Successful business interruption insurance and extra expense claims require preparation and proof

By Higginbotham on August 05 , 2020



It’s one of the worst nightmare scenarios for any business owner. After pouring your sweat, soul and financial resources into building a successful business, a devastating event comes along and forces you to close your doors. It could be a fire, natural disaster, equipment failure or any one of numerous other scenarios. And, it could result in a temporary shutdown – or a permanent business failure. 


Of course, when your business shuts down, so does your income. That’s why it’s a good idea to be prepared with Business Interruption (BI) insurance. BI coverage can help you avoid a permanent shutdown, get your business back on its feet and restore it to the same financial condition it would have been in had the disaster never happened. BI insurance generally covers: 


  • Lost profits 
  • Fixed costs such as utilities and other operating expenses 
  • Relocation costs to operate out of a temporary location 
  • Reasonable extra costs necessary to continue operating 


But when it comes time to file a BI claim, two things are key to success: preparation and proof. 


In any business interruption claim, the burden of proof is on you, the policyholder. And your insurance provider will need answers to some key questions when calculating your claim, such as 


  • What would have happened had the loss not occurred? 
  • What revenues would you have generated under prevailing market conditions? 
  • What operating expenses would you have incurred? 


Answering these questions will require some projections of future results (starting after the date of loss) based on past results, as well as projections of future market conditions and other factors. Most importantly, all projections and calculations need objective, verifiable and evidentiary support whenever possible.  


To ensure your BI claim is accepted and paid in a timely manner, prepare your claim thoroughly. 


To maximize your chances of a successful BI claim, it’s crucial to have a well-organized and well-presented claim that your insurer can quickly understand. Keep in mind they could be dealing with thousands of claims, so the better prepared you are, the easier it is for them.  


Here are some key steps in the process:


Appoint a primary contact who can serve as a liaison between your company and the insurer’s claims personnel for handling all information and documentation requests. You’ll reduce confusion and delays.  


Build a timeline. Provide a summary of the key events and dates leading up to and following the loss. That includes a description of the incident, a narrative of events and key decisions made, an overview of the impact and changes to your operations and what has been or will be done to minimize the loss. 


Document the impact. Document all income losses and expenses to mitigate additional losses. Although documentation will vary by industry, information your insurer may request to substantiate your claim might include: 


  • Historical sales data 
  • Actual experience during the indemnity period 
  • Sales forecasts before, during and after the indemnity period 
  • Industry trends 
  • Production schedules, inventory reports and manufacturing cost statements 
  • Extra expenses to reduce the loss or indemnity period 
  • Profit and loss statements 
  • Purchase and payroll journals 
  • General ledger, tax returns
  • Leases and other contracts

ReviewFinally, it’s always a good idea to have your BI claim reviewed by an experienced independent forensic accountant to ensure everything is in order and easy to understand. This will help streamline the claim process and provide additional reassurance to your insurer.

Diligent preparation and solid, evidence-based proof are the pillars of a successful BI claim.  

According to FEMA, 40 percent of businesses never reopen following a disaster. By being prepared, you have a greater chance of avoiding a permanent shutdown when disaster strikes. Talk to the business insurance experts at Higginbotham about a risk management strategy that will keep your business going. 


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Tags: Business Insurance


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