Think Backwards, Sideways and Forward
Business Interruption coverage is intended to reimburse the policyholder for the income lost or incremental increase of expenses experienced during the loss period. Though the application of this coverage seems straightforward on the surface, making a claim for business interruption is far from simple. In this article, we’ll walk you through what is covered under business interruption and how to think through a BI claim.
Let’s start with how coverage applies by reviewing what is and is not covered:
- Insured for the Actual Loss Sustained, or the overall permanent economic loss to the company;
- Not insured for temporary delays in shipping product to customers;
- If a manufacturing business is operating at capacity, maintains normal levels of inventory, and has no ability to make up lost production, an actual loss is highly likely;
- Insured for the time required to repair or replace damaged property, so long as repairs are conducted in a commercially responsible manner;
- Also insured for any expenses incurred to reduce the business interruption loss, so long as the expenses do not exceed the amount of loss they prevent;
- Potentially insured for consequential sales losses and market share losses for a period following the resumption of normal operations;
- If another business group under this policy is dependent upon your business as a supplier or customer, that potential loss should become part of your exposure scenario.
- Extra expenses incurred to operate as normally as possible during the period of restoration of damaged property are also covered.
In identifying all potential exposures it is common to encounter the uncommon. Repairs to damaged property, production losses, and major extra expenses are obvious to everyone. It is the less-obvious exposures, usually with respect to business interruption, that must be identified to achieve maximum recovery.
Think Backward - How are supply functions affected by the loss? Will take-or-pay contracts expire? Will we lose volume discounts? Will other divisions be forced to take downtime because of our loss?
Think Sideways - Are some of our customers now being served by other insured locations at excess production cost or freight penalties? Have engineers helping in our repair effort been forced to delay other projects that are expected to result in significant savings of operating costs?
Think Forward - Are we losing profit at downstream converting locations that we can no longer supply? Have we lost our position as sole or primary supplier to a key customer? Were productivity improvements delayed?
Not every area of potential loss will be covered by insurance, but it is best to identify all known effects as soon as possible and sort out policy responses later. Unusual loss exposures may require unusual documentation. The more remote the problem the more difficult the reconstruction of events at a later date.
It is essential that all potential exposures be identified as soon as possible after the loss. Initial loss estimates established by the adjuster are of great importance, and every effort should be made to assist the adjuster in preparing an accurate, sustainable estimate.
When property damage is the trigger, a file should be maintained listing each major category of damage and a corresponding estimate of the loss. As new exposures are identified, and as better estimates become available, the list can be updated. The purpose is to facilitate response to the inevitable requests for information on the status of repairs, production, and excess costs.