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"'Golden Rules' of Preparing a Business Interruption Claim"
January 1, 2006
Cove Geary

Commercial enterprises doing business in Louisiana are still recovering in the wake of Hurricanes Katrina and Rita.  Many face catastrophic property losses, often accompanied by business income losses due to a complete cessation of business activities following the storms.  Fortunately, many business owners had the foresight to contract for business interruption insurance (also called “business income” insurance or time-element coverage).  While the existence of insurance offers some relief to affected businesses, the complexity of a business interruption claim coupled with a pressing need for operating capital creates a difficult scenario for business owners.  The following “golden rules” are offered to provide some guidance in the preparation of business interruption insurance claims.

  • Thoroughly examine and document all physical damage.  Except for coverage under civil authority clauses that is limited to a short time period, physical damage to covered property is the triggering event for attachment of business interruption coverage.  The physical damage must be substantial enough to cause the interruption.  Thus, it is imperative to conduct a thorough examination, and to photograph and document damage in detail before any remedial work is performed.  A construction expert or other expert can be helpful in some cases.  The damage may be greater than the untrained eye can detect.  If the insurer believes a part of the losses were caused by a non-covered risk such as flood, and if you disagree, then the need for a skilled independent expert becomes greater.
  • Assemble a team.  A business interruption claim is often more complex, and calls for  more forensic work, than the proof of property damages.   It is a project best tackled by a team of persons with different skill sets – including accounting, legal, insurance, and possibly construction.  A single highly-regarded manager should be selected to lead the team.  He should direct, communicate, and coordinate.  An accountant who truly understands your business is a critical component of the team.   Your insurance broker is also a critical team member.  He or she has an existing relationship with the insurer, and can be the best conduit of information during the handling of the claim.  An adjuster or contractor experienced in loss assessment, who speaks the language of insurers, can help convince the insurer’s adjuster of the extent of the damage.  Depending on the claim, other experts may be warranted, such as an insurance consultant or architect. 
  • Know your policy.  An insured will maximize recovery only by tailoring the claim to the insurance policy.  Attention must be given to the forms of coverage provided, covered locations, covered causes of loss, exclusions, and the loss calculation methodology.  Identify your “business operations,” potential coverage problems, and the strongest arguments for recovery.  A thorough preliminary analysis should be conducted prior to any communications with the insurer.  An inconsistent stance on coverage will damage not only an insured’s credibility, but the critical relationship between the insured and the insurer.
  • Act as though you have no coverage.  Make decisions about repair, restoration, and restarting the business as though you have no insurance coverage at all.  You have a duty to mitigate losses, and this is best satisfied by acting as though the coverage does not exist.  Besides, this is your business, and until the insurer commits to covering the loss, you truly do not know what you will recover, and prudent management calls for making decisions independent of the coverage.   This is particularly important in the period soon after the loss.  At some point, as the insurer investigates the claim and gives an early indication of the coverage, you can partner with the insurer in committing to expensive repairs, such as whether to replace a damaged roof, or whether to tear down and rebuild.
  • Teach the insurer about your business.  You know your business best, and can help maximize your recovery by teaching the insurer about your operations and putting the losses into the proper perspective.  An examination by someone who does not understand your business is more likely to be superficial, and may result in a lower reimbursement.
  • Present your case to the insurer.  Do not rely on the insurer to tell you what your losses are, as it may not understand the business the way that you do.  Do not approach the damage claim by merely responding to the insurer’s questions and filling out the insurer’s forms.  Instead, present your losses as you or your accountant understand them.  Be prepared to fully document the losses, which requires a theoretical projection of the amount of business income lost.  Such a projection is not an easy assignment.  This will require a comparison with financial figures from prior years, as well as adjustments for seasonal differences, growth, pricing, and other trends.
  • Communicate frequently with the insurer.  Let the insurer or its adjuster know about the day-to-day demands the loss has caused—the need for cash for operations, the need to repair property or equipment, or other demands you face.   This helps on many fronts.   For example, it should help resolve doubts the insurer may have, and it may increase your chance of receiving a needed cash advance.  The insured and the insurer have a mutual goal – to expedite the property repairs and return the business to its full operations.  Business interruption coverage generally extends at least until the “period of restoration” concludes, which is typically when the underlying property has been repaired or replaced, or when that can be accomplished with reasonable diligence.  Some policies provide “extended business income” coverage, which provides additional coverage for a certain period of time while the business is recovering after the close of the “period of restoration.”  It is in the best interests of the insured and the insurer for the recovery to be as rapid as possible.  Assuming an adversarial stance from the outset will only serve to delay this process and provoke the insurer, who is additionally processing an unprecedented number of claims following the storms.  Work with the insurer, and let it know the “golden rules” you are applying to get your business up and running again.
  • Keep your eye on ancillary coverages.  Categorize and submit for reimbursement all covered expenses in addition to business interruption losses, including extra expense, expediting expense, debris removal, and other additional coverages, which vary from policy to policy.  
  • Do not rush the claim.  Business interruption claims take time, particularly for the accountants to document the loss.  Sometimes, such as when repairs take months or when the claim cannot be estimated with any certainty, many months must pass in order for the amount of the claim to be fully ascertained.   A business owner can deal with the need for cash by requesting cash advances along the way.  They benefit both parties, because they provide the insured with needed cash, and they help the insured mitigate its losses, thus reducing the amount of the claim at the end of the day.  But because it is often impossible to determine at the early stages how the claim will play out at the end, settling early can be to the insured's detriment. 
  • Be prepared to take a hard line when necessary.   If you disagree with the insurer’s handling of the claim, speak up.  Know the time lines required by law for action by the insurer, and the penalties that may apply for delays or unreasonable treatment by the insurer.  If the claim is being mishandled, speak up in terms that are civil but firm, and be prepared to take a more aggressive position if the insurer does not respond as you believe that it should.
  • Recognize that your goal is a comprehensive claim.  Your team’s ultimate output is a stand-alone document, referencing source materials and documentation.  The claim should be clearly comprehensible to a complete outsider, someone with no insight into insurance or the particular industry of the insured.  The claim document must be able to stand up in court should a dispute carry that far.

Preparation of a business interruption claim is a complex task that requires significant time and effort.  After Hurricanes Katrina and Rita, business owners in Louisiana have suffered a complete break with their former realities, with property damage claims and business losses that they never thought they would confront.  The need for operating cash during the reconstruction places additional pressures on an insured business.  Following these “golden rules” can help the owners of commercial enterprises to facilitate the preparation of their business interruption claims.