The COVID-19 pandemic is causing severe economic disruption throughout the United States and around the world. Declared states of emergency and stay-at-home orders have impacted almost every sector of the economy. As a result, many businesses are turning to their insurance policies for potential financial recovery.

Business interruption insurance provides an insured company with coverage for an unexpected interruption to its income stream due to a loss event. For the foreseeable future, insurance companies will be crushed by pandemic-related business interruption claims. History shows us that claims that are well-documented and have reasonable support will be processed expeditiously and result in higher settlement values. Below are five steps companies should take now to ensure their claim doesn’t get bogged downed in reviews, or worse, a dispute.

There is much controversy around whether such losses will be covered, with estimates of possible losses amounting to many billions of dollars and various state governments taking positions from a regulatory perspective.  Recognizing that coverage questions may be impacted on a state-wide basis, as well as by the specific policy terms, it is likely still worthwhile to consider and plan a course of action, and take the initial steps of considering a claim.

1.) Develop an Action Plan

Unless it is clear that a claim would not be feasible in any circumstances, to prepare a technically sound and well-supported business interruption claim, the insured should identify the team to manage the process from preparation to final resolution, including both internal and external resources, and to develop and execute an action plan.  The first question in the current circumstances is to get advice on coverage.

After that thorough review of the business’ insurance policies to determine coverage, notification requirements need to be addressed, and the team should plan to work with the broker and stay in regular contact with the insurance adjuster throughout the claim process.

If the claim is complex, as it almost certainly will be relative to COVID-19 related claims, insurance coverage counsel can help clarify potential coverage issues and positioning, and accountants experienced in business interruption claims can help simplify claim preparation (claim preparation fees are commonly covered by insurance).

2.) Measure the Business Income Loss

To maximize recovery, the business income loss calculation needs to be objective, supportable and technically sound. It’s important to remember that this measurement is not solely the revenue loss but the revenue loss less the expenses that would have been incurred to generate such revenue. Common areas of scrutiny and challenge include:

  • Correlation of the income loss to the loss event (did the event cause the loss being claimed?)
  • Ordinary course of business forecasts prepared before the loss event (how does the claimed lost income compare to pre-event results?)
  • Trending historical results and achievement of prior budgets (what is the history of being able to estimate results?)
  • Market, industry and economic conditions that may impact the company’s financial results (how does the claimed loss include the impact of external factors?)
  • Make-up sales and other potential offsets (what efforts have been made to reduce the lost income?)

The determination of the indemnity period is often challenged. The indemnity period is defined in the policy, but typically starts at the date the loss event occurred and ends on the date that the company resumes normal operations. Given that federal, state and local COVID-19 restrictions impacting all businesses are still in place, and there is no currently established timeframe for those restrictions to be lifted, an “end” date is not yet determinable. However, the company should begin assessing when normal operations might resume.

3.) Identify Extra Expenses

In addition to lost income, most policies cover expenses that are not normally incurred by the business but are attributable to the loss event. For instance, COVID-19 has forced businesses that are still operating to incur expenses related to the cleaning / disinfecting of work areas beyond what most companies typically perform. Extra expenses may also include costs incurred to mitigate covered losses. This will include expenses necessary to reduce the length of the loss period, continue operations during the loss period or rebuild inventory depleted during the loss period. Examples include freight costs to expedite goods from suppliers, the purchase of equipment to allow employees to work remotely, costs associated with shifting production to other locations, and employee overtime or temporary labor.

Extra expenses and expediting expenses should be recorded in specially designated accounts in the company’s general ledger. This will allow for more efficient tracking to ensure proper inclusion in a claim.

4.) Develop and Execute a Loss Mitigation Plan

Evidence of the insured’s efforts to mitigate costs will be a significant focus of the adjuster. Mitigation efforts could include operating from different or temporary locations and identifying other sources of supplies or customers. After a loss is known, the company should develop a comprehensive mitigation strategy that includes an assessment of possible recovery scenarios— worst, base and best cases — to resume normal operations.

A mitigation plan should include a cash flow projection that will not only provide the company with needed insight into a recovery plan, but can also be used to support a request for partial advance payments from the insurance company (assuming the insurer has rejected all COVID-19 related claims). Further, the need to incur extra expenses can be projected and pre-approval for these expenses can be sought from the insurance company.

5.) Collect and Maintain Supporting Documentation

One of the most critical factors in successfully settling a business interruption claim is the ability to document and support each claim element. Documentation and information that properly and effectively supports a business interruption claim will make it more difficult for an adjuster to deny elements of a claim. Use any downtime or COVID-19-related lull in business to assemble these documents in advance to help expedite your claim:

  • Two years of historical financial statements/budgets/projections
  • Current budgets/business plans, projections of business operations and income covering the interruption period
  • General ledgers, financial statements, customer sales registers
  • Invoices supporting extra and expediting expenses
  • Logs and other evidence of the company’s indemnity period and its efforts to resume business operations

Business interruption insurance intends to put the insured back into the same financial position it would have been but for the loss event. Make a plan, get outside help as needed, and stay in close contact with your insurance adjuster to prepare a claim that is well-documented, technically sound and supported with objective evidence in order to maximize business recovery in a timely manner.

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About the Authors

Michael Yachnik

Michael Yachnik

Michael Yachnik, a Senior Adviser with StoneTurn, brings more than 25 years of experience in assisting clients and counsel with forensic accounting, compliance, risk management and business litigation support projects, […]

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