Business Interruption Claims

What Is Business Interruption Insurance?

Business interruption insurance provides a policy that covers the loss of income that businesses face after a disaster.  The types of disasters covered under the policy depends on the nature of the policy.  Certain policies may also include contingent business interruption, which covers the damages to a business based on an event that effected its suppliers or customers.

What Does Business Interruption Mean For You?

Business Interruption poses a critical threat to the life of a business.  Employees may leave, competitors may intrude, or credit may dry up, any of which could critically disrupt what is otherwise a healthy business.  ValueScope’s valuation experts are experienced in helping business owners get through these difficult times and pursue a business interruption claim.  Our team has the expertise to handle your claim and put your mind at ease.  During the COVID-19 epidemic, many businesses have been forced to shutdown indefinitely, and it remains unclear when and at what levels certain businesses will be able to open.  A successful business interruption claim can represent the difference between a business surviving and bankruptcy.

Calculating Business Interruption Losses:

The primary component of a business interruption claim is lost profits.  The calculation of lost profits must incorporate a number of factors, including but not limited to:

1.  Length of Interruption

a.  There may be a tapering off of the interruption which needs to be accounted for.

2.  Projection of Lost Revenues

a.  This should account for any seasonal factors (i.e. holidays), recent trends in revenue, or construction in progress.

3.  Cost of Physical Damage

a.  Policies may include property repairs and expenses which resulted from the business interruption.

4.  Fixed vs. Variable Costs

a.  The calculation of lost profits will depend upon a company’s breakdown of costs.  The greater amount of fixed costs a business has, the larger the     impact of a decline in revenue will have on profits.

Steps When Calculating Loss:

    1. Analyze the company’s historical performance
    2. Estimate the company’s earnings had no “loss” occurred
    3. Identify continuing and non-continuing expenses

This may seem like a simple calculation, but insurance companies often attempt to use the policy language to maneuver and reimburse you as little money as possible.  Consider the case of a hurricane, in which your furniture business, and the surrounding area is significantly damaged.  If your business had not been damaged, it would have surely benefited from increased demand due to the flooding.  Depending on the language of your policy, you may be entitled to benefit from that hypothetical scenario.

Often policyholders will attempt to file numerous claims and hope for the best.  This is not the best strategy and is a surefire way to lose credibility.  A careful, calculated approach is going to obtain the best results, and that is what ValueScope is here for.

Sample Lost Profits Calculation

The following provides a hypothetical example of how business interruption damages may be calculated.  The example is designed to provide a simplistic representation of the COVID-19 interruption, purely for illustrative purposes.  The monthly financial statements without interruption provide the “but for” picture of the company.

As shown, the company was expected to earn a profit of $100,000 per month, totaling $500,000 over 5 months.  For this example, we assume partial interruption in March, May, and June, and a complete shutdown in April.  The interruption is expected to have no impact on July.

The interruption results in losses for March through May and break-even profit in June.  Thus, the interruption lasted four months, March through June.  The following presents the lost profits calculation.

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