Documenting & Quantifying Your Business Interruption Claim

y: Philip P. Monteleone, CPA, CMA, CFM

All businesses are likely currently reviewing their insurance policies to try to understand what they bought, and if there is any coverage for losses due to the coronavirus.  This is an extremely important issue for continuity, as businesses would like to know if they will have the funds to continue to pay employees during a closure.   While we are CPAs and do not offer advice on coverage and policy exclusions, we can offer help on how to document and quantify your losses should it be determined that full or partial recovery is available from insurance, or the possibility of future government assistance.
 
As of March 17, 2020 insurance companies and claims processors are pointing to policy exclusions for pandemics.   There are already lawsuit filings seeking clarity on coverage.   We cannot know what will and will not be covered.   We do know from past experience with these claims that documentation is critical.   These policies can in some circumstances cover continuing payroll, but of course this would only cover actual continued payments.  We know that many businesses are doing everything they can within their current cash position and borrowing capacity to continue funding the salaries of their employees. 
 
In the September 2004 issue of Review & Outlook, I reviewed the need for business interruption insurance.  We again stressed the need for coverage and the nuances of claims in the wake of Hurricane Katrina during 2005 and 2006.  Again, that need has become an unfortunate reality, and proper documentation and quantification of your claim is critical.  Policyholders unfamiliar with their exclusions will be reasonably upset, and some will likely interpret their positions with great fervor in the hopes of some reasonable relief.
 
Coverage for your structural and contents losses are covered under your property and casualty (P&C) policy, which often includes coverage for lost business income, sometimes called business interruption (BI) insurance.   Many professionals in the industry expect a heated debate over whether the coronavirus has caused physical damage to an insured location, a common requirement of the “chain rule” for claim payment.
 
The objective of business interruption insurance is to financially compensate you, the insured, to make you “whole” for the period of a covered loss, within the constraints of the policy.  Coverage for “civil authority” directed closures often have a 72 hour waiting period, and limited timeframes for payment.  Typical policy language covers net profits plus continuing expenses, including payroll.  Language for “extra expenses” can cover additional costs incurred as a result of the loss.  The “business income” formula will be further defined by policy language, including possible applications of co-insurance.  Complex policy language will require the assistance of professionals familiar with BI claims. 

BI SUPPORT DOCUMENT FROM BOURGEOIS BENNETT CPAs

 BB Recommends:  Maintain your accounting records in the ordinary course of business, with extra care to document specific costs related to mitigation efforts and your continued payroll. Instill a “belt-and suspenders” approach to computer file backups and review your continuity plans with your IT providers. Multiple sources of backups of records could be obtained through your payroll processor, or banking institution, in addition to your own servers and cloud-based networks.  Losses not covered by insurance will likely be tax deductible.  Quantification of your losses over and above policy limits or coverage is still necessary for tax purposes and for possible recovery from sources other than your insurer.  If your business or insured has already experienced a loss or expects to, call your BB professional or Philip Monteleone in the New Orleans office