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Estimating Business Interruption Losses

Estimating Business Interruption Losses

Posted by Douglas Sosnowski on February 02, 2021

From hurricanes and floods to windstorms and wildfires, 2020 is shaping up to be one of the worst years on record for natural disasters in the United States. Experts estimate businesses, including farms, manufacturers, retailers, and construction contractors, will lose billions of dollars from natural disasters this year.

Many business owners have business interruption insurance in place to help recoup lost profits, repair damaged assets, and cover other incremental expenses, but filing a claim can be daunting. Here's some important information to help your company recoup its losses.

Coverage Basics

Most business interruption policies require claims to be filed in a relatively short period of time (often as soon as 30 days after the interruption occurred). In addition to replacing any damaged assets, such as inventory or machinery, this insurance typically covers:

Lost business income. This is basically the profits that would have been earned if not for the loss (typically limited to 12 months or the interruption period, whichever is shorter).

Temporary location expenses. The extra costs of moving to, and operating from, a temporary location may be covered. Expenses for permanent relocation, if necessary, may also be included.

Continuing costs. These are normal operating expenses and other fixed costs that the business still incurred following the event. These expenses must be ordinary and necessary, such as rent, salaries, and related payroll costs during the interruption period (the time it took your business to resume normal operations).

The insured may also be reimbursed for rebuilding costs, “denial of access” losses (for example, if the owner or employees are unable to return to business premises located in an evacuation zone), and other reasonable expenses that allow the business to continue operating while the damage is being repaired. Some policies may even cover the cost of using an outside financial expert to help calculate damages.

Important note: The insured generally has a duty to mitigate its losses during the business interruption period. Sometimes, this entails moving to a temporary location. But mitigation strategies that compromise long-term operations typically aren't required.

For instance, 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. Such key employees would probably be difficult to replace when the business resumed normal operations.

Recouping Losses

When filing a business interruption claim, it's important to:

  • 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. noncontinuing expenses,
  • Explain the long-term viability of various mitigation strategies, and
  • Estimate the interruption period.

A damaged business can hire an outside financial expert to help throughout the claims process. An outside expert 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.

In addition, a financial expert can help assemble and review the requisite documentation to support a claim, such as financial statements, tax returns, receipts, utility bills, and vendor information. He or she can also negotiate with insurance auditors to resolve the claim as quickly and painlessly as possible.

Filing a Claim for COVID-19-Relate Losses

Small businesses have lost billions of dollars during the COVID-19 pandemic. Those that had the foresight to buy business interruption insurance to protect themselves from a disaster-related closing may want to file a claim as soon as possible. Unfortunately, it's likely that those claims will be denied — at least until the courts and lawmakers can address the issue.

Insurance Companies vs. Policyholders

Some insurance companies are claiming the legal defense of “force majeure.” This refers to a situation where unexpected external circumstances prevent a party to a contract — in this case, the insurance company — from meeting their obligations.

In addition, many insurance companies note that business interruption policies provide coverage when a policyholder suffers a loss of income as a result of physical loss or damage to covered property. According to their interpretation, COVID-19 doesn't qualify as a physical loss.

Insurers also highlight the fact that policies don't cover loss of income because of market conditions, an economic slowdown, or concerns regarding contamination. They claim that policies don't provide coverage for government actions designed to limit the spread of COVID-19.

On the flip side, attorneys representing business owners in a growing number of lawsuits against insurance companies state that the existence of SARS, MERS, and the Avian flu have given insurers ample opportunity to predict a subsequent global pandemic involving another virus. As it relates to need for a physical loss to occur to trigger payments under the policy, the attorneys contend that the virus can attach itself to physical surfaces. Therefore, viruses cause physical loss that requires cleaning to remove.

Stay Tuned

Courts and lawmakers are currently addressing these issues. In the meantime, be aware that your insurance company will probably deny COVID-19-related claims, but filing a claim now establishes your company's rights to contest the claim as the legal landscape evolves.

Need Help?

Putting together a comprehensive business interruption claim can be time-consuming and cumbersome. Insurers often delay or deny claims because of differing views on loss calculations, income projections, or the meaning of policy provisions. An experienced financial expert can help ensure that your claim holds up to scrutiny.

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2021 Federal Tax Rates Quick-Reference Guide

2021 Federal Tax Rates Quick-Reference Guide

Posted by Johnathon Miles on January 28, 2021

The following guide includes many of the most important 2021 federal tax amounts including capital gain tax rates, standard mileage rates, estate and trust income tax rates, and itemized deduction limits.

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Subsequent Events: What was “Known or Knowable” on the Valuation Date?

Subsequent Events: What was “Known or Knowable” on the Valuation Date?

Posted by Louis Cercone, Jr. on January 19, 2021

The COVID-19 pandemic has affected the value of many privately-held businesses. When valuing a business in today’s uncertain conditions, experts must put themselves in the shoes of hypothetical investors and consider only relevant information that was known (or knowable) on the valuation date.

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Brisbane Consulting Group Names William Allen, CPA/ABV, CFE Partner

Brisbane Consulting Group Names William Allen, CPA/ABV, CFE Partner

Posted by Paul M. Herlan on January 11, 2021

Through Brisbane Consulting Group, Bill provides business valuation, forensic accounting, and litigation support services.

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COVID-19 Causes Upswing in Wrongful Termination Claims

COVID-19 Causes Upswing in Wrongful Termination Claims

Posted by William P. Allen on January 05, 2021

Many employers have furloughed or laid off workers during the COVID-19 crisis, causing a surge in wrongful termination cases and other types of employment litigation. Financial experts play a critical role in these cases.

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Handle Financial Testimony by Lay Witnesses with Care

Handle Financial Testimony by Lay Witnesses with Care

Posted by Douglas Sosnowski on December 15, 2020

When business owners or other laypeople testify on complex financial or valuation issues, there’s a risk that their testimony will be found inadmissible in commercial litigation. 

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Calculation Vs. Conclusion of Value – Which Level of Service is Appropriate in Litigation?

Calculation Vs. Conclusion of Value – Which Level of Service is Appropriate in Litigation?

Posted by Louis Cercone, Jr. on December 01, 2020

Business valuation experts generally can be engaged to provide either a “conclusion of value” or a “calculation of value.”

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Webinar Recording: An Election Storm - Tax Planning for 2020 and Beyond

Webinar Recording: An Election Storm - Tax Planning for 2020 and Beyond

Posted by Paul M. Herlan on November 17, 2020

Hear from Lumsden McCormick experts on what needs to be done to optimize tax planning with a focus on the proposed presidential plans. Followed by an update to the Paycheck Protection Program including a financial statement presentation and a discussion on the tax aspects of forgiveness.

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Restructuring: How Business Owners Can Get Their Groove Back

Restructuring: How Business Owners Can Get Their Groove Back

Posted by William P. Allen on November 17, 2020

The COVID-19 crisis has affected virtually every business. Many small business owners may be ready to throw in the towel, but restructuring can provide a fresh start. This is a highly complex process that requires continuous monitoring to be effective.

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Optical Works and Logistics V. Sentinel Insurance Company – Using Financial Experts to Support Business Interruption Claims

Optical Works and Logistics V. Sentinel Insurance Company – Using Financial Experts to Support Business Interruption Claims

Posted by Louis Cercone, Jr. on November 03, 2020

As a result of pandemic-related shutdowns, many businesses have filed claims under their business interruption insurance policies. These claims have resulted in litigation over the scope of coverage and the meaning of key policy terms.

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