Adjusting Tips for Business Interruption Claims

Recent weather-related catastrophes have drawn attention to business interruption coverage where there is a need for thorough documentation of losses, according to experts.

Business interruption is defined as the disruption of normal business operations because of an identifiable event beyond the business’ control, they said during a presentation at the mid-year National Association of Public Adjusters meeting held recently in Phoenix, Ariz.

The objective of business interruption insurance is to pay for the financial loss directly resulting from the incident or occurrence, said and Bert F. Verdigets, a certified public accountant in Louisiana, and Brian J. Houghtaling, an attorney at the New Orleans law firm of Huber, Slack, Houghtaling, Pandit & Thomas, LLP.

“Essentially, business interruption coverage is intended to financially compensate the insured for what the business would have done but for the disaster,” said Houghtaling.

According to Houghtaling, as a general rule, business interruption losses are predicated upon direct physical damage to the insured’s covered property.

The supporting documentation for a business interruption claim includes the business’ history, revenue support and expense support.

The business history can be further broken down to include a description of how the business was impacted by the incident, the business fiscal year end, physical location address, goods produced and or services provided, number of employees, main suppliers and customers, and normal operating hours and days.

Revenue support should include an annual or monthly income statements, tax returns, bank statements, sales tax returns, accounting books and software, sales records or receipts on a daily or monthly basis and sales forecasts or business plans.

Expense support should include production data for period before, during and after loss, payroll and payroll tax records for all employees, lease agreements to determine rent expense, franchise agreements to determine amount of fees paid, utility bills, loan agreements to determine interest expense, contractor estimates and receipts for repair work.

Houghtaling recommended insureds conduct a pre-loss review of the policy annually. Houghtaling offered an example of a commercial property owner with 17 locations. Hurricane Katrina caused damage to several of the property owner’s buildings; yet, only one out of the 17 was insured for business income loss.

Katrina business interruption losses highlighted the issue of loss of rent versus loss of income and whether the numbers should be analyzed using gross or net figures, Verdigets said.

Houghtaling described the business interruption “chain” rule: In the event of physical damage to property of the type insured under the property policy by a peril insured under that policy which directly results in an interruption of the insured’s operations, then the policy will cover the losses defined in the policy which are suffered by the insured party or parties, and which are incurred during the period of indemnity defined within the policy.”

The basic business interruption formula is:

Net Income (Loss) + Continuing Expenses + Extra/Additional Expenses = Business Interruption Loss

The two emphasized the importance in distinguishing between “spent” and “incurred” expenses relating to continuing expenses. Just because some expenses have not been paid yet does not mean they are not owed. They provided an example involving the April tornado in Tuscaloosa, Ala. Tenants came in to sign leases for summer occupancy on apartments, leaving a deposit. Those tenants who couldn’t move in due to the destroyed homes and buildings wanted their deposits back.

“Is that considered owed or spent?” asked Houghtaling.

Adjusters need to consider several elements of business income loss, including rent, utility costs, payroll and payroll taxes, transportation expenses incurred to relocate to a temporary location, additional advertising when a business resumes operations and additional payroll costs incurred as a result of a disaster, like overtime and added personnel.