As previously discussed in A&C’s article on COVID-19 and Business Interruption Insurance: Frequently Asked Questions, COVID-19, or Coronavirus, has impacted businesses worldwide. As a company analyzes and documents a business income loss claim, a critical aspect involves an examination of the insurance policy. The policy defines areas of coverage that will indemnify the loss, however it does not describe how to document your loss. This article covers some best practices to document your claim.
What documents are necessary to document a claim?
Necessary documents vary from policy to policy. Business interruption insurance usually covers “Business Income and Extra Expense”. Business income is generally defined as net profit or loss before income taxes that would have been earned or incurred, and continuing normal operating expenses incurred. “Extra Expense” often means necessary expenses you incur during the “period of restoration” that you would not have incurred. Any information used for calculation of the loss amount should be supported by documentation to support the accuracy of the claim.
Necessary documents may include a copy of insurance policy, monthly income statements (or profit and loss statements, tax returns, sales reports), invoices, general ledger, purchase orders for the past three to five years, budget and forecast during the normal course of business, if available, and all supporting documents for lost revenues, saved expenses, and extra expenses incurred. Having these documents ready as much as possible could save time for all parties and avoid further disputes.
Examination of Your Books and Records
Most policies do not define what documents are needed to support a claim. The policy does not provide a list of documents that should be included to verify the claim and support the calculations. Most policies do have an endorsement that allows the insurer to examine and audit your books and records.
Who May Be Involved?
For complex business interruption claims, adjusters may hire an accounting firm that specializes in business interruption. Business interruption claims require deep knowledge of economic damage theory. The complexity of a business interruption claim is a function of the length of the period of restoration, the basis for “but for” projection, and many other factors.
A&C’s qualified and experienced professionals calculate the change in business income by comparing the level of profits before and after the damaging event. A&C’s calculations assist businesses & insurance companies in reaching a supportable lost profit analysis.