A&C has extensive experience in a wide variety of Business Interruption (“BI”) loss calculations. All business is subject to interruptions: fires, hurricanes, tornadoes, power outages, theft, or vandalism, etc. Most business owners understand that it is in their best interest to manage the cost of a potential loss. To include a business interruption insurance/business income loss coverage in their insurance policies is one way to do so. Business Interruption insurance protects businesses from unexpected forced shutdown of business caused by a ‘Covered Cause of Loss’.
In most cases, the goal is to cover the loss of income after the damaging event. It depends on how it is defined in the insurance policy. Generally, the business income coverage pays for the net income that would have been earned if no physical damage occurred. This definition looks straight forward but the calculation of business income loss can be challenging in a number of ways. Common challenges are:
- How to determine lost revenue, or lost gross income
- What are continuing expenses, or fixed expenses
- What are non-continuing expenses, or variable expenses, or saved expense
- What period is covered? (“Period of Restoration”, “Suspension Period”, “Indemnity Period”, “Loss Period”)
The very first thing a loss auditor will request from business owners is the financial history of the business. In most cases, history plays an important role in the estimation of lost revenue, but history does not always repeat. A trusted, experienced expert considers various other performance drivers such as contracts, seasonality, special events, and natures of industries.
Non-continuing expenses, variable expenses, or saved expenses are expenses that can be saved or avoided from lost revenues during the suspension period, such as cost of goods sold. Continuing expenses, or fixed expenses are expenses that cannot be stopped or avoided during the suspension period, such as ordinary payroll. The length of the suspension period is also one of the factors to determine whether an expense is a continuing or a non-continuing expense.
These are just a few of the many questions one may encounter in business interruption loss calculations. A&C’s calculations assist businesses & insurance companies in reaching a supportable lost profit analysis.