RISK MANAGEMENT BRIEFING
R I S K
M A N A G E M E N T
B R I E F I N G
Business Interruption Claims ... Made Easy?
By Glen Wiesman, AIC, CPCU, RPA, Executive General Adjuster, Vericlaim, Inc.
alculating a business interruption
(BI) claim can be challenging, but
before we get into a specific
business interruption claim, let’s look at
some general questions your adjuster will
ask if you have a BI claim.
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What type of operation is affected? What is the production
capacity of your operation? Is there interdependency with
other operations? What is the expected downtime? How
many shifts a day do you operate? Is the production partially
or totally down? What product lines will be affected?
Are sales affected? Partially? Totally? What steps can be
taken to get back into operation as quickly as possible?
Can alternative facilities be used? Can rental equipment,
overtime, or additional shift work be used to reduce the
loss? Can the product affected be purchased/produced
someplace else? If you draw down your inventory to meet
orders, how long will it take you to replenish inventories to
the pre-loss level?
The adjuster should be viewed as someone who will work
with you and not your adversary. He or she will want to
learn as much as he/she can about your business. So, the
more you cooperate with your adjuster and the more
information you give your adjuster the smoother the claim
process will work.
If you do get into a BI situation, the adjuster will most
likely retain an accountant to work with the adjuster to
measure your sales loss. Here again, this should not be
viewed as an “us versus them” situation as both the
accountant, the adjuster and you (the insured) want to get
to the correct answer – how much did the loss incident
affect your sales and what is the net loss to your bottom
line. The adjuster wants to get you back in the position you
would have been had no loss occurred.
So, how do all of the above generalities work in the real
world? Let’s look at a BI loss that affected a retail business.
A water main broke on December 6, 2006 and flooded one
of ABC Electronics (not their real name) retail stores. The
water got up to three feet deep throughout the entire store
causing major damage to the building, the fixtures and
stock. The property damage loss ended up being $2.8M.
The loss occurred at the start of the busiest season of the
year for ABC – three weeks before Christmas and the store
was totally closed for just over 4 months. ABC did have
other stores in the area so they were able to make up some
of the lost sales at their other locations by incurring the
extra expense of advertising and directing their customers to
their other stores. Since the product that was destroyed in
this event was insured at selling price, the amount paid to
ABC Electronics for that lost product resulted in a
deduction from their BI loss.
The gross lost sales for ABC Electronics was measured by
looking at a two year history of sales for this location by
month so that the projected gross lost sales could be
calculated on a month by month basis. Since the sales at this
location were trending up by 15.14%, the insured’s gross
sales loss ended up being more than the actual sales history
showed.
The projected sales loss was (in round figures) $21.1M.
Actual sales of $4.8M were deducted from the projected
sales as was the stock loss of $800K and make-up sales of
$2.8M. This resulted in a gross sales loss of $12.6M.
Variable expenses such as ABC Companies cost of sales,
shipping and the vendor support cost of sales were all
deducted. Even though the store was totally closed, some of
the expenses to the store were allocated to the store by
ABC’s corporate office so those expenses continued during
the period of interruption. Other expenses that did not
continue and therefore deducted from their gross sales loss
continued on other side
were rent, real estate taxes, facilities charges, payroll and
payroll taxes. ABC’s policy did insure ordinary payroll, but
only to the extent that those payroll expenses continued.
During the course of the adjustment of the BI loss, there
was a disagreement on the amount of sales that were made
up at ABC’s other nearby stores and there was a
disagreement on the gross sales that were lost. These
disagreements were minor and quickly resolved. The
biggest disagreement between the adjuster and the insured
ended up being how much of their payroll actually
discontinued during the period of interruption as ABC
Companies claimed that they reassigned all of their hourly
labor to nearby stores. The payroll saved (or not saved) was
a fairly large amount ($300K) and, as is typical of most BI
claims, we ended up reaching a compromise by splitting the
difference on the amount of saved labor. The final agreed
BI loss was $2.1M.
Our experience has shown that most of the problems in
adjusting a business interruption claim can be traced to
three sources: (1) Failure to communicate with the adjuster
on planned procedures and proposed extra expenses; (2)
lack of sufficient documentation; and (3) failure to
demonstrate that a true loss of business has been sustained.
Here are the actual BI loss calculations:
Projected Retail Sales:
Less Actual Sales:
Less payment of stock loss
Less Make-up Sales:
Total Net Sales Loss:
$21,123,151
$4,890,450
$801,556
$2,829,865
$12,601,280
Total Net Sales Loss:
Less:
Saved Variable Expenses:
Other Saved Expenses:
Net BI Loss:
$12,601,280
$9,761,339
$663,388
$2,176,553
For more information regarding this Risk Management Brief, please
contact Glen Wiesman, Executive General Adjuster at Vericlaim, Inc.,
at 847.340.7312 or via e-mail at [email protected].
This article is for informational purposes only and does not constitute a legal opinion. Contact your legal representative for information specific to your needs.
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