Look at the news and you will see that there is no shortage of threats to your business from both natural disasters – including fires, hurricanes, and others – and man-made ones, such as cyber-threats. These events can halt operations, disrupt revenue streams, and threaten the very survival of your business.
For this reason, Business Interruption (BI) insurance is a crucial component of risk management strategies. BI insurance covers the loss of income and the extra expenses borne by a business after a loss event. If one of these losses impacts your business, a forensic accountant can determine the extent of your loss to support your insurance claim, allowing you to focus on the critical work of getting your business back up and running.
Understanding Business Interruption Claims
A Business Interruption claim is made to an insurance company to cover losses incurred when a business is forced to halt or reduce operations due to a covered event. Unlike property insurance, which covers physical damage, BI insurance compensates for lost income and additional expenses incurred during the period of interruption.
BI claims generally consist of several components, each requiring documentation and analysis that are different than a company’s usual accounting procedures. BI categories and their method of calculation will vary based on the insurance policy, but typically fall into the following categories:
- Loss of Income: This covers the net income lost during the interruption period. It often requires the preparation of a financial model that compares the company’s expected performance, absent the loss event, to its actual, impaired performance.
- Continuing Expenses: Certain expenses, such as rent, utilities, and salaries, continue even when business operations are halted and are covered in the claim.
- Extra Expenses: These are additional costs incurred to minimize the business interruption, such as renting temporary premises or equipment. This category can also cover costs related to making the claim, such as engaging a forensic accountant to assist with the claim.
- Extended Period of Indemnity: Some policies offer coverage beyond the immediate period of interruption, allowing for a recovery period after the business resumes operations.
Covered Events and Policy Reviews
BI policies typically cover the same loss events as physical loss policies, including fires, theft, and vandalism, but are a separate coverage category. In addition, insurance policies often require add-on coverage elections for losses that result from widespread natural disasters such as acts of war/terrorism, earthquakes, and floods. New evolving risks relating to cyberattacks and ransomware also generally require separate policies or specific policy elections in order to be covered.
Policy limitations for deductibles, monetary limits for loss events, periods of indemnity, and specific exclusions are important components of a policy’s coverage, and they should be carefully considered.
Insurance coverage and policies should not be treated as static. They must evolve in response to changes in your business’s operations and risk environment. Regular reviews among a company’s management, insurance brokers, and advisors can help identify gaps in coverage and ensure that the policy terms align with the current risks faced by your business. This proactive approach can prevent unwelcome surprises when a loss event occurs.
The Role of Forensic Accountants in BI Claims
Navigating a BI claim can be overwhelming, particularly when a business is already grappling with the operational challenges posed by the underlying event. Forensic accountants bring clarity and precision to the process, allowing business owners to focus on recovery while we handle the financial intricacies of the claim. Our expertise in financial analysis, documentation, and the claim process is invaluable in ensuring that claims are accurately quantified and substantiated.
Here’s how we can assist clients:
- Documenting Claims: Insurers require comprehensive documentation, generally beyond a company’s usual bookkeeping practices, to support BI claims. Forensic accountants assist in gathering and organizing necessary data, such as financial records, projections, sales reports, and expense records, along with critical non-financial data to support such amounts’ inclusion in a claim.
- Quantifying Losses: Calculating the loss involves comparing the actual financial performance during the interruption with the expected performance had the event not occurred, as well as analyzing and differentiating between direct property losses, normal continued expenses, extra expenses, and costs incurred to mitigate losses. Forensic accountants provide this key expertise.
- Consulting with Business Owners and the Insurer: Decisions you make following a loss event can have significant impacts on the extent and duration of losses. Forensic accountants can help you analyze potential courses of action to understand how they will impact your business’s recovery and ensure the mitigation of losses. In addition, forensic accountants often work closely with insurance companies, acting as a bridge between your company and the insurer’s claim adjuster to assist in resolving your claim quickly and fully.
Plan Now and Be Prepared
Business Interruption insurance coverage is vital to protecting your company from disasters. If you haven’t recently reviewed your insurance coverage and evaluated it with respect to your business’s evolving needs and risk environment, make a plan to do so and to periodically reevaluate them.
If you do suffer a loss, the proactive engagement of a forensic accountant early in the loss/claim process can prevent potential pitfalls and ensure your business successfully and timely receives the insurance claim payout it needs to recover.
Consult with your Kreischer Miller accountant today to review your business’s risks and coverages. Should tragedy strike, our forensic accountants are here to help you navigate a BI claim.