Business interruption, like all insurance coverage, is something we hope we’ll never need. Unfortunately, many organizations do not understand their coverage until the day comes when they need it. Following is an overview of business interruption insurance coverage and claim documentation requirements.
Business Interruption Coverage Overview
In general, business interruption coverage is triggered by a covered property loss at your place of business that inhibits your ability to conduct business. Natural disasters such as hurricanes and tornadoes may be the cause, as well as fires and other events. Your policy may also include endorsements for lost income even if you do not have property damage if your business is closed by government order (commonly referred to as civil authority) or if customers cannot reach your place of business due to a natural disaster (ingress and egress). Careful review of your policy is necessary to understand if you have coverage for civil authority or ingress/egress issues, including any limitations to coverage.
Generally, business interruption coverage replaces lost income and pays you for continuing expenses. Continuing expenses are generally fixed expenses such as rent and overhead that continue after the triggering event. You may have an additional endorsement providing coverage to cover payroll during the interruption period (the indemnity period) so that you do not lose your workforce while your business is closed. You may also have coverage for “extra expenses” incurred to help mitigate your loss, such as renting temporary space. Finally, your policy may include coverage to offset the cost of hiring accountants and other advisors to assist you in documenting your claim.
Critical Questions to Ask
- Do you understand your coverage and limitations?
- If you have a major property damage claim, are you prepared to evaluate and quantify any related business interruption claims?
- How does the preparation of an insurance claim (property and business interruption) fit into your overall disaster recovery plan?
- Would you have the resources to work on a claim while trying to restore your business?
Ideally, you should have a contingency plan in place to identify, collect, and retain adequate records to prepare an accurate and complete quantification of losses and submission of your claims. By identifying key documents, data, and other information needed for the future, organizations can develop an efficient process for capturing this information on a contemporaneous basis rather than months after the event when the records may no longer exist and memories have faded.
Consider creating a system, either within your existing accounting system or offline, to track relevant costs. Key correspondence, contracts, and other documents should be identified, collected, and retained. Considering that most correspondence will likely be through telephone, video conference, and other means of electronic communication, taking and retaining notes and meeting minutes is very important. Maintaining a timeline of significant events is also a leading practice.
Documentation Checklist for Business Interruptions
To help you get started, our business interruption and commercial damages professionals have prepared the following checklist of key documents, data, and information you may consider as a starting point in developing your contingency plan.
| Accounting & Financial Records |
|---|
| General ledger/trial balances |
| Internal financial reports |
| Annual financial statements |
| Inventory ledgers |
| Payroll records |
| Production reports, budgets, forecasts, &/or projections |
| Income, payroll, property, & sales tax returns |
| Event/Loss Documentation |
| List of canceled orders, contracts, & other lost business opportunities |
| Applicable correspondence, contracts, & other supporting information for lost business |
| Schedule of extra expenses related to the interruption or mitigation of losses |
| Documentation of fixed expenses incurred, including any records supporting payments |
| Records associated with the disposal of spoiled inventory |
| Details regarding extra or unusual healthcare costs incurred as a result of the event |
| Records of debt & interest incurred because of lower profitability |
| Timeline of significant events, including government-mandated shutdowns, supply chain disruptions, & critical discussions with stakeholders |
| Insurance policies, including any correspondence with & notifications given to insurers |
| Relevant government programs, including any applications & supporting information |
| Personnel calendars/time records during the interruption period |
| Local, state, & federal orders & guidelines |
| A listing of steps the organization has taken to mitigate losses, including supporting information |
How Forvis Mazars Can Help
The preceding guidance is general and not intended to provide specific advice related to your unique circumstances. If you have any questions regarding the unique details of your insurance coverage, contingency plan, or business interruption claim, please contact a professional at Forvis Mazars.