Business interruption insurance claims - getting it right
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When disaster, such as the recent Thailand floods, strikes a business, no one is ever fully prepared.
In the initial confusing aftermath, companies need to quickly assess the damage and organise recovery efforts so they can minimise business disruption and restore operations as quickly as possible. However, the insurance claim management process requires significant time, resources and experience. Most businesses do not have immediate access to their records and very few are experienced in the process and calculations that are needed to properly value their losses. This can lead to the company being at a disadvantage and perhaps not getting full value from their policy.
Quantifying and mitigating damages:
Business Interruption (BI) insurance should play an important role in funding the recovery of many businesses affected by the floods in Thailand. This article explains what BI insurance typically covers and what business owners and their advisers can do to ensure payment is obtained quickly.
What does BI insurance typically cover?
The BI coverage will depend on the policy wording, but typically it covers short-term financial loss arising from interruption to a business’s operations as a result of damage to its premises or equipment. The cover is often extended to include prevention of access to the premises, and sometimes includes loss caused by interruption to the supply of goods and services.
How are BI claims calculated?
The intention of BI insurance is to put you back into the same financial position you would have been had the damage and consequential interruption not occurred. Normally, business interruption insurance covers four key aspects:
• Loss of gross profit/rent
• Additional expenses incurred (eg, hire of portable building for temporary premises)
• Savings in expenses
• Reasonable claim preparation costs (eg, accountant’s costs)
The approach to calculating your claim will depend on your BI policy, your business and the records available.
Example BI calculation (US$):
• + Expected sales (i.e. if the premises had not suffered damage): 100,000,000
• - Actual sales: 20,000,000
• Reduction in sales: 80,000,000
• - Cost of sales (applying normal gross profit of, say, 30 per cent): 24,000,000
= Reduction in gross profit: 56,000,000
• + Additional expenses (eg, rental of temporary premises): 10,000,000
• - Cost savings (eg, lease of damaged premises): 20,000,000
• + Claim preparation costs (eg, accountant’s costs): 5,000,000
= Total BI claim: 51,000,000
What is the indemnity period? Why does it matter?
The indemnity period is the period of insurance protection. It normally commences from the date of the event or damage and normally ends when your business is fully operational again or when the specified indemnity period has expired, whichever occurs first.
Referring to the example above, if this loss of $51,000 occurred over a six-month period, but the indemnity period is for three months, then some of the loss suffered will not be covered by the BI insurance policy.
The indemnity period should be defined in your policy or schedule.
What is the sum insured? Why does it matter?
The sum insured is the level of insurance cover in place. It is the maximum amount of BI cover you have for your business. Referring to the example above, if the sum insured is $40,000, the last $11,000 of the loss will not be covered by the BI insurance policy, leaving aside any excess.
What can I do to ensure my BI insurance claim is accepted and payment is received quickly?
When putting together the BI claim it will be important to consider:
Policy – The BI insurance policy underpins the claim. It sets out what is and what is not covered and the definitions to be applied in your situation.
Presentation of financial loss – The insurer processing the claim is likely to be inundated with insurance claims following the recent floods and have limited knowledge of your business. It is important that you provide your insurer with all of the relevant background and financial information necessary to process your claim. We recommend that you provide your insurer with a brief cover letter setting out the following:
_ An overview of the business.
_ Details of the damaged premises or details of interrupted supplies.
_ Impact on trading.
_ A timeline of key events.
_ Your calculation including any assumption made.
_ Supporting documentation for the claim.
Review
Subjecting your claim to independent review by experienced forensic accountants will ensure it is robust and easy to understand, enabling your insurer to process your claim efficiently, maximising the chance of timely payment of your claim for the right amount. The independent review should also provide the insurer with additional comfort that the claim is robust.
Peter David Hamilton is an associate director, Financial Advisory Services, at Deloitte Touche Tohmatsu Jaiyos.
