assessed to verify the accuracy of the reported P and L data.

Five accountants will come up with five different but relatively similar determinations and calculations. It’s about the relevant range. The ‘but for’ thesis and underpinning, such as, “What would the insured have likely done revenue and expense wise but for the loss (had it not been for the fire, flood, hurricane, etc.).” In the U.S., even a claim of $100K is likely to have both an independent and public adjuster involved. The former being employed by and working in the interest of the insurance carrier, while the latter works on behalf of the insured.

Making the complex or complicated simple

Financial statements often include items like one-time charges in detail that need a thoughtful and trained mind.

Complexity is compounded nowadays with COVID-19 and the respective exclusions. Daily sales data will be the best determinant. If sister-stores exist, a correlative analysis may prove insightful; it depends on proximity to loss location — down the block or on the other coast are drastically different and ‘make-up’ would likely come into play if the sister store was down the block and was found to have done better after the loss location went down. A key question here is: Are they under the same policy?

Comparison data sets provide insights but be careful about applying too general of a trend. For instance, one of our clients is a specialty restaurant with limited competition in the immediate five-block perimeter, not to mention an area for outdoor dining. In our due diligence, we came across statewide-based statistics that stated restaurants, in general, have suffered a reduction in revenue by approximately 58%. However, that’s statewide, and although COVID-19 may have impacted the ‘but for’ argument, I cannot objectively say it would be correct to apply such a trend. My point is that it is likely to have some impact, but not 58%!

Here are some steps to follow when you have a business interruption claim:

  1. Get a team and know what’s covered.
    1. CFO/controller/board/risk manager;
    2. Broker and/or adjuster and/or coverage attorney;
    3. Property/cyber/product-recall-related recovery specialists:
      1. Physical remediation & repair;
      2. Forensic accountant to assist and support your internal resources and focus on the claim submission & related developments.
  2. Document everything (and be prepared to support exactly how each claimed dollar is a direct result of the loss event).
    1. Damage to hard assets, losses of inventory, canceled sales orders;
    2. Requests for rent abatements due to repairs or other loss of functionality; and
    3. All delays to reopening outside of your control.

COVID-19 is delaying repairs and related inspections, which will affect the period of indemnity. Insurance companies are paying in other ways beyond business interruption claims, which frequently have pandemic exclusions. Businesses may not get back to square one immediately. It will take time, and this is why extended period coverage may be appropriate. Risk managers should also consider looking for coverage under contingent business interruption policies.

For more information regarding business interruption claims or to request your free business insurance quote give Smith Brothers Insurance a call at 860-652-3235 or visit us online at



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