Meteorologists warn that the 2024 hurricane season could break records, possibly surpassing 2020, which is the worst hurricane season on record. Even if hurricanes aren’t a direct threat where your organization operates, other natural disasters such as floods, wildfires, and tornadoes could impact your day-to-day operations. Interruptions from these disasters and other crises can cause significant financial losses.

Business owners may purchase business interruption insurance to safeguard against potential losses. These policies can allow you to recoup lost profits, repair damaged assets, and cover other incremental expenses. It’s important to hire a valuation professional when a covered event occurs to explain your coverage and estimate losses.

Understanding Your Coverage

Business interruption insurance is arguably one of the most complicated insurance products on the market today. And most policies require claims to be filed in a relatively short period of time (often within 30 days).

A business interruption policy typically replaces damaged assets (such as inventory or machinery) and compensates the policyholder for lost organizational income. This is basically the profits that would have been earned if it weren’t for the interruption. Most policies limit covered losses to 12 months or the period the organization is interrupted, whichever is shorter.

These policies also may cover:

• The costs of moving to, and operating from, a temporary location
• The expenses for permanent relocation, if necessary
• Ordinary and necessary operating expenses that the organization still incurred

 
Examples of these “continuing costs” include rent, salaries, and related payroll costs during the interruption period (the time it takes your organization to resume normal operations). Beyond continuing costs, the insured may be reimbursed for 1) other reasonable expenses that allow the organization to continue operating while the damage is being repaired, 2) rebuilding costs, and 3) denial-of-access losses (for example, if the owner or employees are unable to return to organization’s premises located in an evacuation zone).

Mitigating Damages From A Business Interruption

Business interruption policies generally require policyholders to mitigate losses during the business interruption period. But mitigation strategies that compromise long-term operations typically aren’t required.

For example, a damaged restaurant wouldn’t be required to lay off its general manager or head chef to save on salary and benefits costs during the interruption period. These individuals are key people who would probably be difficult to replace when the business resumed normal operations.

Calculating Losses

Damaged organizations often hire an outside valuation specialist to help throughout the claims process. In fact, some policies even cover the cost of using an outside professional to help estimate damages.

Outside expertise is particularly helpful if the insured has already submitted a claim and is experiencing pushback or denial from the insurance company. The organization 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.

Business valuation professionals can help policyholders:

• Estimate the interruption period
• Define the term “lost business income,” which can vary depending on the organization’s accounting methods
• Forecast lost organizational income based on historical results and industry or market trends
• Differentiate continuing vs. noncontinuing expenses
• Evaluate the viability of various mitigation strategies

 
In addition, a valuation professional can help assemble and review the requisite documentation to support a claim, such as financial statements, tax returns, receipts, utility bills, and vendor information.

We Can Help

Compiling a comprehensive business interruption claim is time-consuming and adds stress to an already difficult situation. If disaster strikes your organization, contact us to help you file a claim, negotiate with insurance auditors, and resolve the claim as quickly and painlessly as possible. Let our business valuation professionals manage the details so you can focus on getting your organization back up and running.