Values at risk series: Does a business that operates at a loss need business interruption insurance?

December 4, 2014 by John Hutson Leave a Comment

I am often asked by my broker friends, if a business that operates at a loss needs business interruption coverage. My answer is a resounding, “maybe.” Each business in this situation needs to be evaluated separately.

First, determine the amount of continuing expenses that would be incurred under various loss scenarios. Make sure to consider whether or not continuing ordinary payroll and rent needs to be included in the continuing expenses.

Second, determine whether or not the sum of the continuing expenses exceeds the estimated amount of net operating loss estimated for the same period. The excess amount would be the potential recoverable value. If the continuing expenses do not exceed the projected loss then it is unlikely a business would recover any losses with this coverage.

Finally, evaluate the need for and appropriateness of pure extra expense coverage. Make sure this coverage is not limited to covering expenses “to the extent they minimize the business interruption loss otherwise payable.” The coverage needs to apply for the purpose of continuing to operate the business as normally as possible without regard for minimizing losses, which will allow the business to recover as quickly as possible.

Each business and situation is unique. The situation should be reviewed by management, their broker, and their loss valuation expert to determine the best possible coverage and contingency plan in the event of a loss.

Values at risk series: Make sure you’re covered when it comes to professional fees

November 11, 2014 by John Hutson Leave a Comment

The very first question I’m usually asked by a potential client regarding their business interruption claim is, “Are your fees covered?” The answer to this question is “maybe.”

First, I look at the policy to see if there is an endorsement for professional fees or loss adjustment expenses. Second, I make sure there are no exclusions that would exempt my services. Third, I look for the words that say these fees are only covered if they are incurred at the insurer’s request. Finally, I have the insured sign the service agreement and forward a copy to the adjuster for approval before starting work. This ensures that there are no surprises for the client, the adjuster, or me.

The follow up question is, “Will you guarantee that your professional fees won’t exceed the policy limit?” The answer to this question is “no.”

Unfortunately, the amount of expert work that needs to be done to fully document, support, calculate, present, and defend a loss valuation is not dictated by the amount of coverage for these services. It is dictated by the documentation available, the complexity of the loss, and the issues that arise during the settlement process. Additionally, I may not be the only expert involved in the claim process. There may be a need for engineers, arborists, economists, industry experts, and various other experts. These expenses are often necessary to ensure the best possible settlement and can get expensive fairly quickly. Insured’s should discuss their potential needs with their broker and work with them to place appropriate professional fee coverage limits.

What To Do When Fees Exceed Professional Fee Coverage Limits?

On a final note, I think it is a mistake to make a decision whether or not to hire an expert based upon whether or not there is enough fee coverage to make the services “free” to the insured. Here’s a story to illustrate the point: I recently finished a file where the insured had to pay over $125,000 in professional fees, when they only had $25,000 in professional fee coverage. At the beginning of the project, the client was in a real dilemma, because they knew that the project would exceed their professional fee coverage of $25,000. Should they move forward and hire their own experts, or simply rely on the experts provided by the insurance company? You be the judge. The insurance company’s experts valued the business interruption / extra expense loss at $0 for almost two years. After incurring the $125,000 in expert fees, the claim was finally resolved for slightly over $2,000,000.

Values at risk series: Consider your geography

November 7, 2014 by John Hutson Leave a Comment

When estimating values at risk for business interruption insurance, it is necessary to differentiate between maximum possible loss and maximum probable loss. The maximum possible loss is an estimate of loss value that assumes the entire insured entity, including all locations, comes to a complete halt. The maximum probable loss envisions likely loss scenarios which may not affect all locations.

One of the important factors to consider is the geographic location of the insured properties. Let’s assume that we are discussing a retailer with three locations in the Southwest. Because of the nature of retail, the locations operate independently of each other. Now let’s consider the geographic locations.

In the illustration below, all three locations are tightly clustered. This means that a single, regional, catastrophic event could easily impact all three locations. Specifically, a single hurricane could cause direct physical damage, an issuance of evacuation orders, power outages, and ingress/egress issues. This is a case where the maximum probable loss is the same as the maximum possible loss and the value of all locations should be considered.

This second illustration paints quite a different picture. The locations are physically separated and it is highly unlikely that any single insured event would have an impact on all of the locations. Each location would have to be considered for its own potential threats, the likelihood of an event, the values at risk for each location, and the likelihood of multiple concurrent events. In this situation, I would propose that it is statistically improbable that all three locations would suffer a complete, 12 month shutdown at the same time. Therefore, values at risk considering all three locations would overstate the potential values at risk. I would propose that insuring the value at risk from the two highest valued locations would provide reasonable coverage for all probable loss scenarios.

A geographic analysis can greatly impact potential business interruption values at risk. An operation with multiple locations, interdependent locations, and contingent loss issues can make the issues even more complicated. An experienced, credentialed professional, with specific training in damage measurement and risk management, can help explore these issues and work with a broker to find the right balance of business interruption insurance.

We’re not your typical bean counters. We know how to calculate economic damages for business interruption insurance claims and litigations with off-the-charts winning results for our clients. We’d love to help you. Please get in touch.