What is BI insurance? BI insurance replaces business income when a covered cause affects operations. BI policies are complex and when the worst happens, calculating the loss of business income can be challenging.

Business income is net income, i.e., net profit or loss (before income taxes) that would have been earned or incurred had the disruption not stopped operations, plus continuing operating expenses incurred during the period of restoration. BI insurance is designed only to restore the policyholder back to where it would have been financially, had business continued as normal. It does not make the policyholder financially better or worse, nor does it cover the cost of property loss or damage. Property such as buildings, inventory, and equipment that’s inside of buildings is intended to be covered separately, yet often on the same policy.

What, then, is a covered cause? Covered causes are defined in the policy; these generally include fire, hail, ice, lightning, vandalism, weight of snow, wind, explosions and falling objects. Causes generally excluded from coverage are bacteria, earth movement, flood, military action and war, mudslides, nuclear reaction or radiation, offsite power outage, or a virus, such as COVID-19.

TRIGGERING THE BUSINESS INTERRUPTION CLAIM

Three conditions – once met – may trigger a claim to recover income lost due to an interruption:

• A direct physical loss or damage at the described premises caused by or resulting from a covered cause.

• A necessary suspension of operations.

• An actual loss of business income resulting from one or both of the two referenced items.

If any one of these events does not happen, then it is unlikely that a carrier would pay a claim. However, we’re not here to make that call. When in doubt, let your independent insurance broker work with your carrier to assist with filing a claim.

BUSINESS INTERRUPTION CLAIMS AND MISCALCULATIONS: WHAT TO WATCH FOR

Calculating lost revenue rather than lost net income overstates the loss

• Not applying the deductible/waiting period

• Finally, policyholders do not always apply the indemnification period

• Business interruption claims, while often genuine, are also a significant source of insurance fraud. The FBI estimates that non-medical insurance fraud costs $40 billion annually. This staggering number helps explain why insurance carriers have become stricter in their evaluation of even the most obviously legitimate claims.

The following is a list of red flags that carriers tend to look for when evaluating a BI claim:

• The policyholder insists on settling the claim quickly.

• The policyholder’s financial records show the operation had been generating losses or minimal revenue, yet the claim reports a considerable loss.

• The policyholder cannot produce invoices or receipts for extra expenses, those produced have missing information.

• The claim was made shortly after the policy started, after the coverage amount was increased or right before the policy ended.

• The policyholder previously asked hypothetical questions about losses like the one being made.

• The policyholder’s financial records contain abnormal or uncertain information.

• The policyholder refuses to provide applicable documentation to support the claim.

If any of these red flags are present, as the policyholder you will want to preempt the carrier’s investigation by providing clear reasoning for the claim adjuster to consider. Even then, it may be necessary to engage a forensic accountant to assist in the evaluation of the claim. Fortunately, many of today’s policies provide a sub-limit to fund these costs of loss adjustment expenses.

WHAT TO EXPECT WHEN WORKING WITH A FORENSIC ACCOUNTANT ON BI CLAIMS

When you or the insurance carrier engages a forensic accountant, their primary responsibility is to review and evaluate the policyholder’s loss calculation. The forensic accountant is not expected to independently calculate the amount of the loss, nor are they responsible for determining if the claim meets the standard required.

First, the forensic accountant will want a copy of the business interruption policy in order to understand what its terms are. These policies specify the period of restoration, including the deductible/waiting period and the maximum period of coverage, or period of indemnification. There may be specifications in the policy regarding maximum indemnification per month. Finally, the BI section of the property policy will indicate whether extra expense is covered, and if so, what costs are included.

Next, the forensic accountant will request a wide variety of documents from the policyholder – financial and other – to develop a baseline for how the business was performing before the covered loss. Typical documents could include:

• Audited financial statements

• Current year unaudited profit and loss statement and balance sheet by month

• Budget or forecasted financial statements for the year of loss

• General ledgers and bank statements

• Invoices and employee timesheets in cases where the extra expense of payroll is included in the claim

• Sales, inventory, and payroll records

• Other, non-financial, supporting documentation such as an overview of the business operations, a summary of the loss event, and a summary of the repair/remediation process

• Documentation that verifies the period of restoration

In order to prove the start and end of an interruption, the following may also be requested:

Notification to the insurer of suspension (for example, letters or emails)

Invoices or billings from parties engaged to remediate or repair, and other claim reports

The forensic accountant may also request industry reports to compare the performance of the policyholder’s operations to similar operations in the industry and to determine seasonality trends if necessary.

NEXT STEPS: CONFIRMING THE CALCULATION OF LOSS OF BUSINESS INCOME

With this groundwork in place, the forensic accountant will request a copy of the policyholder’s calculation of loss of business income. Sometimes work papers and schedules prepared by the policyholder can be required. At this point, the policyholder would also be expected to stipulate any assumptions or methodologies they used in the calculation.

The first step in calculating loss of business income is to determine the period of restoration. Once the period has been established, a base period of similar length from historical financial results should be used. For example, if the period of restoration is three months, then the base period used should be three months. Revenue regularity can affect the base period though. If revenue has seasonality, then the time frame of the base period may need to be adjusted. In addition, there may be other factors affecting revenue to consider, such as

• A new operation for which historical financial records do not exist

• Competitors entering or leaving the market which can affect future earnings

• A recession or pandemic that may positively or negatively affect an insured’s business.

With the period of restoration established, there are two methods for calculating lost net business income:

Method #1 adds net income that would have been earned or incurred and continuing expenses, and then subtracts the deductible to arrive at lost net business income.

Method #2 starts with expected revenue, subtracts actual revenue (in cases where operations are not completely shut down) and subtracts offset revenue to calculate total revenue. Next, non-continuing expenses, which can be calculated as a proportion/percentage of revenue, are subtracted and finally the deductible is subtracted to arrive at lost net business income.

CLAIM EVALUATIONS WITH UWIB Risk & Insurance Solutions

At UWIB Risk, we have a rigorous methodology for the claim evaluation process. It starts with understanding our client, their operations and the circumstances and potential timeline around the loss event. Next, we send a preliminary request for information to the client and use that information to evaluate and analyze the initial claim. Once we have completed this initial analysis, we work with our client to agree upon the recommended amount of the claim. Then we carefully and objectively assess the claim, including any assumptions made by the client so we can analyze the policyholder’s calculations. We attempt to identify additional questions regarding the injured party’s methodologies. Finally, we create independent work papers that identify and quantify discrepancies, if any, with the claim amount.

UWIB experts have the experience and education to work through any issues that might arise during a business interruption claim. We have worked with many clients, of many types to resolve issues and bring about a successful conclusion.

To learn more about business interruption claims, the role of forensic accountants and how UWIB Risk & Insurance Solutions can help, please contact Josh Acosta, Co-Founder, (800)378-5554 or by email at [email protected]