Losses related to the coronavirus may be recoverable in limited circumstances, but it is a complex process which requires planning, along with specialized insurance and forensic accounting expertise. As many businesses have already discovered, specific circumstances and policy wording are critical to determining if, and to what extent, losses resulting from the coronavirus are included, and quantifiable, under the company’s policy.
Intended to protect a business against the loss of income related to disasters and other emergencies, business interruption coverage is typically included as part of a company’s commercial property insurance policy, and is most commonly triggered when “direct physical loss of or damage to” insured property occurs during natural disasters, such as hurricanes or earthquakes. Similarly, contingent business interruption coverage can apply to losses associated with other events, such as disruptions to the business’s customers or suppliers, while a policy’s civil authority coverage can be triggered when a government limits access to a specific geographic area, impairing access to the policyholder’s premises. In the event of claims related to the coronavirus, policy wording is critical, as insurers will contend that the health crisis does not meet the “direct physical loss” requirement contained within many standard policies. However, specialized insurance policies sold to businesses in the hospitality, travel, or healthcare industries, may provide specific coverage relative to communicable diseases. Accordingly, businesses should be proactive and seek insurance expertise to determine whether the coronavirus has triggered coverage in their specific policy.
In addition to determining whether any coverage applies, businesses must also understand the methods employed to calculate the recoverable financial loss. Policies include standard terms which are used throughout the industry, and although language contained with the clauses may differ slightly, business interruption policies all require the application of methodologies intended to put policyholders back in the same position they would have been “but for” the triggering event. “Net-plus” is the most commonly used term and refers to the net profit before income taxes that would have been earned absent the triggering event, plus continuing normal operating expenses of the business which were unavoidable during the loss period. In a simplified example, assume a business is forced to completely suspend all business operations for 3 months but incurred $25,000 of ongoing costs, such as rent, utilities, and other unavoidable costs during the loss period. If the business would have otherwise earned $100,000 of net profits during that time period, the total business interruption loss would be $125,000. These calculations are highly dependent upon the company’s ability to support the estimated net profits by virtue of historical operations, pre-event projections and forecasts, and other complex financial analyses. Specific circumstances also further complicate the “net-plus” calculations as businesses often are faced with a reduction in business, versus a complete suspension, or have a period of restoration during which the business is recovering from the event, but is not yet fully restored.
Because of these factors, business interruption policies are among the most complex and controversial types of insurance coverage, primarily since they are designed to reimburse insureds for something that never happened- an estimated profit that the business would have earned had its operations not been disrupted. It is for this reason that CPAs who specialize in preparing damage analyses, are frequently requested to prepare these types of claims for their clients and to assist in a settlement, negotiation and litigation with the insurance company. With the full impact of the pandemic still unknown, businesses must keep the lines of communication with brokers, legal counsel, and accountants open, and plan ahead to ensure they are accumulating the information needed to submit a well-presented claim.
Withum understands the complexities associated with business interruption claims. Please do not hesitate to reach out to Jessica or any member of the Forensic and Valuations Services Group with any questions.