Claim Preparation Tips For Business Interruption Insurance

September 2005

Beyond the physical property loss, your business will incur significant additional costs and will not be as profitable as before.  Most businesses have business interruption (BI) insurance to address these risks.  However, getting a proper claim prepared and paid will likely be a challenge.  The tragedy that caused your business interruption may have taken just a few hours, but the resolution will likely take months.

Who are all these People Anyway?

You will have to deal with what appears to be an army of people that the insurance company has assembled to protect its interests.  During the period when your claim is being analyzed and negotiated, you will need to deal with a variety of people that include:

1. Claims Adjuster - This is usually an insurance company employee, but he could also be an employee of an adjusting firm that the carrier employs.  Don't be fooled by adjusters who claim to be "independent", since most if not all of their business originates from the insurance carrier.
2. Claims Manager or Examiner - This is the boss (at least practically speaking) of the claims adjuster.  This is an insurance company employee.
3. Claims Auditor or Accountant - For business interruption or fraud cases, adjusters will usually retain outside accountants.  Usually, these are highly specialized CPA firms whose primary clients are the insurance companies.  They will rarely, if ever, represent a claimant.  These firms will usually not just audit your claim, but will develop their own ideas as to what your claim should be.
4. Subrogation Attorney - The carrier will want to recover the amount they pay by pursuing a wrongdoer that caused the problem.  Recognize that your company may also have similar rights for uninsured items such policy exclusions and deductibles.
5. Clean-up and/or salvage companies - To help restore operations quickly (and hence reduce the insurance company's loss), the carrier may hire or recommend a company to clean-up the damaged area quickly and efficiently.  Materials that are no longer usable by your business may be sold by these companies for a percentage fee based on the price obtained in liquidation.
6. Other technical experts - To evaluate the cause of the loss, pre-existing conditions, and other matters that may impact the allowable claim, the insurance company may hire engineers, scientists, electricians, and other specialists.  Their job is to ensure that the claim is within the policy restrictions.
7. Insurance Broker and Agents - Agents are the legal representative of the insurance company whose policies they sell.  They may represent only one insurance company.  Regardless of their appearance, they are legally obligated to represent the insurer.  In some states, brokers are considered agents.
   
   Brokers are independent insurance sales persons who assist in determining the client's insurance coverage needs.  The desired insurance is then "shopped" among multiple insurance carriers.  Brokers range in size from smaller businesses to large international organizations that provide a wide variety of services (including claim settlement assistance).  Because brokers have numerous and ongoing dealings with the insurance carrier, they may not realistically be able to serve in a neutral capacity.

Claim Preparation Best Practices

1. Communicate Often and Positively - The people in the preceding section have certain common interests with your company.  You both want to reduce your loss, return your business to normal as quickly as possible, and resolve the insurance claim with as little delay and controversy as possible.  Try to maintain a positive relationship with the carrier's representatives.  This may allow you to get early feedback as to the expectations of the insurance company's representative, which in turn may save you time by preparing the claim properly the first time.  You will also want to keep the insurance company well informed of your actions.  In some cases, the carrier may want to make their own inspections, and sell damaged property before you proceed.
2. Get Outside Help - Some policies will pay for the cost to hire your own claims accountant/consultant.  The long list of professionals mentioned in the preceding section will look after the insurance company's interests.  When losses are high, you should match the carrier's efforts with your own expertise.  An experienced claim consultant will be able to:

• Provide a skeptical and independent view of what is reasonable.

• Advise you as to what is allowable, and ensure that your claim is as large as permissible

• Avoid wasted time and effort from a claim that does not comply with policy restrictions, and

• Negotiate with the carrier's adjustors and accountants. 

3. Identify a Leader - Claim preparation and management should be supported with someone who has the authority to marshal resources within your company.  The leader will need to have broad knowledge of the business.  Usually, someone from the risk management or accounting functions, supported by executive management, will take this responsibility.
4. Get an Advance - Negotiate a funding arrangement that advances cash to allow your business to start its recovery.  Insurers will generally agree to such advances.  However, make sure that these advances are not a final settlement of claims.
5. Create a Timetable - The claim preparation will likely involve multiple functions within your company, each of which requires coordination.  Your employees will be busy getting your operations back to normal, so it is easy to delay claim preparation tasks.  If not controlled, these delays will keep your company from getting a timely settlement, and may even cause you to miss deadlines required by your policy.  Having an outside advisor will provide additional short-term resources that will assist keeping on schedule.
6. Gather Documentation - To obtain a smooth and rapid settlement, you will need to support your claim with detailed business records.  Your policy will not specify the records that you will need to produce to document your claim; nevertheless, the insurance company's adjustor and outside accountant will demand substantial documentation before any claim is allowed.  Your claim calculation and documentation will need to be much more than a computer-generated spreadsheet.  Each key variable will need to be supported with contemporaneous business records and related analysis.
7. Use Multiple Approaches - Claims can be prepared based on (i) specific identification, and (ii) trend, statistical and other analyses.  By looking at your claim from multiple perspectives, your business is more likely to address all claim amounts, and have a more comprehensive and convincing analysis.  
8. Use your Accounting System to Capture Extra Costs - Policies often contain coverage for extra expenses that would not otherwise have been incurred.  These costs vary considerable, and are naturally recorded in a wide range of your regular accounting codes.  Simplify the claim preparation process by creating accounts that are used only for extra costs relating to the tragedy.  Since you will need to show that these costs are incremental to the disaster, contemporaneously record the reason that the cost was incurred, and why this was caused by the disaster.    
9. Identify a Single Point of Contact - All requests of your company by the insurance company's team should be channeled through a single person.  Do not let the insurance company's accountants or other representative meet with anyone at your company unless this single company representative is also present.
10. Prepare a Formal Claim - The claim will ultimately be reviewed by several parties, some of whom do not understand your business and the background of your loss.  The claim should be a stand-alone document in an easy-to-understand format.  To avoid the need for controversy and ongoing dispute, prepare the claim as if there will be a dispute and the document will need to be presented in a court of law.   
11. Communicate in Writing - To avoid misunderstandings, have the insurance company's accountants provide their information and document requests in writing.  Maintain a written log of everything that has been provided, as it is common for the insurance company representatives to otherwise request the same information on multiple occasions.  Once the insurance company's accountants have prepared their analysis, get a copy of this calculation so that your team has time to understand the differences in approach and/or analysis.  This will make meetings to discuss the claim more productive.

Following these tips will maximize your recovery, and minimize your frustration.  For additional advice, see Other Business Interruption Coverages.

Fulcrum Inquiry is a claims consulting firm.  We have expertise in claims preparation, retrieval of electronic accounting records, forensic auditing, and litigation consulting.