Frank Rudewicz & Barry Sussman | April 14, 2020
In the coming weeks and months, we expect to see a lot of discussion, and ultimately litigation, concerning the interpretation of insurance policy provisions and whether or not coronavirus-related claims will be covered under existing business interruption policy coverage.
Currently, several states—including Massachusetts, New York, New Jersey and Ohio—have pending legislative bills that, if passed, will require insurers to cover COVID-19 related losses and expenses under existing business interruption insurance policies. It is unknown, at this time, whether these bills will ultimately pass or whether other states will propose similar legislation.
Preparing Your Business Interruption Claim
Due to the ever changing landscape concerning this coverage, businesses with current business interruption policies should consider compiling information as preparation to file a claim. Timely filing may help accelerate any approved payments. Additionally, this information may be necessary across other platforms, including but not limited to, tax filing, valuation, loan applications, etc. Business interruption losses are among the most confusing types of claims in the insurance industry. As the economic impact of COVID-19 evolves, keeping a log of dates, costs and details of what happened will be an important part of quantifying a claim.
After a careful review of the policy to understand coverage, notice requirements and/or deadlines to preserve rights, a Loss Management team should be created that includes both internal and external expertise. Some common expertise:
- Your attorney
- An external forensic accountant to prepare the business interruption claim
- An internal finance contact to assist the forensic accountant in the collection of the financial information required to complete the claim
- An internal operations contact to estimate the effect of the event on the production
- The company’s insurance broker
Accounting for Business Interruption Loss
Depending on the policy wording, the lost profits may be based on lost production or lost sales. The following financial information, at a minimum, should be compiled to determine the lost profits:
- Actual results during the loss period
- Internal monthly management accounts
- Sales invoices / Production volumes
- Forecast results during the loss period
- Last sales forecast / production plan prepared prior to incident
- Outstanding orders at date of incident
- Financial statements completed immediately prior to incident
- Sales / Production during 12 months prior to incident
- Other costs that may need tracking in a separate general ledger account are:
- Additional purchases
- Additional professional fees incurred as a result of the event
- Other extra costs (e.g. freight)
Detailed Records to Keep for Business Interruption Valuation & Claims:
- The day you shut down, or reduced staffing
- Any inefficiencies in the operation when operating with a reduced staff
- Any employees who needed to be reassigned
- “Out of the ordinary” expenses incurred
- Any protective gear purchased, e.g., install “sneeze guards” at your pick-up counter, or other steps to combat this virus and keep your employees safe
- Any lost orders, or clients altogether, to a company in another part of the country who was not in a forced shutdown situation
- Any mitigation opportunities to win a new account or take orders for product at enhanced margins
Good claim documentation is only one of the cornerstones to affect a positive claim settlement. Preparing for the claims will help manage the expectations of everyone involved and ensure that prompt review of your claim is probable.
Contact our Insurance Claim Support Team
Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional.
