How to Contend with Just What Might Become the Most Contentious Part of the Claim and Obtain the Rightful Amount to Cover the Loss of Income
By Donald J. Dragony, CPA, CFF, MBA
Senior Vice President, Chief Financial Officer
& Director of Forensic Accounting
Alex N. Sill Company
Damage done to business property often results in more than just an insurance claim to repair or replace a building and/or its equipment. A serious event often causes a disruption of business operations resulting in an additional claim for a business loss of income. The latter is more commonly known as a “Business Interruption” claim.
It is essential to the survival of most businesses that a Business Interruption (BI) claim be handled professionally and thoroughly for the survival of that business. It is one thing to be reimbursed by your insurance company for the cost to repair or replace your building and business personal property, but if a business has greatly reduced income or none at all for any extended period, the business will struggle to survive. (Just ask a businessman how long could you survive with no sales?) Yet, BI claims are among the most difficult and contentious of all insurance settlements for many reasons. This following outlines some of the most contentious areas where the assistance of an experienced and professional public adjuster is necessary for claim success in the BI arena.
Insurance companies and their representatives can and often:
- Interpret data much differently than the policy holder and their advocates;
- Employ dramatically different assumptions in beginning their loss calculations;
- Frequently disagree with submitted loss of Income claims due to differences related to scope of damage or necessary repair time;
- Strap the business owner and its managers with the extra-ordinary responsibility of preparing copiously detailed documentation;
- Continually question every line item and enact delaying tactics before routinely denying first, second and additional rounds of re-calculations and eventual submissions; and
- More, more, more.
The litany of problems that arise when trying to reach a settlement with an insurance company is the key reason businesses turn to public insurance claim adjusters with decades of successful experiences obtaining what was due per the terms of the policy – companies like the Alex N. Sill Company.
Understanding the Process
The process of calculating a BI loss typically begins with analyzing pre- and post-loss profit and loss financial statements. The time interval is usually measured on a month to month basis, except for the month that the event occurred and the month the “Period of Restoration” (POR) ends. The POR is the time-frame allowed to measure time element losses, such as BI losses. The period begins on the date the loss occurs and ends the earlier of the date the physical damage is repaired and restored to pre-loss condition or the date it could have been restored using due diligence and dispatch. (Remember that phrase — it can come back to haunt you when calculating a BI loss.) Factually, claims are often calculated based on the actual length of time it takes to restore the business personal property and any Extended Period of Indemnity (EPI), if the policy provides for this additional time frame coverage.
Insurance companies often find fault with the submitted loss of income claim requests based on differences related to scope of damage or necessary repair time. Tactically, insurance carriers:
- Often minimize, or even disregard entirely, the adjustment time, which should be added when determining the POR;
- Frequently disagree with the insured’s assumed or actual pace of reconstruction and argue the repairs should have been completed sooner; and
- Often calculate repair time that is much shorter than the actual repair time and limit indemnity to this shorter time period.
- *Often attempt to disregard or disallow any delay in commencing reconstruction while the claim negotiation continues (for the reason that an insured usually prefers to know what the total settlement will be before commencing reconstruction, while the carrier desires that the insured begin construction even while the claim negotiation is going on)
Given all of the above areas of potential contention, the final determination of the Period of Restoration often becomes a negotiation between the carrier and insured. It is essential that an insured either understand a particular carrier’s view/past position on the elements that make up a POR or employ a professional advisor with skill and experience in negotiating this element on his behalf.
Sales Projection Computations
Sales projections are a major assumption/component of a business interruption computation and thus receive considerable scrutiny during the adjustment process which potentially evolve into sources of contention by an insurance company.
The computations customarily include three years of pre-loss monthly sales to establish a trend and determine if seasonality is a factor. Any shorter period, say two years, would be a comparison and not a trend. Trends are better indicators than comparisons when projecting the future. Longer time periods tend to uncover factors outside of the sales variations themselves. For example, the economy’s impact on the business, inflation, new competition or other geographical changes in the surrounding area.
For these reasons, a 36-month look back at the period leading up to the loss is often acceptable to formulate a sales projection. In growing markets, the insurance companies may want to only consider the most recent pre-loss year. This is unfair during an improving economy environment. Similarly, downturn trends should be acknowledged in a claim. However, any projected additional downturn can be a calculation of year over year percentages or various months carved out of the entire data set.
