Navigating business interruption claims following a disaster [video podcast]
Watch the video podcast, ‘Business Interruption: How to Navigate Covered Cause of Loss in the Wake of a Natural Disaster.”
For many businesses ravaged by Hurricane Harvey or Hurricane Irma, the road to recovery looks long and difficult—starting with the painful process of filing insurance claims in order to recoup financial losses.
In most cases, this is uncharted territory for business owners, who may not fully understand the finer points of their insurance coverage, how to manage or file claims, and how to protect the interests of their companies throughout the process. That’s understandable, says William Legier of Legier & Company, who personally experienced this challenge after Hurricane Katrina wreaked havoc on his business in 2005.
While preparing claims for his company, Legier had to stay on top of all of the clauses and stipulations in his insurance policy, such as the mitigation clause. “After we were told that we could not return to New Orleans, we had to find a way to get trucks to our office building so we could move all of our computers and files to Baton Rouge,” he explains. “Had we not do that, there would have been a question [from the insurance company] as to whether we did our best to mitigate our loss.”
In the years since then, Legier and his team have helped countless businesses successfully manage this process after experiencing catastrophic events such as natural disasters. Here, he breaks down the key terms and conditions that every business owner needs to understand if they want to reap the full value of their insurance coverage.
- Business income coverage
What it is: Also called “Business Interruption Coverage,” this is the coverage that protects your business against loss of income or profits when events such as natural disasters occur. It refers to the profits that your business would have presumably earned had it not been for the event that occurred (e.g., hurricane) before income taxes. In theory, it should cover the time from when your company shuts down until the time that it’s up and running again.
What you need to know: Policies for this coverage vary greatly. Take the time to read your policy and make sure you understand what it takes to trigger coverage for business interruption. The insurance company will consider the cost of normal operations (e.g., ordinary payroll) when calculating your loss. In other words, if you lost $1 million revenues and you saved $900,000 because you didn’t have to pay employees or buy a product that you needed to sell, then the difference ($100,000) is your lost profits for the purposes of the claim.
- Declaration sheet
What it is: This is the summary of your insurance coverage. It outlines your coverage limits, deductibles, waiting period before you can collect payment for business interruption, co-insurance (percentage of value), and claims data expense.
What you need to know: When you’re reviewing your Dec sheet, make sure you understand all of the terms and definitions on the page. (Many are outlined below.)
- Covered cause of loss
What it is: This is refers to the coverage that is triggered for damages such as roof damage or wind damage.
What you need to know: Most policies expect businesses to submit claims for a covered cause of loss within 30 days of the event. If your business is closed but you do not have a covered cause of loss, you are not entitled to file a claim. Note that flood insurance does not usually cover business interruption.
- Claims data coverage
What it is: This covers the cost of hiring a professional to calculate your business interruption claim. In the event of a natural disaster, it is highly recommended.
What you need to know: If you’ve lost key documents or data in a natural disaster, you may be able to recover some of them. For example, there are services that can restore waterlogged computers. Governmental agencies and independent third-parties may also be able to provide sales tax reports or other relevant documents.
- Period of restoration
What it is: This is the period during which you are expected to rebuild your business to the condition that it was in prior to the event that you’re dealing with. Often, it is limited to 12 months, but some policies offer an extended period.
What you need to know: The insurance company will look at what your company was historically earning in revenues to determine what you would have been earning in the period of restoration. However, if your company was growing at a rate of, say, 10 percent per year, try to negotiate these provisions.
- Extra expense coverage
What it is: This coverage takes care of expenses that you wouldn’t have otherwise incurred had it not been for the event, such as truck rentals or a generator purchase. To qualify, your expenses need to be considered necessary for minimizing the suspension of business operations.
What you need to know: Keep track of your expenses, and remember that there’s a time limit for incurring and/or submitting them (typically 12 months).
- Extended business income coverage
What it is: After your period of restoration ends, this coverage kicks in to extend your business interruption period.
What you need to know: This coverage can be helpful for businesses such as retailers who may need extra time reopen their doors and get their customers back.
- Civil authority coverage
What it is: This provision covers your loss of business income and extra expenses when a governmental agency or civil authority prohibits access to your premises due to physical loss or damage to your property. Typically, this occurs when electricity, water and other basic utilities fail or shut down.
What you need to know: If you are dealing with flood damage, and your flood insurance does not provide business income provisions, civil authority coverage may apply.
- Riders, endorsements, exclusions, inclusions
What they are: Riders are additions to your policy that describe other conditions that you need to be aware of. Endorsements are additions to your policy that expand your coverage in some way. Exclusions and inclusions negate certain policy provisions.
What you need to know: Pay attention to exclusions and inclusions in particular. You may think that you’ve got great coverage, only to later discover that some of your policy provisions are excluded.
- Proof of claim
What it is: This is documentation for your claim, indicating how much you lost and the calculation you are using to support that claim. You have to file this claim in order to get on record with the insurance company.
What you need to know: There is a time limit for submitting a proof of claim, so make sure you’re aware of your policy’s restrictions. If possible, have an independent party review your submission to make sure that you’re not missing something that could potentially increase your claim.
When in doubt, hire a professional—or at least get some professional coaching before contacting your insurance adjuster. “You want to be prepared to avoid stepping in the wrong direction,” notes Legier. “Words once spoken are like eggs once broken — you can’t take them back.”