Planning for Business Interruption Losses

Key Points:
  • Business interruption claims will be on the rise, maybe even twenty years from now
  • Being an educated business owner, who can make well-informed, timely decisions is key
  • Business interruption claims are among the most complex, and controversial types of insurance coverage
  • Businesses have to be in a place to have solid proof that they would have made a certain amount of revenue, had COVID-19 not taken place

Many business owners are beginning to turn to their insurance provider, to determine if business interruption claims can be filed, to recover losses resulting from the COVID-19 crisis.

As much as everyone is sick of seeing the word COVID-19, and hearing it on the news, it is important that as a business community we stay informed and educated.  Taking the right steps today, will prepare businesses to weather the storm, and come out on top.  This may mean pivoting your business’ product or service offerings, it may mean short-term lay-offs, and it may mean things that we have yet to encounter.   What we do know is that being an educated business owner, who can make well-informed, timely decisions is key.

Managing Risk in a Crisis.

As we all know, COVID-19 is now a worldwide pandemic.   Not only is it impacting individual health, and straining healthcare systems, it is having a major impact on the United States and Global Economy.

The scariest part, the virus currently has unpredictable consequences.  Planning for what is known, is easier than planning for the unknown.  Business owners are faced with the daunting battle of trying to keep cash coming in the door, and planning for what their business will be when this virus subsides.   The cherry on top, the lengthy insurance claim process, which many business owners will have to go through to try to recoup lost revenue.

Determining Financial Loss.

Business owners need to put themselves in a place to clearly understand how to recapture lost revenue and income, so they can minimize financial disruptions moving forward.  There are many calculations employed to determine financial loss.  Most calculations involve the relation between how a triggering event impacts the earnings of a business over a period of time.  The following graph can help to visualize how the financial loss can be quantified:
Business interruption claims

If we put some numbers to go along with this graph, let’s look at a simple example of a financial loss calculation:

Business Interruption Period:  3 months
Expected Profits during Interruption Period:  $1 million
Actual Profits during Interruption Period:  $300,000
Business Interruption Loss:  $700,000

There are a number of factors that can impact the numbers above.  The business needs to be able to support the expected profits based on financial analysis, including review of historical financial and operating data, and projections/forecasts that were prepared prior to the triggering event.  There are also other challenges in supporting these calculations, such as the determination of when the business is truly restored to normal operations when recovering from an interruption, as interruptions can take the form of complete business suspension, or simply a reduction in business.

Planning Ahead.

To help your business stay afloat, and plan for risk during this epidemic, BDO USA, has prepared a great risk management checklist which you can find here.  These are great questions to not only be asking yourself now, but to ask yourself when this is all over.  Unfortunately, COVID-19 will not be the last crisis the world sees, so as business owners, we need to remain prepared.

Business interruption claims are among the most complex, and controversial types of insurance coverage.  A lot of this is due to the fact that insurance companies have to reimburse companies for what could have happened, not what did actually happen.  Companies have to be in a place to have solid proof that they would have made a certain amount of revenue, had COVID-19 not taken place.

CPAs who have expertise in helping companies value their business, and can help companies clearly identify and communicate revenue they would have received to their insurance provider, are going to be highly sought after now, and most likely 10 to 20 years from now.  We predict insurance claims from COVID-19 will last for at least another twenty years.

 

We have deep expertise not only valuing businesses, but working with them to file business interruption claims.  Please don’t hesitate to reach out to Mark Blood or Mike Tota, if we can provide guidance to your organization, during this unprecedented time.

 

We are available, and we are here to help.