Saved Expenses Calculations (Non-continuing Expenses)
Saved expenses, which include the cost of not selling a product, including material, labor and overhead, are considered a reduction from lost sales. Additional savings also may be found in operating expenses, both variable and semi-fixed. Together, the total of these savings are properly deducted from lost sales since these costs were not incurred.
Differences of opinions arise, however, when different base periods are used to formulate projected expenses. The result after subtracting actual expenses is a variance in saved expenses based on different projections. In some instances, claims may try to be resolved before the POR ends. Representing yet another area of differences in the claim adjustment process, the anticipated continuing expenses need to be estimated for the balance of the POR.
Extra Expense vs. Property Replacement
Many insurance policies provide for Extra Expense Coverage. Some coverages state the Extra Expense must reduce the loss that otherwise would have been paid. This involves another theoretical calculation as to what the insurable losses would have been had the insured not incurred the extra expenses. The theory states the insurer will pay for an extra expense amount (say .50 per widget additional cost to produce), provided the business interruption loss for not producing at all, is greater than the .50 extra expense. Nevertheless, there are apt to be differences in the insurance company’s opinion versus the policyholder’s calculations.
Even if an insurance policy provides for “pure” extra expense coverage, meaning the expense does not have to reduce the loss, there are difficulties in categorizing many expenses. If an insured buys a new type of machine to expedite the production process after a fire, the insurer may classify this equipment as replacement of property damage, when in fact, the insured may never have purchased this equipment at all, had the loss not occurred. Differences often arise in these categories.
Lost Sales On New Equipment or Business
Sometimes a loss occurs to a new piece of equipment recently bought or constructed to increase sales or create sales in a new niche business. Under these circumstances, there is no history to rely on to measure lost business. Current contracts and cancellations add support to lost sales, but rarely measure the full extent of missed business.
Insurance companies sometimes stand hard on these claims suggesting there is no “actual loss sustained” as there were no previous sales. This is not an acceptable estoppel. It is incumbent upon the insured to demonstrate evidence that sales would have occurred. This can be done with customer correspondence, purchase orders and other written acknowledgements. Losses should not be limited to actual lost orders, although that is sometimes the insurance position.
Depreciation is one of the most frequently encountered disagreements with insurance companies. Carriers argue destroyed assets cannot be depreciated, hence, the depreciation becomes a saved expense. This exercise reduces the business interruption payment that would be made if depreciation is ignored.
It is reasonable to ignore depreciation because it is a non-cash entry captured on the financial statement. It is the write off of a sunk cost, a cost incurred prior to the insured peril.
Sometimes the insurance company indicates they are reimbursing for the destroyed assets and therefore, they are not going to pay for depreciation on those same assets. Treating the depreciation as “saved” does not meet the justice test, as it ultimately ends up reducing the reimbursable dollars associated with lost margins on lost sales and also reduces the continuing post loss continuing expenses which are fully insurable.
It is interesting that there are currently a few insurance companies that have agreed to disregard depreciation as a saved expense.
The Sill Advantage
Business Interruption loss adjustments are extremely complicated calculations made up of several over-lapping assumptions and/or conclusions and/or philosophies which make it very difficult to reach an equitable resolution with the insurance companies. The issues illustrated above are only a few examples of areas where disagreements frequently occur. It is important to remember when commencing discussions concerning BI losses that insurance policies are unilateral contracts of adhesion that are written by insurance companies and list more exclusions and exceptions than broadened coverage. As a result, reasonable, supportable different interpretations and positions should be resolved and settled in favor of the insured.
Ultimately, resolution of a business interruption matter requires a reasonable approach to preparing a claim. This is where the expertise of the Alex N. Sill Company begins. Sill’s experience and thousands of monumental successes are evidence of the ability to not just prepare the claim, but to also effectively counter the insurer’s rebuttals and get past the excessive decreases they propose.
Alex N. Sill Company has successfully handled thousands of such assignments during our nearly 90 years of serving as a public insurance claims adjuster. We are expert at avoiding the shell game and finding the optimal solutions to maximizing the actual amounts recovered for the policy owner.
Contact a Sill public adjuster near you for assistance in such matters.