Summer can bring extreme weather, including floods, droughts, wildfires, tornadoes and hurricanes. These natural disasters and other crises can interrupt normal business operations, causing significant financial losses.

If disaster strikes, a business interruption insurance policy can allow you to recoup lost profits, repair damaged assets and cover other incremental expenses. When a covered event has occurred, a business valuation professional can help explain what’s covered and calculate how much you’re entitled to recover.

Coverage basics

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).

In addition to replacing any damaged assets, such as inventory or machinery, a business interruption policy typically covers lost business income. This is basically the profits that would have been earned if it weren’t for the interruption. The income is typically limited to 12 months or the period the business is interrupted, whichever is shorter. Some policies also cover the costs of moving to, and operating from, a temporary location. The expenses for permanent relocation, if necessary, may also be included.

Most policies will also cover ordinary and necessary operating expenses that the business still incurred. Examples of these “continuing costs” may include rent, salaries and related payroll costs during the interruption period (the time it took 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).

Mitigation

It’s important to note that you generally have a duty to mitigate losses during the business interruption period. But mitigation strategies that compromise long-term operations typically aren’t required.

For example, a damaged manufacturer wouldn’t be required to lay off its plant manager or top salesperson 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.

Loss calculations

Damaged businesses often hire an outside valuation specialist to help throughout the claims process. In fact, some policies even cover the cost of using an outside expert 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 have specialized training that comes in handy when:

• Estimating the interruption period,
• Defining the term “lost business income,” which can vary depending on the company’s accounting methods,
• Forecasting lost business income based on historical results and industry or market trends,
• Differentiating continuing vs. non-continuing expenses, and
• Evaluating 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. These experts can also negotiate directly with insurance auditors to resolve the claim as quickly and painlessly as possible.

Let a business valuation pro handle the details

Putting together a comprehensive business interruption claim is time-consuming and takes careful consideration. Claims may be delayed or denied if there are different interpretations of loss calculations, income projections or the meaning of policy provisions. A business valuation pro can help alleviate the stress of filing a claim, allowing you to focus on getting your business back up and running.

(This is Blog Post #1269)