Meteorologists warn that the 2024 hurricane season could break records, possibly surpassing 2020, the worst hurricane season on record. Even if hurricanes aren’t a threat where your business operates, other natural disasters — such as floods, wildfires and tornadoes — could impact your normal operations. Interruptions from these disasters and other crises can cause significant financial losses.

Business owners may purchase business interruption insurance to safeguard against potential losses. These policies can allow you to recoup lost profits, repair damaged assets and cover other incremental expenses. When a covered event occurs, it’s important to hire a business valuation professional to explain your coverage and estimate your losses.

Understanding your coverage

Business interruption insurance is arguably one of the most complicated insurance products on the market today. And most policies require claims to be filed in a relatively short period of time (often within 30 days).

A business interruption policy typically replaces damaged assets (such as inventory or machinery) and compensates the policyholder for lost business income. This is basically the profits that would have been earned if it weren’t for the interruption. Most policies limit covered losses to 12 months or the period the business is interrupted, whichever is shorter.

These policies also may cover:

• The costs of moving to, and operating from, a temporary location,
• The expenses for permanent relocation, if necessary, and
• Ordinary and necessary operating expenses that the business still incurred.

Examples of these “continuing costs” include rent, salaries and related payroll costs during the interruption period (the time it takes your business to resume normal operations). Beyond continuing costs, the insured may be reimbursed for 1) other reasonable expenses that allow the business to continue operating while the damage is being repaired, 2) rebuilding costs, and 3) denial-of-access losses (for example, if the owner or employees are unable to return to business premises located in an evacuation zone).

Mitigating damages

Business interruption policies generally require policyholders to mitigate losses during the business interruption period. But mitigation strategies that compromise long-term operations typically aren’t required.

For example, a damaged restaurant wouldn’t be required to lay off its general manager or head chef to save on salary and benefits costs during the interruption period. These individuals are key people who would probably be difficult to replace when the business resumed normal operations.

Calculating losses

Damaged businesses often hire an outside business valuation specialist to help throughout the claims process. In fact, some policies even cover the cost of using an outside professional to help estimate damages.

Outside expertise is particularly helpful if the insured has already submitted a claim and is experiencing pushback or denial from the insurance company. The business may also need professional help to get the insurer’s attention — especially after a major disaster when insurance carriers are overwhelmed with business interruption claims.

Business valuation professionals can help policyholders:

• Estimate the interruption period,
• Define the term “lost business income,” which can vary depending on the company’s accounting methods,
• Forecast lost business income based on historical results and industry or market trends,
• Differentiate continuing vs. non-continuing expenses, and
• Evaluate the viability of various mitigation strategies.

In addition, a valuation pro can help assemble and review the requisite documentation to support a claim, such as financial statements, tax returns, receipts, utility bills and vendor information.

(This is Blog Post #1619)